pfsi_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2017

 

Or

 

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

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

3043 Townsgate Road, Westlake Village, California

 

91361

(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 ☒ No ☐

 

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 ☒ No ☐

 

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

 

 

 

 

 

           Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

           Non-accelerated filer ☐ (Do not check if a smaller reporting company)                                  

 

                Smaller reporting company ☐

          

           Emerging growth company ☐

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

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 August 4, 2017

Class A Common Stock, $0.0001 par value

 

23,510,542

Class B Common Stock, $0.0001 par value

 

50

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

June 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

3

 

 

 

PART I. FINANCIAL INFORMATION 

5

 

 

 

Item 1. 

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Income

6

 

Consolidated Statements of Changes in Stockholders’ Equity

7

 

Consolidated Statements of Cash Flows

8

 

Notes to Consolidated Financial Statements

9

Item 2. 

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

64

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

80

Item 4. 

Controls and Procedures

80

 

 

 

PART II. OTHER INFORMATION 

82

 

 

 

Item 1. 

Legal Proceedings

82

Item 1A. 

Risk Factors

82

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

82

Item 3. 

Defaults Upon Senior Securities

82

Item 4. 

Mine Safety Disclosures

82

Item 5. 

Other Information

82

Item 6. 

Exhibits

83

 

 

 

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Table of Contents

 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions. 

 

Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:

·

projections of our revenues, income, earnings per share, capital structure or other financial items;

·

descriptions of our plans or objectives for future operations, products or services;

·

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

·

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

 

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

 

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2017.

 

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

·

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

·

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

·

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

·

our dependence on U.S. government sponsored entities and changes in their current roles or their guarantees or guidelines;

·

changes to government mortgage modification programs;

·

certain banking regulations that may limit our business activities;

·

foreclosure delays and changes in foreclosure practices;

·

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

·

our dependence on the multi-family and commercial real estate sectors for future originations and investments in commercial mortgage loans and other commercial real estate related loans;

·

changes in macroeconomic and U.S. real estate market conditions;

·

difficulties inherent in growing loan production volume;

·

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

3


 

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·

any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

·

changes in prevailing interest rates;

·

increases in loan delinquencies and defaults;

·

our dependence on the success of the small balance multifamily market for future originations of commercial mortgage loans and other commercial real estate-related loans;

·

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

·

our obligation to indemnify third party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

 

·

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);

·

our obligation to indemnify PMT and certain investment funds if our services fail to meet certain criteria or characteristics or under other circumstances;

·

decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

·

the extensive amount of regulation applicable to our investment management segment;

·

conflicts of interest in allocating our services and investment opportunities among ourselves and certain advised entities;

·

the effect of public opinion on our reputation;

·

our recent growth;

·

our ability to effectively identify, manage, monitor and mitigate financial risks;

·

our initiation of new business activities or expansion of existing business activities;

·

our ability to detect misconduct and fraud; and

·

our ability to mitigate cybersecurity risks and cyber incidents.

 

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document.  Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

 

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

 

4


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

    

2017

    

2016

 

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Cash (includes $50,458 and $91,788 pledged to creditors)

 

 $

75,978

 

 $

99,367

Short-term investments at fair value

 

 

145,440

 

 

85,964

Mortgage loans held for sale at fair value (includes $3,019,088 and $2,125,174 pledged to creditors)

 

 

3,037,602

 

 

2,172,815

Derivative assets

 

 

70,075

 

 

82,905

Servicing advances, net (includes valuation allowance of $48,161 and $45,425; $72,010 and $81,306 pledged to creditors)

 

 

291,907

 

 

348,306

Carried Interest due from Investment Funds pledged to creditors

 

 

71,019

 

 

70,906

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,372

 

 

1,228

Mortgage servicing rights (includes $678,441 and $515,925 at fair value; $1,736,119 and $1,617,671 pledged to creditors)

 

 

1,951,599

 

 

1,627,672

Real estate acquired in settlement of loans

 

 

822

 

 

1,418

Furniture, fixtures, equipment and building improvements, net (includes $27,476 and $25,134 pledged to creditors)

 

 

31,418

 

 

31,321

Capitalized software, net (includes $1,797 and $515 pledged to creditors)

 

 

18,197

 

 

11,205

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

 

 

150,000

 

 

150,000

Receivable from PennyMac Mortgage Investment Trust

 

 

17,725

 

 

16,416

Receivable from Investment Funds

 

 

1,330

 

 

1,219

Mortgage loans eligible for repurchase

 

 

462,487

 

 

382,268

Other 

 

 

77,767

 

 

50,892

Total assets

 

 $

6,404,738

 

 $

5,133,902

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

3,021,328

 

 $

1,735,114

Mortgage loan participation and sale agreements

 

 

243,361

 

 

671,426

Notes payable

 

 

429,692

 

 

150,942

Obligations under capital lease

 

 

26,641

 

 

23,424

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

 

 

261,796

 

 

288,669

Derivative liabilities

 

 

16,564

 

 

22,362

Accounts payable and accrued expenses

 

 

132,053

 

 

134,611

Mortgage servicing liabilities at fair value

 

 

18,295

 

 

15,192

Payable to Investment Funds

 

 

15,236

 

 

20,393

Payable to PennyMac Mortgage Investment Trust 

 

 

132,709

 

 

170,036

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

73,084

 

 

75,954

Income taxes payable

 

 

40,672

 

 

25,088

Liability for mortgage loans eligible for repurchase

 

 

462,487

 

 

382,268

Liability for losses under representations and warranties  

 

 

19,568

 

 

19,067

Total liabilities

 

 

4,893,486

 

 

3,734,546

 

 

 

 

 

 

 

Commitments and contingencies  –  See Note 20

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 23,472,795  and 22,426,779 shares, respectively

 

 

 2

 

 

 2

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 50 and 49 shares, respectively

 

 

 —

 

 

 —

Additional paid-in capital

 

 

199,146

 

 

182,772

Retained earnings

 

 

185,907

 

 

164,549

Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders

 

 

385,055

 

 

347,323

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

1,126,197

 

 

1,052,033

Total stockholders' equity

 

 

1,511,252

 

 

1,399,356

Total liabilities and stockholders’ equity

 

 $

6,404,738

 

 $

5,133,902

 

5


 

Table of Contents

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

    

2017

    

2016

 

2017

 

2016

 

 

 

(in thousands, except earnings per share)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

99,597

 

$

132,118

 

$

188,248

 

$

225,594

 

Recapture payable to PennyMac Mortgage Investment Trust

 

 

(1,506)

 

 

(1,915)

 

 

(3,201)

 

 

(3,867)

 

 

 

 

98,091

 

 

130,203

 

 

185,047

 

 

221,727

 

Mortgage loan origination fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

28,303

 

 

27,443

 

 

52,498

 

 

48,870

 

From PennyMac Mortgage Investment Trust

 

 

1,890

 

 

1,464

 

 

3,269

 

 

2,471

 

 

 

 

30,193

 

 

28,907

 

 

55,767

 

 

51,341

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

21,107

 

 

19,111

 

 

37,677

 

 

32,046

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

112,348

 

 

92,770

 

 

218,815

 

 

184,097

 

From PennyMac Mortgage Investment Trust

 

 

10,099

 

 

16,427

 

 

20,585

 

 

27,880

 

From Investment Funds

 

 

543

 

 

723

 

 

1,039

 

 

1,424

 

Ancillary and other fees

 

 

11,202

 

 

10,818

 

 

23,068

 

 

22,270

 

 

 

 

134,192

 

 

120,738

 

 

263,507

 

 

235,671

 

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

 

 

(94,435)

 

 

(111,611)

 

 

(152,360)

 

 

(228,474)

 

Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust

 

 

7,156

 

 

17,428

 

 

9,929

 

 

36,877

 

 

 

 

(87,279)

 

 

(94,183)

 

 

(142,431)

 

 

(191,597)

 

Net mortgage loan servicing fees

 

 

46,913

 

 

26,555

 

 

121,076

 

 

44,074

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,638

 

 

5,199

 

 

10,646

 

 

10,551

 

From Investment Funds

 

 

369

 

 

531

 

 

735

 

 

1,091

 

 

 

 

6,007

 

 

5,730

 

 

11,381

 

 

11,642

 

Carried Interest from Investment Funds

 

 

241

 

 

244

 

 

113

 

 

837

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

32,948

 

 

18,332

 

 

55,002

 

 

30,259

 

From PennyMac Mortgage Investment Trust

 

 

2,025

 

 

2,222

 

 

3,830

 

 

3,824

 

 

 

 

34,973

 

 

20,554

 

 

58,832

 

 

34,083

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

32,511

 

 

19,753

 

 

57,338

 

 

33,725

 

To PennyMac Mortgage Investment Trust

 

 

4,366

 

 

5,713

 

 

9,013

 

 

12,728

 

 

 

 

36,877

 

 

25,466

 

 

66,351

 

 

46,453

 

Net interest expense

 

 

(1,904)

 

 

(4,912)

 

 

(7,519)

 

 

(12,370)

 

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

 

 

76

 

 

229

 

 

215

 

 

143

 

Results of real estate acquired in settlement of loans

 

 

(119)

 

 

393

 

 

(144)

 

 

(42)

 

Other

 

 

1,116

 

 

1,346

 

 

2,581

 

 

1,809

 

Total net revenues

 

 

201,721

 

 

207,806

 

 

406,194

 

 

351,207

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

82,967

 

 

83,147

 

 

168,207

 

 

151,445

 

Servicing

 

 

24,702

 

 

13,430

 

 

51,545

 

 

34,317

 

Technology

 

 

11,581

 

 

7,733

 

 

22,937

 

 

14,580

 

Loan origination

 

 

5,116

 

 

4,910

 

 

9,249

 

 

9,096

 

Professional services

 

 

4,523

 

 

4,559

 

 

8,341

 

 

8,292

 

Other

 

 

14,872

 

 

9,769

 

 

25,923

 

 

19,080

 

Total expenses

 

 

143,761

 

 

123,548

 

 

286,202

 

 

236,810

 

Income before provision for income taxes

 

 

57,960

 

 

84,258

 

 

119,992

 

 

114,397

 

Provision for income taxes

 

 

7,214

 

 

9,963

 

 

14,860

 

 

13,559

 

Net income

 

 

50,746

 

 

74,295

 

 

105,132

 

 

100,838

 

Less: Net income attributable to noncontrolling interest

 

 

40,267

 

 

59,820

 

 

83,774

 

 

81,188

 

Net income attributable to PennyMac Financial Services, Inc. common stockholders

 

$

10,479

 

$

14,475

 

$

21,358

 

$

19,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.66

 

$

0.93

 

$

0.89

 

Diluted

 

$

0.44

 

$

0.65

 

$

0.91

 

$

0.89

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,388

 

 

22,078

 

 

23,006

 

 

22,042

 

Diluted

 

 

77,650

 

 

76,280

 

 

77,641

 

 

76,236

 

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

 

 

6


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Class A Common Stock

 

Noncontrolling 

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private 

 

 

 

 

 

 

 

 

Additional

 

 

 

National Mortgage

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

Acceptance

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

Company, LLC

    

equity

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

21,991

 

$

 2

 

$

172,354

 

$

98,470

 

$

791,524

 

$

1,062,350

Net income

 

 —

 

 

 —

 

 

 —

 

 

19,650

 

 

81,188

 

 

100,838

Stock and unit-based compensation

 

93

 

 

 —

 

 

2,119

 

 

 —

 

 

5,917

 

 

8,036

Issuance of Class A common stock in settlement of directors' fees

 

12

 

 

 —

 

 

149

 

 

 —

 

 

 —

 

 

149

Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.

 

93

 

 

 —

 

 

2,640

 

 

 —

 

 

(2,640)

 

 

 —

Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

 

 —

 

 

 —

 

 

(520)

 

 

 —

 

 

 —

 

 

(520)

Balance at June 30, 2016

 

22,189

 

$

 2

 

$

176,742

 

$

118,120

 

$

875,989

 

$

1,170,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

22,427

 

$

 2

 

$

182,772

 

$

164,549

 

$

1,052,033

 

$

1,399,356

Net income

 

 —

 

 

 —

 

 

 —

 

 

21,358

 

 

83,774

 

 

105,132

Stock and unit-based compensation

 

 —

 

 

 —

 

 

3,450

 

 

 —

 

 

7,256

 

 

10,706

Issuance of Class A common stock in settlement of directors' fees

 

 —

 

 

 —

 

 

108

 

 

 —

 

 

61

 

 

169

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

 

1,046

 

 

 —

 

 

16,927

 

 

 —

 

 

(16,927)

 

 

 —

Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

 

 —

 

 

 —

 

 

(4,111)

 

 

 —

 

 

 —

 

 

(4,111)

Balance at June 30, 2017

 

23,473

 

$

 2

 

$

199,146

 

$

185,907

 

$

1,126,197

 

$

1,511,252

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net income

 

$

105,132

 

$

100,838

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(185,047)

 

 

(221,727)

 

Accrual of servicing rebate payable to Investment Funds

 

 

100

 

 

148

 

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

 

 

142,431

 

 

191,597

 

Carried Interest from Investment Funds

 

 

(113)

 

 

(837)

 

Capitalization of interest on mortgage loans held for sale at fair value

 

 

(21,615)

 

 

(13,513)

 

Accrual of interest on excess servicing spread financing

 

 

9,013

 

 

12,728

 

Amortization of debt issuance costs

 

 

7,122

 

 

5,215

 

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

 

 

(144)

 

 

(72)

 

Results of real estate acquired in settlement in loans

 

 

144

 

 

42

 

Stock and unit-based compensation expense

 

 

10,390

 

 

8,036

 

Provision for servicing advance losses

 

 

18,030

 

 

12,519

 

Loss from disposition of fixed assets

 

 

377

 

 

 —

 

Depreciation and amortization

 

 

4,117

 

 

2,274

 

Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust

 

 

(21,244,194)

 

 

(16,783,840)

 

Originations of mortgage loans held for sale

 

 

(2,353,899)

 

 

(2,736,621)

 

Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale

 

 

(1,814,080)

 

 

(703,464)

 

Sale and principal payments of mortgage loans held for sale

 

 

24,497,179

 

 

19,176,697

 

Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust

 

 

40,222

 

 

8,139

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(11,520)

 

 

(11,399)

 

Decrease (increase) in servicing advances

 

 

38,821

 

 

(11,182)

 

Increase in receivable from Investment Funds

 

 

(211)

 

 

(120)

 

Increase in receivable from PennyMac Mortgage Investment Trust

 

 

(1,092)

 

 

(2,056)

 

Decrease in deferred tax asset

 

 

 —

 

 

13,515

 

Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

(6,221)

 

 

 —

 

Increase in other assets

 

 

(29,608)

 

 

(10,941)

 

(Decrease) increase in accounts payable and accrued expenses

 

 

(30,395)

 

 

9,781

 

Decrease in payable to Investment Funds

 

 

(5,157)

 

 

(2,220)

 

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(37,650)

 

 

(2,332)

 

Increase in income taxes payable

 

 

14,824

 

 

 —

 

Net cash used in operating activities

 

 

(853,044)

 

 

(958,795)

 

Cash flow from investing activities

 

 

 

 

 

 

 

(Increase) decrease in short-term investments

 

 

(59,476)

 

 

5,256

 

Net settlement of derivative financial instruments used for hedging

 

 

(30,949)

 

 

138,801

 

Purchase of mortgage servicing rights

 

 

(159,465)

 

 

(11)

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(4,668)

 

 

(14,459)

 

Acquisition of capitalized software

 

 

(7,719)

 

 

(3,342)

 

Increase in margin deposits and restricted cash

 

 

(12,071)

 

 

(16,443)

 

Net cash (used in) provided by investing activities

 

 

(274,348)

 

 

109,802

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

13,332,610

 

 

18,461,897

 

Repurchase of assets sold under agreements to repurchase

 

 

(12,046,244)

 

 

(18,037,356)

 

Issuance of mortgage loan participation certificates

 

 

10,491,796

 

 

10,843,858

 

Repayment of mortgage loan participation certificates

 

 

(10,919,650)

 

 

(10,341,436)

 

Advances on notes payable

 

 

435,000

 

 

68,000

 

Repayment of notes payable

 

 

(153,073)

 

 

(15,671)

 

Advances of obligations under capital lease

 

 

10,298

 

 

12,652

 

Repayment of obligations under capital lease

 

 

(7,081)

 

 

(3,345)

 

Repayment of excess servicing spread financing

 

 

(28,910)

 

 

(38,281)

 

Settlement of excess servicing spread financing

 

 

 —

 

 

(59,045)

 

Payment of debt issuance costs

 

 

(11,059)

 

 

(4,037)

 

Proceeds from common stock options exercised

 

 

316

 

 

 —

 

Net cash provided by financing activities

 

 

1,104,003

 

 

887,236

 

Net (decrease) increase in cash

 

 

(23,389)

 

 

38,243

 

Cash at beginning of period

 

 

99,367

 

 

105,472

 

Cash at end of period

 

$

75,978

 

$

143,715

 

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization and Basis of Presentation

 

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary 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 consolidates the financial results of PennyMac and its subsidiaries.

 

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production (including correspondent production and consumer direct lending) and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of entities 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 adviser 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, 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, an affiliate of these registered funds, PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”) and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). 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 residential mortgage loans on behalf of non-affiliates and the Advised Entities, purchases and originates new prime credit quality residential mortgage loans, and engages in other 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”) and U.S. Department of Agriculture (“USDA”) (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 (“Carried Interest”) from the Master Fund.

 

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily

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indicative of income to be anticipated for the full year ending December 31, 2017. Intercompany accounts and transactions have been eliminated.

 

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

 

Note 2—Concentration of Risk

 

A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these entities (generally comprised of servicing recapture fees, mortgage loan origination fees, fulfillment fees, mortgage loan servicing fees, management fees, Carried Interest, and net interest charged to these entities) totaled 21% and 26% of total net revenue for the quarters ended June 30, 2017 and 2016, respectively, and 19% and 28% for the six months ended June 30, 2017 and 2016, respectively.

 

Note 3—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSR”) Recapture

 

The Company provides fulfillment and other services to PMT under a mortgage banking services agreement. Before September 12, 2016, the Company was entitled to a fulfillment fee based on the type of mortgage loan that PMT acquired and equal to a percentage of the unpaid principal balance (“UPB”) of such mortgage loan. The applicable fulfillment fee percentages were (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, and (iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that the Company was permitted, in its sole discretion, to reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction was only credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

 

Effective September 12, 2016, pursuant to the terms of an amended and restated mortgage banking services agreement, the applicable fulfillment fee percentages are (i) 0.35% for mortgage loans sold or delivered to Fannie Mae or Freddie Mac, and (ii) 0.85% for all other mortgage loans; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to Ginnie Mae guidelines. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae mortgage-backed securities (“MBS”) and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.

 

In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under the Company’s early purchase program, the Company is entitled to fees accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $35 for each mortgage loan that PMT acquires thereunder.

 

Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if the Company refinances mortgage 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 UPB that is not less than 30% of the aggregate UPB of all the mortgage loans so originated.

 

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Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, the Company may, at its option, pay cash to PMT in an amount equal to such fair value instead of transferring such MSRs. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, 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 mortgage loan production activities and MSR recapture between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

    

2017

    

2016

   

2017

    

2016

 

 

(in thousands)

Mortgage servicing rights and excess servicing spread recapture incurred included in Net gains on mortgage loans held for sale at fair value

 

$

1,506

 

$

1,915

 

$

3,201

 

$

3,867

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

21,107

    

$

19,111

    

$

37,677

 

$

32,046

Unpaid principal balance of mortgage loans fulfilled for PMT

 

$

5,918,027

 

$

5,174,020

 

$

10,549,933

 

$

8,433,383

 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

3,204

 

$

2,824

 

$

6,065

 

$

4,773

Unpaid principal balance of mortgage loans purchased from PMT

 

$

10,641,243

 

$

9,409,399

 

$

20,215,960

 

$

15,905,121

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of mortgage loans held for sale to PMT

 

$

18,692

 

$

3,424

 

$

40,222

 

$

8,139

Tax service fees received from PMT included in Mortgage loan origination fees

 

$

1,890

 

$

1,464

 

$

3,269

 

$

2,471

Property management fees received from PMT included in Other income

 

$

95

 

$

54

 

$

166

 

$

85

Early purchase program fees earned from PMT included in Mortgage loan servicing fees

 

$

 1

 

$

 1

 

$

 6

 

$

 2

 

Mortgage Loan Servicing

 

The Company has a loan servicing agreement with PMT (“Servicing Agreement”). The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges relating to mortgage loans it services for PMT. The Servicing Agreement was amended and restated as of September 12, 2016; however, the fee structure was not amended in any material respect.

 

·

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $100 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month. To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

 

·

The base servicing fees for non-distressed mortgage loans are 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 fee rates are $7.50 per month and $8.50 per month for fixed-rate loans and adjustable-rate loans, respectively.

 

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·

The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from 0.50% for a streamline modification to 1.50% for a liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.

 

·

Because PMT has limited employees and infrastructure, 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. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

 

·

Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a mortgage loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.

 

·

The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan (“HAMP”); provided, however, that with respect to any such incentive payments paid to the Company in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

 

The Servicing Agreement expires on September 12, 2020, 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 mortgage loan servicing fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

    

2017

    

2016

 

2017

   

2016

 

 

(in thousands)

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

    

$

82

    

$

79

    

$

147

    

$

135

Activity-based

 

 

176

 

 

172

 

 

319

 

 

287

 

 

 

258

 

 

251

 

 

466

 

 

422

Mortgage loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

1,754

 

 

2,959

 

 

3,713

 

 

6,359

Activity-based

 

 

1,767

 

 

8,518

 

 

4,157

 

 

11,967

 

 

 

3,521

 

 

11,477

 

 

7,870

 

 

18,326

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

6,188

 

 

4,583

 

 

12,025

 

 

8,927

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