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Section 1: 10-Q (10-Q)

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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 March 31, 2018

 

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 May 3, 2018

Class A Common Stock, $0.0001 par value

 

25,094,668

Class B Common Stock, $0.0001 par value

 

45

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

March 31, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

3

 

 

 

PART I. FINANCIAL INFORMATION 

5

 

 

 

Item 1. 

Financial Statements (Unaudited):

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

58

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

72

Item 4. 

Controls and Procedures

74

 

 

 

PART II. OTHER INFORMATION 

75

 

 

 

Item 1. 

Legal Proceedings

75

Item 1A. 

Risk Factors

75

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

75

Item 3. 

Defaults Upon Senior Securities

75

Item 4. 

Mine Safety Disclosures

75

Item 5. 

Other Information

75

Item 6. 

Exhibits

76

 

 

 

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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, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2018.

 

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;

 

·

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 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 the 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 our 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;

 

·

our ability to mitigate cybersecurity risks and cyber incidents;

 

·

our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and

 

·

our organizational structure and certain requirements in our charter documents.

 

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)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands, except share amounts)

 

ASSETS

 

 

 

 

 

 

 

Cash (includes $116,570 and $20,765 pledged to creditors)

 

 $

137,863

 

 $

37,725

 

Short-term investments at fair value

 

 

105,890

 

 

170,080

 

Mortgage loans held for sale at fair value (includes $2,569,189 and $3,081,987 pledged to creditors)

 

 

2,584,236

 

 

3,099,103

 

Derivative assets

 

 

89,469

 

 

78,179

 

Servicing advances, net (includes valuation allowance of $61,670 and $59,958; $104,685 and $114,643 pledged to creditors)

 

 

284,145

 

 

318,066

 

Carried Interest due from Investment Funds pledged to creditors

 

 

538

 

 

8,552

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,352

 

 

1,205

 

Mortgage servicing rights (includes $2,354,489 and $638,010 at fair value; $2,178,536 and $2,098,067 pledged to creditors)

 

 

2,354,489

 

 

2,119,588

 

Real estate acquired in settlement of loans

 

 

2,338

 

 

2,447

 

Furniture, fixtures, equipment and building improvements, net (includes $22,250 and $23,915 pledged to creditors)

 

 

30,172

 

 

29,453

 

Capitalized software, net (includes $1,457 and $1,568 pledged to creditors)

 

 

28,919

 

 

25,729

 

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

 

 

142,938

 

 

144,128

 

Receivable from PennyMac Mortgage Investment Trust

 

 

27,356

 

 

27,119

 

Receivable from Investment Funds

 

 

460

 

 

417

 

Mortgage loans eligible for repurchase

 

 

1,018,488

 

 

1,208,195

 

Other 

 

 

94,238

 

 

98,107

 

Total assets

 

 $

6,902,891

 

 $

7,368,093

 

LIABILITIES

 

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

1,814,282

 

 $

2,381,538

 

Mortgage loan participation purchase and sale agreements

 

 

510,443

 

 

527,395

 

Notes payable

 

 

1,140,022

 

 

891,505

 

Obligations under capital lease

 

 

16,435

 

 

20,971

 

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

 

 

236,002

 

 

236,534

 

Derivative liabilities

 

 

4,476

 

 

5,796

 

Accounts payable and accrued expenses

 

 

113,046

 

 

106,716

 

Mortgage servicing liabilities at fair value

 

 

12,063

 

 

14,120

 

Payable to Investment Funds

 

 

26

 

 

2,427

 

Payable to PennyMac Mortgage Investment Trust 

 

 

117,987

 

 

136,998

 

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

 

 

46,037

 

 

44,011

 

Income taxes payable

 

 

58,956

 

 

52,160

 

Liability for mortgage loans eligible for repurchase

 

 

1,018,488

 

 

1,208,195

 

Liability for losses under representations and warranties  

 

 

20,429

 

 

20,053

 

Total liabilities

 

 

5,108,692

 

 

5,648,419

 

 

 

 

 

 

 

 

 

Commitments and contingencies  –  Note 14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 24,277,768 and 23,529,970 shares, respectively

 

 

 2

 

 

 2

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 45 and 46 shares, respectively

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

221,495

 

 

204,103

 

Retained earnings

 

 

282,114

 

 

265,306

 

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

 

 

503,611

 

 

469,411

 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

1,290,588

 

 

1,250,263

 

Total stockholders' equity

 

 

1,794,199

 

 

1,719,674

 

Total liabilities and stockholders’ equity

 

 $

6,902,891

 

 $

7,368,093

 

 

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

5


 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

 

2018

 

2017

 

 

 

(in thousands, except earnings per share)

 

Revenues

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

From non-affiliates

 

$

59,028

 

$

88,651

 

From PennyMac Mortgage Investment Trust

 

 

12,386

 

 

(1,695)

 

 

 

 

71,414

 

 

86,956

 

Mortgage loan origination fees:

 

 

 

 

 

 

 

From non-affiliates

 

 

23,355

 

 

24,195

 

From PennyMac Mortgage Investment Trust

 

 

1,208

 

 

1,379

 

 

 

 

24,563

 

 

25,574

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

11,944

 

 

16,570

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

From non-affiliates

 

 

135,483

 

 

106,467

 

From PennyMac Mortgage Investment Trust

 

 

11,019

 

 

10,486

 

From Investment Funds

 

 

 —

 

 

496

 

Ancillary and other fees

 

 

14,171

 

 

11,866

 

 

 

 

160,673

 

 

129,315

 

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

 

 

(36,963)

 

 

(57,925)

 

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

 

 

(6,921)

 

 

2,773

 

 

 

 

(43,884)

 

 

(55,152)

 

Net mortgage loan servicing fees

 

 

116,789

 

 

74,163

 

Management fees:

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,696

 

 

5,008

 

From Investment Funds

 

 

79

 

 

366

 

 

 

 

5,775

 

 

5,374

 

Carried Interest from Investment Funds

 

 

(180)

 

 

(128)

 

Net interest income (expense):

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

From non-affiliates

 

 

40,639

 

 

22,054

 

From PennyMac Mortgage Investment Trust

 

 

1,976

 

 

1,805

 

 

 

 

42,615

 

 

23,859

 

Interest expense:

 

 

 

 

 

 

 

To non-affiliates

 

 

32,811

 

 

24,827

 

To PennyMac Mortgage Investment Trust

 

 

3,934

 

 

4,647

 

 

 

 

36,745

 

 

29,474

 

Net interest income (expense)

 

 

5,870

 

 

(5,615)

 

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

 

 

182

 

 

139

 

Results of real estate acquired in settlement of loans

 

 

(28)

 

 

(25)

 

Other

 

 

1,872

 

 

1,465

 

Total net revenues

 

 

238,201

 

 

204,473

 

Expenses

 

 

 

 

 

 

 

Compensation

 

 

102,013

 

 

85,240

 

Servicing

 

 

26,299

 

 

26,843

 

Technology

 

 

14,620

 

 

11,356

 

Occupancy and equipment

 

 

6,377

 

 

5,042

 

Professional services

 

 

5,738

 

 

3,818

 

Marketing

 

 

2,161

 

 

1,736

 

Loan origination

 

 

2,115

 

 

4,133

 

Other

 

 

5,882

 

 

4,273

 

Total expenses

 

 

165,205

 

 

142,441

 

Income before provision for income taxes

 

 

72,996

 

 

62,032

 

Provision for income taxes

 

 

6,070

 

 

7,646

 

Net income

 

 

66,926

 

 

54,386

 

Less: Net income attributable to noncontrolling interest

 

 

50,307

 

 

43,507

 

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

 

$

16,619

 

$

10,879

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

Basic

 

$

0.70

 

$

0.48

 

Diluted

 

$

0.67

 

$

0.47

 

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

 

23,832

 

 

22,619

 

Diluted

 

 

79,461

 

 

77,143

 

 

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

 

 

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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, 2016

 

22,427

 

$

 2

 

$

182,772

 

$

164,549

 

$

1,052,033

 

$

1,399,356

Net income

 

 —

 

 

 —

 

 

 —

 

 

10,879

 

 

43,507

 

 

54,386

Stock and unit-based compensation

 

157

 

 

 —

 

 

1,903

 

 

 —

 

 

3,874

 

 

5,777

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

 

 5

 

 

 —

 

 

84

 

 

 —

 

 

 —

 

 

84

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

 

329

 

 

 —

 

 

8,763

 

 

 —

 

 

(8,763)

 

 

 —

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.

 

 —

 

 

 —

 

 

(2,008)

 

 

 —

 

 

 —

 

 

(2,008)

Balance at March 31, 2017

 

22,918

 

$

 2

 

$

191,514

 

$

175,428

 

$

1,090,651

 

$

1,457,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

23,530

 

$

 2

 

$

204,103

 

$

265,306

 

$

1,250,263

 

$

1,719,674

Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value

 

 —

 

 

 —

 

 

 —

 

 

189

 

 

587

 

 

776

Balance at January 1, 2018

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

16,619

 

 

50,307

 

 

66,926

Stock and unit-based compensation

 

 —

 

 

 —

 

 

5,191

 

 

 —

 

 

4,235

 

 

9,426

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

 

 —

 

 

 —

 

 

24

 

 

 —

 

 

55

 

 

79

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc. by noncontrolling interest unitholders and issued as equity compensation

 

748

 

 

 —

 

 

14,859

 

 

 —

 

 

(14,859)

 

 

 —

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

 

 —

 

 

 —

 

 

(2,682)

 

 

 —

 

 

 —

 

 

(2,682)

Balance at March 31, 2018

 

24,278

 

$

 2

 

$

221,495

 

$

282,114

 

$

1,290,588

 

$

1,794,199

 

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)

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net income

 

$

66,926

 

$

54,386

 

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

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(71,414)

 

 

(86,956)

 

Accrual of servicing rebate payable to Investment Funds

 

 

 —

 

 

45

 

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

 

 

43,884

 

 

55,152

 

Carried Interest from Investment Funds

 

 

180

 

 

128

 

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

 

 

(14,467)

 

 

(8,900)

 

Accrual of interest on excess servicing spread financing

 

 

3,934

 

 

4,647

 

Amortization of debt issuance costs and premiums

 

 

(3,600)

 

 

3,269

 

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

 

 

(147)

 

 

(103)

 

Results of real estate acquired in settlement in loans

 

 

28

 

 

25

 

Stock-based compensation expense

 

 

6,171

 

 

5,525

 

Provision for servicing advance losses

 

 

6,787

 

 

9,921

 

Depreciation and amortization

 

 

2,592

 

 

1,952

 

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

 

 

(9,212,188)

 

 

(10,016,788)

 

Originations of mortgage loans held for sale

 

 

(1,281,302)

 

 

(1,061,212)

 

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

 

 

(911,585)

 

 

(936,948)

 

Sale and principal payments of mortgage loans held for sale to non-affiliates

 

 

11,103,785

 

 

11,860,133

 

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

 

 

781,326

 

 

21,530

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(6,309)

 

 

(5,303)

 

Decrease in servicing advances

 

 

27,450

 

 

21,251

 

Collection of Carried Interest

 

 

7,834

 

 

 —

 

Sale of real estate acquired in settlement of loans

 

 

1,230

 

 

 —

 

Increase in receivable from PennyMac Mortgage Investment Trust

 

 

(955)

 

 

(4,206)

 

(Increase) decrease in receivable from Investment Funds

 

 

(43)

 

 

176

 

Increase in other assets

 

 

(1,593)

 

 

(966)

 

Increase (decrease) in accounts payable and accrued expenses

 

 

4,745

 

 

(28,163)

 

Decrease in payable to Investment Funds

 

 

(2,401)

 

 

(2,037)

 

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(19,544)

 

 

(5,480)

 

Increase in income taxes payable

 

 

6,068

 

 

7,630

 

Net cash provided by (used in) operating activities

 

 

537,392

 

 

(111,292)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

 

64,190

 

 

(30,370)

 

Net settlement of derivative financial instruments used for hedging

 

 

(128,099)

 

 

(20,492)

 

Purchase of mortgage servicing rights

 

 

(27,544)

 

 

(203)

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(2,779)

 

 

(2,329)

 

Acquisition of capitalized software

 

 

(3,722)

 

 

(4,526)

 

Sale of assets purchased from PMT under agreement to resell

 

 

1,190

 

 

 —

 

Decrease (increase) in margin deposits

 

 

15,501

 

 

(2,434)

 

Net cash used in investing activities

 

 

(81,263)

 

 

(60,354)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

9,771,234

 

 

5,815,923

 

Repurchase of assets sold under agreements to repurchase

 

 

(10,338,629)

 

 

(5,516,480)

 

Issuance of mortgage loan participation certificates

 

 

6,155,178

 

 

5,302,595

 

Repayment of mortgage loan participation certificates

 

 

(6,172,301)

 

 

(5,732,434)

 

Advances on notes payable

 

 

650,000

 

 

400,000

 

Repayment of notes payable

 

 

(400,000)

 

 

(110,633)

 

Advances of obligations under capital lease

 

 

 —

 

 

10,298

 

Repayment of obligations under capital lease

 

 

(4,536)

 

 

(2,544)

 

Repayment of excess servicing spread financing

 

 

(12,291)

 

 

(14,632)

 

Payment of debt issuance costs

 

 

(7,891)

 

 

(7,246)

 

Issuance of common stock pursuant to exercise of options

 

 

3,255

 

 

252

 

Net cash (used in) provided by financing activities

 

 

(355,981)

 

 

145,099

 

Net increase (decrease) in cash and restricted cash

 

 

100,148

 

 

(26,547)

 

Cash and restricted cash at beginning of quarter

 

 

38,173

 

 

99,642

 

Cash and restricted cash at end of quarter

 

$

138,321

 

$

73,095

 

Cash and restricted cash at end of period are comprised of the following:

 

 

 

 

 

 

 

Cash

 

$

137,863

 

$

72,767

 

Restricted cash included in Other assets

 

 

458

 

 

328

 

 

 

$

138,321

 

$

73,095

 

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

 

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 and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage 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 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.” In 2017 and through the quarter ended March 31, 2018, the Investment Funds sold or liquidated all of their remaining investments. PCM expects to complete liquidation of the Investment Funds during 2018.

 

·

PennyMac Loan Services, LLC (“PLS”) a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and the Advised Entities, purchases, originates and sells 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.

 

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Note 2—Basis of Presentation and Accounting Changes

 

Basis of Presentation

 

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. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

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 indicative of income to be anticipated for the full year ending December 31, 2018. 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.

 

Accounting Changes

 

During the quarter ended March 31, 2018, the Company adopted changes to the accounting principles used in the preparation of its financial statements summarized below.

 

Mortgage Servicing Rights

 

Effective January 1, 2018, the Company has elected to change the accounting for the classes of mortgage servicing rights (“MSRs”) it had accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The Company determined that a single accounting treatment across all MSRs is consistent with lender valuation under its financing arrangements and simplifies the Company’s hedging activities. As the result of this change, the Company recorded an adjustment to increase its investment in MSRs by $848,000, an increase in its liability for income taxes payable of $72,000 and in increase in stockholders’ equity of $776,000.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”), which supersedes the guidance in the Revenue Recognition topic of the ASC. Effective January 1, 2018, the Company adopted ASU 2014-09 as amended using the modified retrospective method. The adoption of ASU 2014-09 did not require the Company to record a cumulative effect adjustment to its beginning retained earnings.

 

The Company’s revenues from contracts with customers that are subject to ASU 2014-09 include fulfillment fees, management fees, Carried Interest and certain reimbursed overhead costs. Other revenue and income streams are not subject to ASU 2014-09 as they are financial instruments or other contractual rights and obligations accounted for under the Receivables,  Investments and Debt and Equity Securities, Topics of the ASC Transfers and Servicing, Topic 825 Financial Instruments and  Derivatives and Hedging.  

 

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Fulfillment Fees

 

Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. Fulfillment fee amounts are based upon a negotiated fee schedule and the unpaid principal balance of the mortgage loans purchased by PMT. The Company’s obligation under the agreement is fulfilled when PMT completes the sale or securitization of a mortgage loan it purchases. Fulfillment fees are generally collected within 30 days of purchase by PMT, although a portion of the fulfillment fees may not be collected until 30 days following sale or securitization to the extent such sale or securitization does not occur in the month of purchase. Fulfillment fee revenue is recognized in the month the fee is earned. Fulfillment fees receivable contract assets are disclosed in Note 4Transactions with Affiliates.  

 

Management fees

   

Management fees represent compensation to the Company for its management services provided to the Advised Entities. Management fees are earned based on the Investment Funds’ net assets and PMT’s shareholders’ equity amounts and profitability in excess of specified thresholds, and are recognized as services are provided and are paid to the Company on a quarterly basis within 30 days of the end of the quarter. Management fees receivable contract assets are disclosed in Note 4Transactions with Affiliates.

 

Carried Interest

 

The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to the Company. As a result, the Company has concluded as part of its assessment of the effect of the adoption of ASU 2014-09 that its Carried Interest represents an equity method investment subject to the Investments – Equity Method and Joint Ventures topic of the ASC. Therefore, effective January 1, 2018, the Company recharacterized its Carried Interest as financial instruments under the equity method of accounting. Carried Interest balances are disclosed in Note 9Carried Interest Due from Investment Funds.

 

Expense reimbursements

 

Under the Company’s management agreement with PMT, PMT is required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end. Before the adoption of ASU 2014-09, the Company accounted for such reimbursements as reductions to expenses. With the adoption of ASU 2014-09, the Company is required to include such expense reimbursements in its net revenues. As a result of the adoption of ASU 2014-09, certain overhead reimbursement amounts were reclassified from the following expense line items to Other revenue as summarized below:

 

 

 

 

 

 

 

Quarter ended

Income statement line

 

March 31, 2018

 

 

(in thousands)

Compensation

 

$

120

Occupancy and equipment

 

 

589

Technology

 

 

220

Other

 

 

192

Total expense reimbursements included in Other revenue

 

$

1,121

 

 

 

 

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Cash Flows

 

During the quarter ended March 31, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. Accordingly, the Company retrospectively changed the presentation of its consolidated statements of cash flows to conform to the requirements of ASU 2016-18. For the purpose of reporting statement of cash flows, the Company has identified tenant security deposits relating to rental properties owned by PMT and managed by the Company as restricted cash, which are included in Other asset on the Company’s consolidated balance sheets. As the result of adoption of ASU 2016-18, the Company’s consolidated statements of cash flows for the quarter ended March 31, 2017 changed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As previously

 

 

Effect of adoption

 

 

 

 

 

 

reported

    

 

of ASU 2016-18

    

 

As reported

 

 

(in thousands)

Cash flow from operating activities

 

$

(111,345)

 

$

53

 

$

(111,292)

Cash and restricted cash at quarter end

 

$

72,767

 

$

328

 

$

73,095

 

 

 

Note 3—Concentration of Risk

 

A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these entities (generally comprised of gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, mortgage loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), management fees, Carried Interest, and net interest charged to these entities) totaled 15% and 16% of total net revenue for the quarters ended March 31, 2018 and 2017, respectively.

 

Note 4—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 an amended and restated mortgage banking services agreement for which it receives a fulfillment fee. Pursuant to the terms of mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS 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. The mortgage banking services agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.

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The Company sells newly originated loans to PMT under a mortgage loan purchase agreement and a flow commercial mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. Beginning in the quarter ended September 30, 2017, the Company also sells non-government insured or guaranteed mortgage loans to PMT under the mortgage loan purchase agreement. The Company sells to PMT small balance commercial mortgage loans, including multifamily mortgage loans, originated as part of its commercial lending activities using the flow commercial mortgage loan purchase agreement.

 

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 cash in an amount equal to 30% of the fair market value of the MSRs related to all the mortgage loans so originated. 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 March 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Net gain (loss) on mortgage loans held for sale at fair value:

 

 

 

 

 

 

 

Net gain on mortgage loans held for sale to PMT

 

$

13,811

 

$

 —

 

Mortgage servicing rights and excess servicing spread recapture incurred

 

 

(1,425)

 

 

(1,695)

 

 

 

$

12,386

 

$

(1,695)

 

Sale of mortgage loans held for sale to PMT

 

$

781,326

 

 

21,530

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

11,944

    

$

16,570

 

Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees

 

$

4,225,631

 

$

4,631,906

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

2,641

 

$

2,871

 

Unpaid principal balance of mortgage loans purchased from PMT

 

$

8,847,873

 

$

9,574,717

 

 

 

 

 

 

 

 

 

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

 

$

1,208

 

$

1,379

 

Property management fees received from PMT included in Other income

 

$

99

 

$

71

 

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

 

$

 —

 

$

 5

 

 

Mortgage Loan Servicing

 

The Company has a mortgage 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 REO. The Company also remains entitled to customary ancillary income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

 

·

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $85 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

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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.

 

·

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.

 

·

Because PMT has a small number of employees and limited 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.

 

·

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; 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 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 $750 for a streamline modification to $1,750 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.

 

·

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 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 March 31, 

 

    

2018

    

2017

 

 

(in thousands)

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

Base and supplemental

    

$

56

    

$

65

Activity-based

 

 

122

 

 

143

 

 

 

178

 

 

208

Mortgage loans at fair value:

 

 

 

 

 

 

Base and supplemental

 

 

1,005

 

 

1,958

Activity-based

 

 

2,080

 

 

2,390

 

 

 

3,085

 

 

4,348

Mortgage servicing rights:

 

 

 

 

 

 

Base and supplemental

 

 

7,649

 

 

5,837

Activity-based

 

 

107

 

 

93

 

 

 

7,756

 

 

5,930

 

 

$

11,019

 

$

10,486

 

Investment Management Activities

 

The Company has a management agreement with PMT (“Management Agreement”). The Management Agreement provides that:

 

·