Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

(Mark One)

 

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

Or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to           

 

Commission file number: 001-35916

 


 

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

80-0882793

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

6101 Condor Drive, Moorpark, California

 

93021

(Address of principal executive offices)

 

(Zip Code)

 

(818) 224-7442

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  o  No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  o  No  x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at June 17, 2013

Class A Common Stock, $0.0001 par value

 

12,777,777

Class B Common Stock, $0.0001 par value

 

60

 

 

 



Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

March 31, 2013

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

1

 

 

Item 1.

Financial Statements (Unaudited)

1

PennyMac Financial Services, Inc.

1

 

Balance Sheets as of March 31, 2013 and December 31, 2012

1

 

Notes to Balance Sheets

2

 

 

 

Private National Mortgage Acceptance Company, LLC

3

 

Financial Statements (Unaudited):

 

 

Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012

3

 

Consolidated Statements of Income as of March 31, 2013 and December 31, 2012

4

 

Consolidated Statements of Changes in Members’ Equity

5

 

Consolidated Statements of Cash Flows as of March 31, 2013 and December 31, 2012

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59

Item 4.

Controls and Procedures

59

 

 

PART II. OTHER INFORMATION

59

 

 

Item 1.

Legal Proceedings

59

Item 1A.

Risk Factors

59

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

 



Table of Contents

 

EXPLANATORY NOTE

 

The financial statements and other disclosures contained in this report include those of PennyMac Financial Services, Inc. (“PFSI”), which is the registrant, and those of Private National Mortgage Acceptance Company, LLC (“PennyMac”), in which PFSI acquired an ownership interest in a reorganization transaction that was completed after March 31, 2013 in connection with the initial public offering of PFSI (which was completed on May 14, 2013).  Accordingly, because PFSI had no substantial assets or activities (except for activities relating to its initial public offering) as of March 31, 2013 and because the reorganization transactions had not been completed as of such date, PFSI believes it is informative to provide the financial statements and various other disclosures of PennyMac as of March 31, 2013 and for the quarters ended March 31, 2013 and 2012. For more information regarding the transactions described above, see Note 22, “Subsequent Events,” to the financial statements of PennyMac contained in this report.

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PENNYMAC FINANCIAL SERVICES, INC.

BALANCE SHEETS (UNAUDITED)

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(in thousands except share data)

 

ASSETS

 

 

 

 

 

Cash

 

$

50

 

$

 

Total assets

 

$

50

 

$

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Payable to Private National Mortgage Acceptance Company, LLC

 

$

50

 

$

 

Total liabilities

 

 

50

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Class A Common Stock, par value $0.0001 per share, 9,000 shares authorized, none issued and outstanding

 

$

 

$

 

Class B Common Stock, par value $0.0001 per share, 1,000 shares authorized, none issued and outstanding

 

 

 

Total stockholders’ equity

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

50

 

$

 

 

1



Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO BALANCE SHEET (UNAUDITED)

 

Note 1—Organization

 

PennyMac Financial Services, Inc. (the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its sole asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac and operates and controls all of the businesses and affairs of PennyMac subject to the consent rights of other members under certain circumstances and, through PennyMac and its subsidiaries, continues to conduct the business now conducted by these subsidiaries.

 

Note 2—Summary of Significant Accounting Policies

 

Basis of Accounting—The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America. Separate statements of income, changes in stockholders’ equity and cash flows have not been presented in the financial statements because this entity has had no activities.

 

Underwriting Commissions and Offering Costs—Underwriting commissions and offering costs to be incurred by the Company in connection with its common share offerings will be reflected as a reduction of additional paid-in capital. Underwriting commissions and offering costs are not recorded in the Company’s consolidated balance sheet because such costs are not the Company’s liability until the Company completes a successful initial public offering.

 

Organizational Costs—Organizational costs are not recorded in the Company’s consolidated balance sheet because such costs are not the Company’s liability until the Company completes a successful initial public offering. Thereafter, costs incurred to organize the Company will be expensed as incurred.

 

Note 3 — Liabilities

 

In March 2013, the Company borrowed $50,000 from PennyMac to fund its operating cash account.

 

Note 4—Stockholders’ Equity

 

Under the Company’s certificate of incorporation as in effect as of March 31, 2013 and December 31, 2012, the Company is authorized to issue 9,000 shares of Class A Common Stock, par value $0.0001 per share (“Class A Common Stock”), and 1,000 shares of Class B Common Stock, par value $0.0001 per share (“Class B Common Stock”), and all shares of Class A common stock and Class B Common Stock are identical.

 

Note 5—Subsequent Events

 

Management has evaluated all events and transactions through the date the Company issued these financial statements. During this period:

 

·                  In connection with the initial public offering (“IPO”) by the Company of its Class A Common Stock, par value $0.0001 per share, covered by the final prospectus, dated May 8, 2013 and included as part of the Registration Statement on Form S-1, as amended (File No. 333-186495) (the “Registration Statement”), the Company and PennyMac consummated a recapitalization (“Recapitalization”). Under the terms of the Recapitalization, the Company, PennyMac and the existing unitholders of PennyMac entered into that certain Fourth Amended and Restated Limited Liability Company Agreement of PennyMac, dated May 8, 2013 (the “LLC Agreement”), pursuant to which, among other things, the Company became the sole managing member of PennyMac and the capital structure of PennyMac was modified by converting all existing classes of units into new Class A units, with the allocation of Class A units among PennyMac’s existing owners determined pursuant to the distribution provisions of its former limited liability company agreement based upon the liquidation value of PennyMac, assuming it was liquidated at the time of the IPO of Class A Common Stock with a value implied by the IPO of the shares of Class A Common Stock sold in the IPO.

 

Also in connection with the Recapitalization, on May 8, 2013, the Company entered into: (i) an exchange agreement with PennyMac and the then-existing unitholders of PennyMac; (ii) a tax receivable agreement with PennyMac and the then-existing unitholders of PennyMac; (iii) a registration rights agreement with the then-existing unitholders of PennyMac and (iv) separate stockholder agreements with each of BlackRock Mortgage Ventures, LLC and HC Partners LLP, formerly known as Highfields Capital Investments LLC.

 

·                  On May 8, 2013, the Company’s Amended and Restated Certificate of Incorporation and the Company’s Amended and Restated Bylaws became effective. The Company is authorized to issue 210.0 million shares consisting of 10.0 million shares of Preferred Stock, par value $0.0001 per share, 200.0 million shares of Class A Common Stock, and 1,000 shares of Class B Common Stock.

 

·                  On May 14, 2013, the Company completed its IPO by issuing approximately 12.8 million shares of Class A Common Stock for cash consideration of $16.875 per share (net of underwriting discounts) to a syndicate of underwriters led by Citigroup Global Markets, Inc., BofA Merrill Lynch, Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co., as joint book-running managers for the offering. Barclays Capital Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, and Wells Fargo Securities, LLC acted as co-managers. The Company’s net proceeds from the offering were approximately $215.6 million, after deducting underwriting discounts and commissions. As contemplated in the Registration Statement, the Company used the net proceeds from the offering to purchase approximately 12.8 million newly issued Class A units of PennyMac at a price per Class A unit of $16.875.

 

·      On June 13, 2013, the Sub-Committee of the Compensation Committee of PFSI authorized the grant of (a) nonstatutory stock options (each a “Stock Option”) to purchase a total of 259,565 shares of PFSI’s Class A Common Stock (the “Optioned Shares”), and (b) 324,460 performance-based restricted stock units (“RSUs”), pursuant to PFSI’s 2013 Equity Incentive Plan, to its executive officers, including those equity awards granted to the named executive officers and principal financial officer of PFSI as previously disclosed in a Current Report on Form 8-K filed with the SEC on June 17, 2013. Also on June 13, 2013 and as disclosed in the aforementioned Current Report on Form 8-K, the Compensation Committee authorized the grant of (a) Stock Options to purchase a total of 164,112 Optioned Shares, (b) 177,007 performance-based RSUs, and (c) 69,127 time-based RSUs to other eligible participants pursuant to the Company’s 2013 Equity Incentive Plan.

 

2



Table of Contents

 

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(in thousands
except unit data)

 

ASSETS

 

 

 

 

 

Cash

 

$

56,135

 

$

12,323

 

Short-term investments, at fair value

 

72,664

 

53,164

 

Mortgage loans held for sale at fair value

 

203,661

 

448,384

 

Servicing advances

 

96,587

 

93,152

 

Receivable from Investment Funds

 

3,169

 

3,672

 

Receivable from PennyMac Mortgage Investment Trust

 

14,748

 

16,691

 

Derivative assets

 

27,481

 

27,290

 

Carried Interest due from Investment Funds

 

52,460

 

47,723

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

1,942

 

1,897

 

Mortgage servicing rights at fair value

 

18,622

 

19,798

 

Mortgage servicing rights at lower of amortized cost or fair value

 

128,370

 

89,177

 

Furniture, fixtures, equipment and building improvements, net

 

6,253

 

5,065

 

Capitalized software, net

 

866

 

795

 

Other

 

10,019

 

13,032

 

Total assets

 

$

692,977

 

$

832,163

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Mortgage loans sold under agreements to repurchase

 

$

180,049

 

$

393,534

 

Note payable

 

63,437

 

53,013

 

Payable to Investment Funds

 

37,766

 

36,795

 

Payable to PennyMac Mortgage Investment Trust

 

53,909

 

46,779

 

Accounts payable and accrued expenses

 

42,966

 

36,279

 

Derivative liabilities

 

2,359

 

509

 

Liability for losses under representations and warranties

 

4,748

 

3,504

 

Total liabilities

 

385,234

 

570,413

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

MEMBERS’ EQUITY

 

 

 

 

 

Preferred units, 96,682 units authorized and subscribed, 96,682 units issued and outstanding as of March 31, 2013 and December 31, 2012

 

$

97,148

 

$

97,148

 

Common units, 20,556 units authorized; 15,890 and 13,552 units issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

 

 

 

Class C units, 3,738 units authorized; 440 and 367 units issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

 

 

 

Members’ equity attributable to common and Class C units from equity compensation plan

 

22,446

 

22,270

 

Subscriptions receivable

 

(729

)

(4,842

)

Retained earnings

 

188,878

 

147,174

 

Total members’ equity

 

307,743

 

261,750

 

Total liabilities and members’ equity

 

$

692,977

 

$

832,163

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands except unit data)

 

Revenue

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

39,957

 

$

13,937

 

Loan origination fees

 

5,668

 

235

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

28,244

 

6,124

 

Net servicing income:

 

 

 

 

 

Loan servicing fees

 

 

 

 

 

From non-affiliates

 

9,057

 

2,845

 

From PennyMac Mortgage Investment Trust

 

7,722

 

4,206

 

From Investment Funds

 

2,147

 

3,623

 

Mortgage servicing rebate to Investment Funds

 

(139

)

(246

)

Ancillary and other fees

 

2,265

 

1,390

 

 

 

21,052

 

11,818

 

Amortization, impairment and change in estimated fair value of mortgage servicing rights

 

(5,010

)

(242

)

Net servicing income

 

16,042

 

11,576

 

Management fees:

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

6,492

 

1,804

 

From Investment Funds

 

1,914

 

2,389

 

 

 

8,406

 

4,193

 

Carried Interest from Investment Funds

 

4,737

 

1,789

 

Interest

 

1,742

 

431

 

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

 

88

 

195

 

Other

 

814

 

470

 

Total net revenue

 

105,698

 

38,950

 

Expenses

 

 

 

 

 

Compensation

 

35,681

 

18,739

 

Interest

 

3,330

 

1,062

 

Loan origination

 

2,507

 

171

 

Professional services

 

2,288

 

1,244

 

Technology

 

1,586

 

982

 

Servicing

 

1,531

 

978

 

Occupancy

 

491

 

383

 

Other

 

2,991

 

160

 

Total expenses

 

50,405

 

23,719

 

Net income

 

$

55,293

 

$

15,231

 

 

 

 

 

 

 

Net income attributable to preferred units

 

$

46,014

 

$

13,308

 

Net income attributable to non-vested Class C unit awards outstanding

 

$

1,332

 

$

 

Net income attributable to Class C units

 

$

190

 

$

 

Net income attributable to non-vested common unit awards outstanding

 

$

534

 

$

1,157

 

Net income attributable to common units

 

$

7,223

 

$

766

 

 

 

 

 

 

 

Earnings per unit

 

 

 

 

 

Preferred units

 

$

475.92

 

$

137.64

 

Class C units

 

$

432.71

 

$

 

Common units

 

 

 

 

 

Basic

 

$

456.19

 

$

112.73

 

Diluted

 

$

429.83

 

$

54.37

 

Weighted average units outstanding

 

 

 

 

 

Preferred units

 

96,682

 

96,682

 

Class C units

 

439

 

 

Common units

 

 

 

 

 

Basic

 

15,833

 

6,792

 

Diluted

 

16,804

 

14,082

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Class C

 

 

 

 

 

 

 

 

 

Preferred units

 

Common units

 

common units

 

Subscriptions

 

Retained

 

 

 

 

 

Units

 

Amounts

 

Units

 

Amounts

 

Units

 

Amounts

 

receivable

 

earnings

 

Total

 

 

 

(in thousands except unit data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

96,682

 

$

96,374

 

4,564

 

$

2,737

 

 

$

 

$

(19,918

)

$

44,722

 

$

123,915

 

Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

 

 

 

 

 

 

 

15,058

 

 

15,058

 

Distributions

 

 

 

 

 

 

 

 

(18

)

(18

)

Unit-based compensation expense

 

 

 

2,228

 

2,736

 

 

 

 

 

2,736

 

Net income

 

 

 

 

 

 

 

 

15,231

 

15,231

 

Balance at March 31, 2012

 

96,682

 

$

96,374

 

6,792

 

$

5,473

 

 

$

 

$

(4,860

)

$

59,935

 

$

156,922

 

Balance at December 31, 2012

 

96,682

 

97,148

 

13,552

 

21,895

 

367

 

375

 

(4,842

)

147,174

 

261,750

 

Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

4,113

 

(13,589

)

(9,476

)

Unit-based compensation expense

 

 

 

2,338

 

52

 

73

 

124

 

 

 

176

 

Net income

 

 

 

 

 

 

 

 

55,293

 

55,293

 

Balance at March 31, 2013

 

96,682

 

$

97,148

 

15,890

 

$

21,947

 

440

 

$

499

 

$

(729

)

$

188,878

 

$

307,743

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Cash flow from operating activities:

 

 

 

 

 

Net income

 

$

55,293

 

$

15,231

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Net gain on mortgage loans held for sale at fair value

 

(39,957

)

(13,937

)

Accrual of servicing rebate to Investment Funds

 

139

 

246

 

Amortization, impairment and change in fair value of mortgage servicing rights

 

5,010

 

242

 

Carried Interest from Investment Funds

 

(4,737

)

(1,789

)

Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

 

(45

)

(154

)

Unit-based compensation expense

 

176

 

2,736

 

Amortization of debt issuance costs and commitment fees relating to financing facilities

 

1,145

 

549

 

Depreciation and amortization

 

137

 

132

 

Purchase from affiliate of mortgage loans held for sale

 

(3,548,397

)

(838,120

)

Originations of mortgage loans held for sale

 

(268,125

)

(61,891

)

Sale and principal payments of mortgage loans held for sale

 

4,061,097

 

813,128

 

Increase in servicing advances

 

(3,435

)

(9,567

)

Decrease in receivable from Investment Funds

 

364

 

3,660

 

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

2,427

 

(5,129

)

Increase in other assets

 

(3,507

)

(1,946

)

Increase in accounts payable and accrued expenses

 

6,685

 

4,645

 

Increase in payable to Investment Funds

 

971

 

2,226

 

Increase in payable to PennyMac Mortgage Investment Trust

 

6,997

 

8,340

 

Net cash provided (used in) by operating activities

 

272,238

 

(81,398

)

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Net increase in short-term investment

 

(19,500

)

(18,209

)

Purchase of furniture, fixtures, equipment and building improvements

 

(1,531

)

(721

)

Acquisition of capitalized software

 

(151

)

(14

)

Decrease in margin deposits and restricted cash

 

5,293

 

769

 

Net cash used in investing activities

 

(15,889

)

(18,175

)

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

Sale of loans under agreements to repurchase

 

3,485,093

 

824,458

 

Repurchase of loans sold under agreements to repurchase

 

(3,698,578

)

(742,611

)

Increase (decrease) in notes payable

 

10,424

 

(1,018

)

Collection of subscriptions receivable

 

 

15,058

 

Distributions

 

(9,476

)

(18

)

Net cash (used in) provided by financing activities

 

(212,537

)

95,869

 

Net increase (decrease) in cash

 

43,812

 

(3,704

)

Cash at beginning of period

 

12,323

 

16,465

 

Cash at end of period

 

$

56,135

 

$

12,761

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization and Basis of Presentation

 

Private National Mortgage Acceptance Company, LLC (“PennyMac”) is a Delaware limited liability company which, through its subsidiaries (collectively, the “Company”), engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage lending (including correspondent lending and retail lending) and loan servicing. The investment management activities and a portion of the loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly-owned subsidiaries are:

 

·                  PNMAC Capital Management, LLC (“PCM”) – a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment advisor under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

 

Presently, PCM has management agreements with PennyMac Mortgage Investment Trust, a publicly held real estate investment trust (“PMT”), and three investment funds: PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., (the “Master Fund”), both registered under the Investment Company Act of 1940, as amended; and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, “Investment Funds”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

 

·                  PennyMac Loan Services, LLC (“PLS”) – a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of third parties or entities managed by the Company, originates new prime credit quality residential mortgage loans, and generally engages in mortgage banking activities for its own account and the account of PMT.

 

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) (each an “Agency” and collectively the “Agencies”).

 

·                  PNMAC Opportunity Fund Associates, LLC (“PMOFA”) – a Delaware limited liability company and the general partner of the Master Fund. PMOFA is entitled to incentive fees representing allocations of profits (the “Carried Interest”) from the Master Fund.

 

Initial Public Offering and Recapitalization

 

PennyMac Financial Services, Inc. (“PFSI”) is a Delaware corporation that has not engaged in any business or other activities except in connection with its formation and initial public offering of shares.

 

On May 14, 2013, PFSI completed an initial public offering (“IPO”) in which it sold approximately 12.8 million shares of its common stock, which includes approximately 1.7 million shares sold pursuant to the exercise by the underwriters of an over-allotment option, at a public offering price of $18.00 per share. PFSI received net proceeds of $215.6 million, after deducting underwriting discounts and commissions, from sales of its shares in the IPO. PFSI used these net proceeds to purchase approximately 12.8 million Class A Units of PennyMac. PFSI operates and controls all of the business and affairs and consolidates the financial results of PennyMac and its subsidiaries.

 

Prior to the IPO, PennyMac completed a recapitalization by amending its limited liability company agreement to convert all classes of ownership interests held by its existing owners to a single class of common units. The conversion of existing interests was based on the various interests’ liquidation priorities as specified in PennyMac’s prior limited liability company agreement. In connection with that recapitalization, PFSI became the sole managing member of PennyMac.

 

As part of the IPO, PFSI entered into a tax receivable agreement with the Company’s existing owners whereby PFSI will pay to such owners of PennyMac 85% of the tax benefits, if any, that PFSI is deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of the then-existing unitholders and (ii) certain other tax benefits related to PFSI entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

The accompanying consolidated financial statements of the Company do not reflect the effect of the recapitalization described above which took effect on May 8, 2013, or the IPO completed on May 14, 2013.

 

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Basis of presentation

 

The Company’s unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. The information included in this quarterly report on Form 10-Q should be read with the financial statements and accompanying notes included in the Company’s final prospectus dated May 8, 2013 as part of its Registration Statement on Form S-1, as amended (SEC File No. 333-186495) (the “Registration Statement”).

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2013.

 

Note 2—Concentration of Risk

 

A substantial portion of the Company’s activities relate to the Advised Entities. Fees charged to these entities (comprised of management fees, loan servicing fees and loan servicing rebates, Carried Interest income and fulfillment fees from PMT) totaled 49% and 52% of total revenues for the quarters ended March 31, 2013 and 2012, respectively.

 

Note 3—Transactions with Affiliates

 

PennyMac Mortgage Investment Trust

 

Management Fees

 

Before February 1, 2013, under a management agreement, the Company received from PMT a base management fee. The base management fee was calculated at 1.5% per year of PMT’s shareholders’ equity. The management agreement also provided for a performance incentive fee, which was calculated at 20% per year of the amount by which PMT’s “core earnings,” on a rolling four-quarter basis and before the incentive fee, exceeded an 8% “hurdle rate” as defined in the management agreement. The Company did not earn a performance incentive fee prior to February 1, 2013.

 

Effective February 1, 2013, the management agreement was amended to provide that:

 

·                  The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s shareholders’ equity up to $2 billion, (ii) 1.375% per year of shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s shareholders’ equity in excess of $5 billion.

 

·                  The performance incentive fee is calculated at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

 

The performance incentive fee is calculated quarterly and is equal to the sum of: (a) 10% of the amount by which PMT’s net income for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s net income for the quarter exceeds (i) a 12% return on PMT’s equity plus the high watermark, up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s net income for the quarter exceeds a 16% return on equity plus the high watermark.

 

For the purpose of determining the amount of the performance incentive fee:

 

“Net income” is defined as net income or loss computed in accordance with U.S. GAAP and certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

 

“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the four-quarter period.

 

The “high watermark” starts at zero and is adjusted quarterly. The quarterly adjustment reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the Fannie Mae Mortgage-Backed Security (“MBS”) yield (the target yield) for such quarter. If the net income is lower than the target yield, the high watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s net income over (or under) the target yield, until the net income in excess of the target yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.

 

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The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or in PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

 

Following is a summary of the base management and performance incentive fees earned from PMT for the periods presented:

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Base management fee

 

$

4,364

 

$

1,804

 

Performance incentive fee

 

2,128

 

 

 

 

$

6,492

 

$

1,804

 

 

The term of the management agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the management agreement.

 

In the event of termination by PMT, the Company may be entitled to a termination fee in certain circumstances.  The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual (or, if the period is than 24 months, annualized) performance incentive fee earned by the Company, in each case during the 24-month period before termination.

 

Mortgage Loan Servicing

 

The Company has a loan servicing agreement with PMT. Before February 1, 2013, the servicing fee rates were based on the risk characteristics of the mortgage loans serviced and total servicing compensation was established at levels that management believed were competitive with those charged by other servicers or specialty servicers, as applicable.

 

·                  Servicing fee rates for nonperforming loans ranged between 50 and 100 basis points per year on the unpaid principal balance of the mortgage loans serviced on PMT’s behalf. The Company was also entitled to certain customary market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges, as well as interest on funds on deposit in custodial accounts. In the event the Company either effected a refinancing of a loan on PMT’s behalf and not through a third party lender and the resulting loan was readily saleable, or originated a loan to facilitate the disposition of real estate that PMT had acquired in settlement of a loan, the Company was entitled to receive from PMT market-based fees and compensation.

 

·                  For mortgage loans serviced by PMT as a result of acquisitions and sales with servicing rights retained in connection with PMT’s correspondent lending business, the Company was entitled to base subservicing fees and other customary market-based fees and charges as described above.

 

Effective February 1, 2013, the servicing agreement was amended to provide for servicing fees payable to the Company that changed from being based on a percentage of the loan’s unpaid principal balance to fixed per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO. The Company also remains entitled to market-based fees and charges including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges relating to loans it services for PMT.

 

·                  The base servicing fees for distressed whole loans are calculated based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or the related underlying real estate. Presently, the base servicing fees for distressed whole loans range from $30 per month for current loans up to $125 per month for loans that are severely delinquent and in foreclosure.

 

·                  The base servicing fees for loans subserviced by the Company on PMT’s behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fees for loans subserviced on PMT’s behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable rate mortgage loans. To the extent that these loans become delinquent, the Company is entitled to an additional servicing fee per loan falling within a range of $10 to $75 per month based on the delinquency, bankruptcy and foreclosure status of the loan or the related underlying real estate. The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

 

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·                  The Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement because PMT does not have any employees or infrastructure. For these services, the Company receives a supplemental fee of $25 per month for each distressed whole loan and $3.25 per month for each subserviced loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred in performance of its servicing obligations.

 

·                  The Company, on behalf of PMT, currently participates in the U.S. Department of the Treasury and HUD’s Home Affordable Modification Program (“HAMP”) (and other similar mortgage loan modification programs), which establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including loan servicers, for achieving modifications and successfully remaining in the program. The loan servicing agreement entitles the Company to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to the Company under HAMP in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company shall reimburse PMT an amount equal to the incentive payments.

 

Following is a summary of mortgage loan servicing fees earned for the periods presented:

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Loan servicing fees:

 

 

 

 

 

Base

 

$

4,361

 

$

3,028

 

Activity-based

 

3,361

 

1,178

 

 

 

$

7,722

 

$

4,206

 

 

The term of the servicing agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

 

Correspondent Lending

 

Before February 1, 2013, PMT paid the Company a fulfillment fee of 50 basis points of the unpaid principal balance of mortgage loans sold to non-affiliates where PMT is approved or licensed to sell to such non-affiliate. Effective February 1, 2013, the mortgage banking and warehouse services agreement provides for a fulfillment fee paid to the Company based on the type of mortgage loan that PMT acquires. The fulfillment fee is equal to a percentage of the unpaid principal balance of mortgage loans purchased by PMT, with the addition of potential fee rate discounts applicable to PMT’s monthly purchase volume in excess of designated thresholds. The Company has also agreed to provide such services exclusively for PMT’s benefit, and the Company and its affiliates are prohibited from providing such services for any other third party.

 

The Company is entitled to a fulfillment fee based on the type of mortgage loan that PMT acquires and equal to a percentage of the unpaid principal balance of such mortgage loan. Presently, the applicable percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide, (iii) 0.80% for the U.S. Department of the Treasury and HUD’s Home Affordable Refinance Program (“HARP”) mortgage loans with a loan-to-value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan-to-value ratio of greater than 105%, and (v) 0.50% for all other mortgage loans not contemplated above.

 

In the event that PMT purchases mortgage loans with an aggregate unpaid principal balance in any month greater than $2.5 billion and less than $5 billion, the Company has agreed to discount the amount of such fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.025%, (ii) the amount of unpaid principal balance in excess of $2.5 billion and (iii) the percentage of the aggregate unpaid principal balance relating to mortgage loans for which the Company collected fulfillment fees in such month. In the event PMT purchases mortgage loans with an aggregate unpaid principal balance in any month greater than $5 billion, the Company has agreed to discount the amount of such fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.05%, (ii) the amount of unpaid principal balance in excess of $5 billion and (iii) the percentage of the aggregate unpaid principal balance relating to mortgage loans for which the Company collected fulfillment fees in such month.

 

PMT does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the mortgage banking and warehouse services agreement, the Company currently purchases loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from PMT at its cost less fees collected by PMT from the seller, plus accrued interest and a sourcing fee of three basis points.

 

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In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under PennyMac Loan Services, LLC early purchase program, the Company is entitled to fees (i) accruing at a rate equal to $25,000 per year, and (ii) in the amount of $50 for each mortgage loan PMT acquires. In consideration for the warehouse services provided by the Company with respect to mortgage loans that PMT finances for its warehouse lending clients, with respect to each facility, the Company is entitled to fees (i) accruing at a rate equal to $25,000 per year, and (ii) in the amount of $50 for each mortgage loan that PMT finances thereunder. Where PMT has entered into both an early purchase agreement and a warehouse lending agreement with the same client, the Company shall only be entitled to one $25,000 per annum fee and, with respect to any mortgage loan that becomes subject to both such agreements, only one $50 per loan fee.

 

The term of the mortgage banking and warehouse services agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

Following is a summary of correspondent lending activity between the Company and PMT for the periods presented:

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Sourcing fees paid

 

$

1,010

 

$

244

 

Fulfillment fee revenue

 

$

28,244

 

$

6,124

 

Unpaid principal balance of loans fulfilled

 

$

3,366,770

 

$

799,207

 

 

Investment Activities

 

Pursuant to the terms of a mortgage servicing rights (“MSR”) recapture agreement, effective February 1, 2013, if the Company refinances through its retail lending business loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to one of PMT’s wholly-owned subsidiaries, without cost to PMT, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on February 1, 2017, subject to automatic renewal for additional 18-month periods.

 

Pursuant to the terms of a spread acquisition and MSR servicing agreement, PMT may acquire from the Company the rights to receive certain excess servicing spread arising from MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans. The terms of each transaction under the spread acquisition and MSR servicing agreement will be subject to the terms of such agreement as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

 

Other Transactions

 

In connection with the IPO of PMT’s common shares on August 4, 2009, the Company entered into an agreement with PMT pursuant to which PMT agreed to reimburse the Company for the $2.9 million payment that it made to the underwriters in such offering (the “Conditional Reimbursement”) if PMT satisfied certain performance measures over a specified period of time. Effective February 1, 2013, PMT amended the terms of the reimbursement agreement to provide for the reimbursement to the Company of the Conditional Reimbursement if PMT is required to pay the Company performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The reimbursement agreement also provides for the payment to the underwriters in such offering of the payment that PMT agreed to make to them at the time of the offering if PMT satisfied certain performance measures over a specified period of time. As the Company earns performance incentive fees under the management agreement, such underwriters will be paid by PMT at a rate of $20 of payments for every $100 of performance incentive fees earned by the Company. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million.

 

In the event the termination fee is payable to the Company under the management agreement and the Company and the underwriters have not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

 

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PMT reimburses the Company for other expenses, including common overhead expenses incurred on its behalf by the Company, in accordance with the terms of its management agreement. Such amounts are summarized below:

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Reimbursement of expenses incurred on PMT’s behalf

 

$

1,358

 

$

2,410

 

Reimbursement of common overhead incurred by PCM and its affiliates

 

2,606

 

386

 

 

 

$

3,964

 

$

2,796

 

 

 

 

 

 

 

Payments and settlements during the period (1)

 

$

33,362

 

$

5,485

 

 


(1) Payments and settlements include payments for management fees and correspondent lending activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

 

 

Amounts due from PMT are summarized below as of the dates presented:

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

(in thousands)

 

Management fees

 

$

6,518

 

$

4,473

 

Servicing fees

 

3,191

 

3,670

 

Contingent underwriting fees

 

2,941

 

2,941

 

Allocated expenses

 

2,098

 

1,132

 

Loan purchases

 

 

4,475

 

 

 

$

14,748

 

$

16,691

 

 

The Company also holds an investment in PMT in the form of 75,000 common shares of beneficial interest as of March 31, 2013 and December 31, 2012. The shares had fair values of $1,942,000 and $1,897,000 as of March 31, 2013 and December 31, 2012, respectively.

 

Investment Funds

 

Amounts due from the Investment Funds are summarized below for the dates presented:

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

(in thousands)

 

Receivable from Investment Funds:

 

 

 

 

 

Management fees

 

$

1,913

 

$

2,164

 

Loan servicing fees

 

853

 

1,052

 

Expense reimbursements

 

245

 

695

 

Loan servicing rebate

 

158

 

(239

)

 

 

$

3,169

 

$

3,672

 

Carried interest due from Investment Funds:

 

 

 

 

 

PNMAC Mortgage Opportunity Fund, LLC

 

$

32,707

 

$

29,785

 

PNMAC Mortgage Opportunity Fund Investors, LLC

 

19,753

 

17,938

 

 

 

$

52,460

 

$

47,723

 

 

Amounts due to the Investment Funds totaling $37,766,000 and $36,795,000 represent amounts advanced by the Investment Funds to fund servicing advances made by the Company as of March 31, 2013 and December 31, 2012, respectively.

 

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Note 4—Earnings Per Unit

 

The following reflects the earnings per unit calculation of the Company and is not attributable to the calculation of PFSI’s earnings per common share following the IPO and recapitalization, as discussed in Note 22—Subsequent Events.

 

Earnings per unit is calculated using the two-class method. The Company allocates net income or loss to each class of participating unitholders as specified in the Company’s limited liability company agreement, which requires the allocation of distributions among the units under the assumption of a hypothetical liquidation of the Company as follows:

 

·                  First, to the preferred member units until the aggregate unpaid preferred distributions (the 8% annual compounded preferred return) have been paid.

 

·                  Second, to the preferred member units until all of the initial paid-in capital has been returned.

 

·                  Third, distributions will be made to the extent that prior period undistributed net income has not been distributed to any member (preferred, common or Class C). This represents previous undistributed amounts applicable to the remaining tiers (i.e. tier four, five and six that follow).

 

·                  Fourth, distributions will be made to the preferred and common units on a pro-rata basis to each outstanding unit. This distribution is referred to as the priority operating profit allocation to preferred and common units receiving an 8% compounded annual priority return beginning June 1, 2011. The aggregate amount distributable under this tier can range between $435,246,000 and $135,246,000 depending on the thresholds for newly originated loan acquisitions achieved by the correspondent lending group after June 1, 2011. Before June 1, 2011 there were no allocations of income required for this fourth tier distribution. If unpaid amounts exist at a period end, they are paid out of the following year or in a liquidation event under tier three above.

 

·                  Fifth, distributions will be made under the priority capital appreciation allocation to preferred and common units on a pro-rata basis to each unit outstanding. The priority capital appreciation would require total distributions in this tier of up to $300,000,000 before June 1, 2011. After June 1, 2011, the amount distributable under this tier can range between $300,000,000 and $0 depending on the thresholds for newly originated loan acquisitions achieved by the correspondent lending group. If unpaid amounts exist at a period end they are paid out of the following year or in a liquidation event under tier three above.

 

·                  Sixth, and finally, a sharing of the remaining distributions among all members (including the preferred, common, and Class C unitholders on a pro-rata basis) to each unit outstanding with allocations up to the strike price of vested and unvested unit awards being paid back first, as a priority allocation, to the preferred and common unitholders that did not receive such units as stock based compensation awards. If unpaid amounts exist at a period end they are paid out of the following year or in a liquidation event under tier three above.

 

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The following is a reconciliation of net income to net income attributable to common unitholders and a table summarizing the basic and diluted earnings per unit calculations for the periods presented:

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands except unit
data)

 

Earnings per preferred unit:

 

 

 

 

 

Net income

 

$

55,293

 

$

15,231

 

Net income attributable to preferred units

 

 

 

 

 

Distributed priority return

 

$

13,589

 

$

1,426

 

Undistributed priority return

 

29,519

 

 

Undistributed earnings

 

2,906

 

11,882

 

Net income attributable to preferred units

 

$

46,014

 

$

13,308

 

Preferred units outstanding

 

96,682

 

96,682

 

Earnings per preferred unit

 

$

475.92

 

$

137.64

 

 

 

 

 

 

 

Earnings per common unit:

 

 

 

 

 

Net income attributable to common members

 

$

7,757

 

$

1,923

 

Less: Distributions to non-vested common unit awards outstanding

 

 

 

Undistributed earnings attributable to non-vested common unit awards outstanding

 

534

 

1,157

 

Net income attributable to common units

 

$

7,223

 

$

766

 

Basic earnings per common unit:

 

 

 

 

 

Weighted-average common units outstanding

 

15,833

 

6,792

 

Basic earnings per common unit

 

$

456.19

 

$

112.73

 

Diluted earnings per common unit:

 

 

 

 

 

Net income attributable to common units

 

$

7,223

 

$

766

 

Weighted-average common units outstanding

 

15,833

 

6,792

 

Dilutive potential common units—units issuable under equity-based compensation plan

 

971

 

7,290

 

Diluted weighted-average number of common units outstanding

 

16,804

 

14,082

 

Diluted earnings per common units

 

$

429.83

 

$

54.37

 

Earnings per Class C unit:

 

 

 

 

 

Net income attributable to Class C

 

$

1,522

 

$

 

Less: Undistributed income attributable to non-vested Class C units

 

1,332

 

 

Net income available to Class C units

 

$

190

 

$

 

Weighted-average Class C units outstanding

 

439

 

 

Earnings per Class C unit

 

$

432.71

 

$

 

 

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Note 5—Loan Sales and Servicing Activities

 

The Company purchases and sells mortgage loans to the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.

 

The following table summarizes cash flows between the Company and transferees upon sale of mortgage loans in transactions where the Company maintains continuing involvement with the mortgage loans (primarily the obligation to service the loans on behalf of the loans’ owners or owners’ agents):

 

 

 

Quarter ended March 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Cash flows:

 

 

 

 

 

Proceeds from sales

 

$

4,061,097

 

$

813,128

 

Servicing fees received

 

$

9,299

 

$

1,846

 

Net servicing advances

 

$

(3,736

)

$

609

 

Quarter-end information:

 

 

 

 

 

Unpaid principal balance of loans outstanding at period-end

 

$

12,485,598

 

$

1,499,970

 

Loans delinquent 30-89 days

 

$

119,433

 

$

9,650

 

Loans delinquent 90 or more days or in foreclosure or bankruptcy

 

$

36,566

 

$

3,450

 

 

The Company’s mortgage servicing portfolio is summarized as follows:

 

 

 

March 31, 2013

 

 

 

Servicing
rights owned

 

Subservicing

 

Total
loans serviced

 

 

 

(in thousands)

 

Affiliated entities

 

$

 

$

21,384,109

 

$

21,384,109

 

Agencies

 

13,328,541

 

 

13,328,541

 

Private investors

 

1,260,086

 

 

1,260,086

 

Mortgage loans held for sale

 

193,894

 

 

193,894

 

 

 

$

14,782,521

 

$

21,384,109

 

$

36,166,630

 

Amount subserviced for the Company

 

$

43,546

 

$

285,243

 

$

328,789

 

Delinquent mortgage loans:

 

 

 

 

 

 

 

30 days

 

$

187,015

 

$

175,071

 

$

362,086

 

60 days

 

67,328

 

96,266

 

163,594

 

90 days or more

 

129,865

 

1,083,921

 

1,213,786

 

 

 

384,208

 

1,355,258

 

1,739,466

 

Loans pending foreclosure

 

69,559

 

1,211,596

 

1,281,155

 

 

 

$

453,767

 

$

2,566,854

 

$

3,020,621

 

Custodial funds managed by the Company(1)

 

$

200,611

 

$

224,176

 

$

424,787

 

 

15



Table of Contents

 

 

 

December 31, 2012

 

 

 

Servicing
rights owned

 

Subservicing

 

Total
loans serviced

 

 

 

(in thousands)

 

Affiliated entities

 

$

 

$

16,552,939

 

$

16,552,939

 

Agencies

 

9,860,284

 

 

9,860,284

 

Private investors

 

1,321,584

 

 

1,321,584

 

Mortgage loans held for sale

 

417,742

 

 

417,742

 

 

 

$

11,599,610

 

$

16,552,939

 

$

28,152,549

 

Amount subserviced for the Company

 

$

45,562

 

$

375,818

 

$

421,380

 

Delinquent mortgage loans:

 

 

 

 

 

 

 

30 days

 

$

191,884

 

$

187,653

 

$

379,537

 

60 days

 

60,886

 

122,564

 

183,450

 

90 days or more

 

112,847

 

851,851

 

964,698

 

 

 

365,617

 

1,162,068

 

1,527,685

 

Loans pending foreclosure

 

75,329

 

1,290,687

 

1,366,016

 

 

 

$

440,946

 

$

2,452,755

 

$

2,893,701

 

Custodial funds managed by the Company(1)

 

$

263,562

 

$

150,080

 

$

413,642

 

 


(1)         Borrower and investor custodial cash accounts relate to loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interest on custodial funds it manages on behalf of the loans’ investors, which is recorded as part of the interest income in the Company’s consolidated statements of income.

 

Following is a summary of the geographical distribution of loans included in the Company’s servicing portfolio for the top five states as measured by the total unpaid principal balance:

 

State

 

March 31,
2013

 

December 31,
2012

 

 

 

(in thousands)

 

California

 

$

13,710,964

 

$

10,696,508

 

Virginia

 

1,698,397

 

*

 

Texas

 

1,677,184

 

1,223,382

 

Florida

 

1,668,887

 

1,385,286

 

Colorado

 

1,602,650

 

1,299,295

 

Washington

 

*

 

1,143,849

 

All other states

 

15,808,548

 

12,404,229

 

 

 

$

36,166,630

 

$

28,152,549

 

 


*                                         State did not represent a top five state as of the respective date.

 

Certain of the loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers. Loans are subserviced for the Company when the loans are secured by property in the State of Massachusetts where the Company is not licensed and a license is required to perform such services, or on a transitional basis for loans where the Company has obtained the rights to service the loans but servicing of the loans has not yet transferred to the Company’s servicing system.

 

16



Table of Contents

 

Note 6—Netting of Financial Instruments

 

The Company uses derivative instruments to manage exposure to interest rate risk for the commitments it makes to purchase or originate mortgage loans at specified interest rates (interest rate lock commitments or “IRLCs”), its inventory of mortgage loans held for sale and MSRs. All derivative financial instruments are recorded on the balance sheet at fair value with changes in fair value recognized in current period income. The Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) by (or for) its counterparties when subject to an enforceable master netting arrangement. In the event of default, all counterparties are subject to legally enforceable master netting agreements. The derivatives that are not subject to a master netting arrangement are IRLCs.

 

As of March 31, 2013 and December 31, 2012, the Company was not party to reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following table.

 

Offsetting of Derivative Assets

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Gross
amounts
of
recognized
assets

 

Gross
amounts
offset
in the
balance
sheet

 

Net
amounts
of assets
presented
in the
balance
sheet

 

Gross
amounts
of
recognized
assets

 

Gross
amounts
offset
in the
balance
sheet

 

Net
amounts
of assets
presented
in the
balance
sheet

 

 

 

(in thousands)

 

Derivatives subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS put options

 

$

431

 

$

 

$

431

 

$

967

 

$

 

$

967

 

MBS call options

 

755

 

 

755

 

 

 

 

Forward purchase contracts

 

4,544

 

 

4,544

 

1,645

 

 

1,645

 

Forward sale contracts

 

553

 

 

553

 

1,818

 

 

1,818

 

Netting

 

 

(4,239

)

(4,239

)

 

(1,091

)

(1,091

)

 

 

6,283

 

(4,239

)

2,044

 

4,430

 

(1,091

)

3,339

 

Derivatives not subject to master netting arrangements - IRLCs

 

25,437

 

 

25,437

 

23,951

 

 

23,951

 

Total

 

$

31,720

 

$

(4,239

)

$

27,481

 

$

28,381

 

$

(1,091

)

$

27,290

 

 

Derivative Assets, Financial Assets, and Collateral Held by Counterparty

 

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that does not meet the accounting guidance qualifying for setoff accounting.

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Net amount
of assets

 

Gross amounts not
offfset in the
consolidated balance
sheet

 

 

 

Net amount
of assets

 

Gross amounts not
offset in the
consolidated balance
sheet

 

 

 

 

 

in the
balance
sheet

 

Financial
instruments

 

Cash
collateral
received

 

Net
amount

 

in the
balance
sheet

 

Financial
instruments

 

Cash
collateral
received

 

Net
amount

 

 

 

(in thousands)

 

Interest rate lock commitments

 

$

25,437

 

$

 

$

 

$

25,437

 

$

23,951

 

$

 

$

 

$

23,951

 

Barclays Capital

 

747

 

 

 

747

 

 

 

 

 

Bank of America, N.A.

 

297

 

 

 

297

 

1,782

 

 

 

1,782

 

Citibank

 

190

 

 

 

190

 

522

 

 

 

522

 

Bank of NY Mellon

 

47

 

 

 

47

 

311

 

 

 

311

 

Other

 

763

 

 

 

763

 

724

 

 

 

724

 

Total

 

$

27,481

 

$

 

$

 

$

27,481

 

$

27,290

 

$

 

$

 

$

27,290

 

 

17



Table of Contents

 

Offsetting of Derivative Liabilities and Financial Liabilities

 

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. The assets sold under agreements to repurchase do not qualify for setoff accounting.

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Gross
amounts
of
recognized
liabilities

 

Gross
amounts
offset
in the
consolidated
balance
sheet

 

Net
amounts
of liabilities
presented
in the
consolidated
balance
sheet

 

Gross
amounts
of
recognized
liabilities

 

Gross
amounts offset
in the
consolidated
balance
sheet

 

Net
amounts
of liabilities
presented
in the
consolidated
balance
sheet

 

 

 

(in thousands)

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to a master netting arrangement:

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

$

59

 

$

 

$

59

 

$

389

 

$

 

$

389

 

Forward sale contracts

 

9,411

 

 

9,411

 

1,894

 

 

1,894

 

Netting

 

 

(7,111

)

(7,111

)

 

(1,785

)

(1,785

)

 

 

9,470

 

(7,111

)

2,359

 

2,283

 

(1,785

)

498

 

Derivatives not subject to a master netting arrangement - IRLCs

 

 

 

 

11

 

 

11

 

Total derivatives

 

9,470

 

(7,111

)

2,359

 

2,294

 

(1,785

)

509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans sold under agreements to repurchase

 

180,049

 

 

180,049

 

393,534

 

 

393,534

 

Total

 

$

189,519

 

$

(7,111

)

$

182,408

 

$

395,828

 

$

(1,785

)

$

394,043

 

 

Derivative Liabilities, Financial Liabilities, and Collateral Held by Counterparty

 

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that does not meet the accounting guidance qualifying for setoff accounting. All assets sold under agreements to repurchase are secured by sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Net amount of

 

Gross amounts
not offset in the
balance sheet

 

 

 

Net amount of

 

Gross amounts
not offset in the
balance sheet

 

 

 

 

 

liabilities
in the
balance sheet

 

Financial
instruments

 

Cash
collateral
pledged

 

Net
amount

 

liabilities
in the
balance sheet

 

Financial
instruments

 

Cash
collateral
pledged

 

Net
amount

 

 

 

(in thousands)

 

Citibank, N.A.

 

$

61,419

 

$

(61,092

)

$

 

$

327

 

$

121,200

 

$

(121,200

)

$

 

$

 

Bank of America, N.A.

 

92,910

 

(92,910

)

 

 

150,082

 

(150,082

)

 

 

Credit Suisse First Boston Mortgage Capital LLC

 

26,399

 

(26,047

)

 

352

 

122,443

 

(122,252

)

 

191

 

Morgan Stanley Bank, N.A.

 

216

 

 

 

216

 

53

 

 

 

53

 

Goldman Sachs

 

668

 

 

 

668

 

 

 

 

 

Other

 

796

 

 

 

796

 

265

 

 

 

265

 

Total

 

$

182,408

 

$

(180,049

)

$

 

$

2,359

 

$

394,043

 

$

(393,534

)

$

 

$

509

 

 

18



Table of Contents

 

Note 7—Fair Value

 

The Company’s consolidated financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its estimated fair value as discussed in the following paragraphs.

 

Fair Value Accounting Elections

 

Management identified all of its non-cash financial assets and its originated MSRs relating to loans with initial interest rates of more than 4.5% to be accounted for at estimated fair value so changes in fair value will be reflected in results of operations as they occur and more timely reflect the results of the Company’s performance. The Company’s financial assets subject to this election include the short-term investments and mortgage loans held for sale.

 

For originated MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, management has concluded that such assets present different risks to the Company than originated MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assets are aimed at mainly moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ values. Management has identified these assets for accounting using the amortization method. Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at mainly moderating the effects of changes in interest rates on the assets’ values. During the period, a portion of the IRLCs, the fair value of which typically increases when prepayment speeds increase, were used to mitigate the effect of changes in fair value of the servicing assets, which typically decreases as prepayment speeds increase.

 

19



Table of Contents

 

Financial Statement Items Measured at Fair Value on a Recurring Basis

 

Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis:

 

 

 

March 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investment

 

$

72,664

 

$

72,664

 

$

 

$

 

Mortgage loans held for sale at fair value

 

203,661

 

 

199,174

 

4,487

 

Investment in PMT

 

1,942

 

1,942

 

 

 

Mortgage servicing rights at fair value

 

18,622

 

 

 

18,622

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

25,437

 

 

 

25,437

 

Forward purchase contracts

 

4,544

 

 

4,544

 

 

Forward sales contracts

 

553

 

 

553

 

 

MBS put options

 

431

 

 

431

 

 

MBS call options

 

755

 

 

755

 

 

Total derivative assets before netting

 

31,720

 

 

6,283

 

25,437

 

Netting (1)

 

(4,239

)

 

 

 

Total derivative assets

 

27,481

 

 

6,283

 

25,437

 

 

 

$

324,370

 

$

74,606

 

$

205,457

 

$

48,546

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

$

59

 

$

 

$

59

 

$

 

Forward sales contracts

 

9,411

 

 

9,411

 

 

Total derivative liabilities before netting

 

9,470

 

 

9,470

 

 

Netting (1)

 

(7,111

)

 

 

 

Total derivative liabilities

 

$

2,359

 

$

 

$

9,470

 

$

 

 


(1)         Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

 

20



Table of Contents

 

 

 

December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investment

 

$

53,164

 

$

53,164

 

$

 

$

 

Mortgage loans held for sale at fair value

 

448,384

 

 

448,384

 

 

Investment in PMT

 

1,897

 

1,897

 

 

 

Mortgage servicing rights at fair value

 

19,798

 

 

 

19,798

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

23,951

 

 

 

23,951

 

Forward purchase contracts

 

1,645

 

 

1,645

 

 

Forward sales contracts

 

1,818

 

 

1,818

 

 

MBS put options

 

967

 

 

967

 

 

Total derivative assets before netting

 

28,381

 

 

4,430

 

23,951

 

Netting (1)

 

(1,091

)

 

 

 

Total derivative assets

 

27,290

 

 

4,430

 

23,951

 

 

 

$

550,533

 

$

55,061

 

$

452,814

 

$

43,749

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

11

 

$

 

$

 

$

11

 

Forward purchase contracts

 

389

 

 

389

 

 

Forward sales contracts

 

1,894

 

 

1,894

 

 

Total derivative liabilities before netting

 

2,294

 

 </