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Section 1: 10-Q (10-Q)

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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 September 30, 2016

 

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, 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  ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(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 ☐ 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 November 7, 2016

Class A Common Stock, $0.0001 par value

 

22,309,354

Class B Common Stock, $0.0001 par value

 

49

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

September 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. 

 

Consolidated Balance Sheets

 

Consolidated Statements of Income

 

Consolidated Statements of Changes in Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

Item 2. 

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

61 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

86 

Item 4. 

Controls and Procedures

86 

 

 

 

PART II. OTHER INFORMATION 

87 

 

 

 

Item 1. 

Legal Proceedings

87 

Item 1A. 

Risk Factors

87 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

87 

Item 3. 

Defaults Upon Senior Securities

87 

Item 4. 

Mine Safety Disclosures

87 

Item 5. 

Other Information

87 

Item 6. 

Exhibits

88 

 

 

 

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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, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2016.

 

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;

·

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

·

foreclosure delays and changes in foreclosure practices;

·

certain banking regulations that may limit our business activities;

·

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;

·

purchase opportunities for mortgage servicing rights (“MSRs”) and our success in winning bids;

·

changes in prevailing interest rates;

3


 

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·

increases in loan delinquencies and defaults;

·

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

·

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

·

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 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 historical 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


 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2016

   

2015

 

 

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Cash (includes $84,851 and $93,757 pledged to creditors)

 $

94,727

     

 $

105,472

 

Short-term investments at fair value

 

58,749

 

 

46,319

 

Mortgage loans held for sale at fair value (includes $3,094,617 and $1,079,489 pledged to creditors)

 

3,127,377

 

 

1,101,204

 

Derivative assets

 

135,777

 

 

50,280

 

Servicing advances, net (includes valuation allowance of $38,031 and $33,458)

 

306,150

 

 

299,354

 

Carried Interest due from Investment Funds pledged to creditors

 

70,870

 

 

69,926

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

1,169

 

 

1,145

 

Mortgage servicing rights (includes $492,028 and $660,247 at fair value; $1,333,078 and $803,560 pledged to creditors)

 

1,337,674

 

 

1,411,935

 

Real estate acquired in settlement of loans

 

1,996

 

 

 —

 

Furniture, fixtures, equipment and building improvements, net (includes $22,281 and $14,034 pledged to creditors)

 

29,121

 

 

16,311

 

Capitalized software, net (includes $444 and $783 pledged to creditors)

 

8,361

 

 

3,025

 

Note receivable from PennyMac Mortgage Investment Trust

 

150,000

 

 

150,000

 

Receivable from PennyMac Mortgage Investment Trust

 

14,747

 

 

18,965

 

Receivable from Investment Funds

 

1,596

 

 

1,316

 

Deferred tax asset

 

 —

 

 

18,378

 

Mortgage loans eligible for repurchase

 

197,819

 

 

166,070

 

Other 

 

60,061

 

 

45,594

 

Total assets

 $

5,596,194

 

 $

3,505,294

 

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 $

2,491,366

 

 $

1,166,731

 

Mortgage loan participation and sale agreement

 

782,913

 

 

234,872

 

Notes payable

 

110,619

 

 

61,136

 

Obligations under capital lease

 

20,700

 

 

13,579

 

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

 

280,367

 

 

412,425

 

Derivative liabilities

 

4,426

 

 

9,083

 

Accounts payable and accrued expenses

 

106,684

 

 

89,915

 

Mortgage servicing liabilities at fair value

 

13,045

 

 

1,399

 

Payable to Investment Funds

 

27,265

 

 

30,429

 

Payable to PennyMac Mortgage Investment Trust 

 

165,264

 

 

162,379

 

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

 

75,434

 

 

74,315

 

Income taxes payable

 

11,415

 

 

 —

 

Liability for mortgage loans eligible for repurchase

 

197,819

 

 

166,070

 

Liability for losses under representations and warranties  

 

18,473

 

 

20,611

 

Total liabilities

 

4,305,790

 

 

2,442,944

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,274,145 and 21,990,831 shares, respectively

 

2

 

 

2

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49 and 51 shares, respectively

 

 —

 

 

 —

 

Additional paid-in capital

 

179,134

 

 

172,354

 

Retained earnings

 

141,805

 

 

98,470

 

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

 

320,941

 

 

270,826

 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

969,463

 

 

791,524

 

Total stockholders' equity

 

1,290,404

 

 

1,062,350

 

Total liabilities and stockholders’ equity

 $

5,596,194

 

 $

3,505,294

 

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

    

$

183,811

     

$

85,744

    

$

409,405

     

$

247,822

 

Recapture payable to PennyMac Mortgage Investment Trust

 

 

(1,690)

 

 

(3,098)

 

 

(5,557)

 

 

(5,843)

 

 

 

 

182,121

 

 

82,646

 

 

403,848

 

 

241,979

 

Mortgage loan origination fees

 

 

34,621

 

 

29,448

 

 

85,962

 

 

70,551

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,255

 

 

17,553

 

 

59,301

 

 

45,752

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

98,865

 

 

83,424

 

 

282,962

 

 

200,392

 

From PennyMac Mortgage Investment Trust

 

 

11,039

 

 

11,736

 

 

38,919

 

 

34,542

 

From Investment Funds

 

 

770

 

 

796

 

 

2,194

 

 

1,917

 

Ancillary and other fees

 

 

11,913

 

 

10,096

 

 

34,183

 

 

33,131

 

 

 

 

122,587

 

 

106,052

 

 

358,258

 

 

269,982

 

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

 

 

(80,830)

 

 

(59,065)

 

 

(309,304)

 

 

(128,073)

 

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

 

 

4,107

 

 

10,271

 

 

40,984

 

 

10,674

 

 

 

 

(76,723)

 

 

(48,794)

 

 

(268,320)

 

 

(117,399)

 

Net mortgage loan servicing fees

 

 

45,864

 

 

57,258

 

 

89,938

 

 

152,583

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,025

 

 

5,742

 

 

15,576

 

 

18,524

 

From Investment Funds

 

 

496

 

 

714

 

 

1,587

 

 

3,384

 

 

 

 

5,521

 

 

6,456

 

 

17,163

 

 

21,908

 

Carried Interest from Investment Funds

 

 

107

 

 

1,483

 

 

944

 

 

2,898

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

20,735

 

 

13,764

 

 

50,994

 

 

35,348

 

From PennyMac Mortgage Investment Trust

 

 

1,974

 

 

1,289

 

 

5,798

 

 

1,822

 

 

 

 

22,709

 

 

15,053

 

 

56,792

 

 

37,170

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

22,689

 

 

12,918

 

 

56,414

 

 

31,526

 

To PennyMac Mortgage Investment Trust

 

 

4,827

 

 

8,026

 

 

17,555

 

 

17,596

 

 

 

 

27,516

 

 

20,944

 

 

73,969

 

 

49,122

 

Net interest expense

 

 

(4,807)

 

 

(5,891)

 

 

(17,177)

 

 

(11,952)

 

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

 

 

(13)

 

 

(158)

 

 

130

 

 

(295)

 

Result of real estate acquired in settlement of loans

 

 

42

 

 

 —

 

 

 —

 

 

 —

 

Other

 

 

684

 

 

410

 

 

2,493

 

 

2,446

 

Total net revenue

 

 

291,395

 

 

189,205

 

 

642,602

 

 

525,870

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

96,132

 

 

74,129

 

 

247,577

 

 

202,695

 

Servicing

 

 

22,177

 

 

16,770

 

 

56,494

 

 

55,108

 

Technology

 

 

9,733

 

 

6,676

 

 

24,313

 

 

18,104

 

Loan origination

 

 

6,471

 

 

4,314

 

 

15,567

 

 

12,813

 

Professional services

 

 

4,631

 

 

3,803

 

 

12,923

 

 

10,710

 

Other

 

 

12,973

 

 

9,590

 

 

32,053

 

 

24,480

 

Total expenses

 

 

152,117

 

 

115,282

 

 

388,927

 

 

323,910

 

Income before provision for income taxes

 

 

139,278

 

 

73,923

 

 

253,675

 

 

201,960

 

Provision for income taxes

 

 

16,976

 

 

8,575

 

 

30,535

 

 

23,308

 

Net income

 

 

122,302

 

 

65,348

 

 

223,140

 

 

178,652

 

Less: Net income attributable to noncontrolling interest

 

 

98,617

 

 

52,668

 

 

179,805

 

 

144,195

 

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

 

$

23,685

 

$

12,680

 

$

43,335

 

$

34,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.07

 

$

0.58

 

$

1.96

 

$

1.59

 

Diluted

 

$

1.06

 

$

0.58

 

$

1.95

 

$

1.58

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,217

 

 

21,810

 

 

22,101

 

 

21,702

 

Diluted

 

 

76,355

 

 

76,138

 

 

76,331

 

 

76,098

 

 

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

 

 

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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, 2014

    

21,578

    

$

2

    

    

$

162,720

    

$

51,242

    

$

593,302

    

$

807,266

 

Net income

 

 —

 

 

 —

 

 

 

 —

 

 

34,457

 

 

144,195

 

 

178,652

 

Stock and unit-based compensation

 

75

 

 

 —

 

 

 

3,746

 

 

 —

 

 

9,358

 

 

13,104

 

Distributions

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(9,627)

 

 

(9,627)

 

Issuance of common stock in settlement of directors' fees

 

13

 

 

 —

 

 

 

223

 

 

 —

 

 

 —

 

 

223

 

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

 

177

 

 

 —

 

 

 

2,919

 

 

 —

 

 

(2,919)

 

 

 —

 

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.

 

 —

 

 

 —

 

 

 

(311)

 

 

 —

 

 

 —

 

 

(311)

 

Balance at September 30, 2015

 

21,843

 

$

2

 

 

$

169,297

 

$

85,699

 

$

734,309

 

$

989,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

21,991

 

$

2

 

 

$

172,354

 

$

98,470

 

$

791,524

 

$

1,062,350

 

Net income

 

 —

 

 

 —

 

 

 

 —

 

 

43,335

 

 

179,805

 

 

223,140

 

Stock and unit-based compensation

 

99

 

 

 —

 

 

 

3,341

 

 

 —

 

 

8,914

 

 

12,255

 

Distributions

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(6,742)

 

 

(6,742)

 

Issuance of common stock in settlement of directors' fees

 

18

 

 

 —

 

 

 

230

 

 

 —

 

 

 —

 

 

230

 

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

 

166

 

 

 —

 

 

 

4,038

 

 

 —

 

 

(4,038)

 

 

 —

 

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.

 

 —

 

 

 —

 

 

 

(829)

 

 

 —

 

 

 —

 

 

(829)

 

Balance at September 30, 2016

 

22,274

 

$

2

 

 

$

179,134

 

$

141,805

 

$

969,463

 

$

1,290,404

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Cash flow from operating activities

 

 

                              

 

 

                              

 

Net income

 

$

223,140

 

$

178,652

 

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

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(403,848)

 

 

(241,979)

 

Accrual of servicing rebate payable to Investment Funds

 

 

209

 

 

1,193

 

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

 

 

268,320

 

 

117,399

 

Carried Interest from Investment Funds

 

 

(944)

 

 

(2,898)

 

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

 

 

(20,451)

 

 

(11,703)

 

Accrual of interest on excess servicing spread financing

 

 

17,555

 

 

17,596

 

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

 

 

7,944

 

 

5,688

 

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

 

 

(24)

 

 

422

 

Stock and unit-based compensation expense

 

 

12,255

 

 

13,104

 

Provision for servicing advance losses

 

 

19,799

 

 

23,538

 

Depreciation and amortization

 

 

3,965

 

 

1,585

 

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

 

 

(29,144,685)

 

 

(24,864,698)

 

Originations of mortgage loans held for sale

 

 

(4,428,426)

 

 

(3,106,147)

 

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

 

 

(1,588,711)

 

 

(989,009)

 

Sale and principal payments of mortgage loans held for sale

 

 

33,124,241

 

 

28,346,871

 

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

 

 

13,146

 

 

13,708

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(13,525)

 

 

(17,112)

 

Increase in servicing advances

 

 

(28,591)

 

 

(47,080)

 

Increase in receivable from Investment Funds

 

 

(489)

 

 

(444)

 

Decrease in receivable from PennyMac Mortgage Investment Trust

 

 

5,491

 

 

8,889

 

Decrease in deferred tax asset

 

 

18,668

 

 

21,399

 

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

 

 

 —

 

 

(4,299)

 

Increase in other assets

 

 

(24,325)

 

 

(23,113)

 

Increase in accounts payable and accrued expenses

 

 

12,992

 

 

22,280

 

Decrease in payable to Investment Funds

 

 

(3,164)

 

 

(5,697)

 

Increase in payable to PennyMac Mortgage Investment Trust

 

 

1,971

 

 

22,698

 

Increase in income taxes payable

 

 

11,415

 

 

 —

 

Net cash used in operating activities

 

 

(1,916,072)

 

 

(519,157)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Increase in short-term investments

 

 

(12,430)

 

 

(3,079)

 

Advance on note receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

(168,546)

 

Repayment of note receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

18,546

 

Purchase of mortgage servicing rights

 

 

(23)

 

 

(379,264)

 

Net settlement of derivative financial instruments used for hedging

 

 

173,696

 

 

(3,678)

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(17,539)

 

 

(5,716)

 

Acquisition of capitalized software

 

 

(5,572)

 

 

(1,745)

 

(Increase) decrease in margin deposits and restricted cash

 

 

(39,467)

 

 

5,331

 

Net cash  provided by (used in) investing activities

 

 

98,665

 

 

(538,151)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

31,708,423

 

 

25,947,385

 

Repurchase of assets sold under agreements to repurchase

 

 

(30,384,066)

 

 

(25,482,890)

 

Issuance of mortgage loan participation certificates

 

 

21,895,964

 

 

13,265,896

 

Repayment of mortgage loan participation certificates

 

 

(21,347,920)

 

 

(13,162,123)

 

Advances on notes payable

 

 

97,000

 

 

289,556

 

Repayment of notes payable

 

 

(48,661)

 

 

(29,411)

 

Issuance of excess servicing spread financing

 

 

 —

 

 

271,452

 

Repayment of excess servicing spread financing

 

 

(54,623)

 

 

(55,800)

 

Repurchase of excess servicing spread financing

 

 

(59,045)

 

 

 —

 

Advances of obligations under capital lease

 

 

12,651

 

 

 —

 

Repayment of obligation under capital lease

 

 

(5,530)

 

 

(6)

 

Payment of debt issuance costs

 

 

(6,525)

 

 

(5,965)

 

Assumption of mortgage servicing liability

 

 

5,736

 

 

 —

 

Distribution to Private National Mortgage Acceptance Company, LLC members

 

 

(6,742)

 

 

(9,627)

 

Net cash provided by financing activities

 

 

1,806,662

 

 

1,028,467

 

Net decrease in cash

 

 

(10,745)

 

 

(28,841)

 

Cash at beginning of period

 

 

105,472

 

 

76,256

 

Cash at end of period

 

$

94,727

 

$

47,415

 

 

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, 2015.

 

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, 2016. Intercompany accounts and transactions have been eliminated.

 

Preparation of financial statements in compliance with GAAP requires management to make estimates and judgments 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. Fees (generally comprised of fulfillment fees, mortgage loan servicing fees, management fees, Carried Interest and servicing recapture fees) and interest charged to these entities totaled 15% and 20% of total net revenue for the quarters ended September 30, 2016 and 2015, respectively, and 22% and 18% for the nine months ended September 30, 2016 and 2015, respectively.

 

Note 3—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities

 

Following is a summary of mortgage lending and sourcing activity between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

   

2016

   

2015

   

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights and excess servicing spread recapture incurred

    

$

1,690

    

$

3,098

    

$

5,557

 

$

5,843

 

Fulfillment fee revenue

 

$

27,255

 

$

17,553

 

$

59,301

 

$

45,752

 

Unpaid principal balance of mortgage loans fulfilled for PMT

 

$

7,263,557

 

$

4,073,201

 

$

15,696,940

 

$

10,542,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

3,509

 

$

3,236

 

$

8,282

 

$

7,084

 

Unpaid principal balance of mortgage loans purchased from PMT

 

$

11,694,065

 

$

10,783,882

 

$

27,599,186

 

$

23,602,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of mortgage loans held for sale to PMT

 

$

5,007

 

$

1,047

 

$

13,146

 

$

11,875

 

Tax service fees received from PMT

 

$

2,006

 

$

1,291

 

$

4,537

 

$

3,293

 

Early purchase program fees earned from PMT

 

$

5

 

$

 —

 

$

7

 

$

 —

 

 

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Mortgage Loan Servicing Activities

 

Following is a summary of mortgage loan servicing fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

 

Nine months ended September 30, 

 

 

 

2016

   

2015

 

 

2016

   

2015

 

 

 

(in thousands)

 

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

    

$

90

    

$

130

    

 

$

225

    

$

198

 

Activity-based

 

 

210

 

 

153

 

 

 

497

 

 

243

 

 

 

 

300

 

 

283

 

 

 

722

 

 

441