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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 June 30, 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 July 31, 2018

Class A Common Stock, $0.0001 par value

 

25,101,553

Class B Common Stock, $0.0001 par value

 

45

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

June 30, 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

67

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

83

Item 4. 

Controls and Procedures

84

 

 

 

PART II. OTHER INFORMATION 

85

 

 

 

Item 1. 

Legal Proceedings

85

Item 1A. 

Risk Factors

85

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

85

Item 3. 

Defaults Upon Senior Securities

85

Item 4. 

Mine Safety Disclosures

85

Item 5. 

Other Information

86

Item 6. 

Exhibits

86

 

 

 

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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


 

Table of Contents

·

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)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2018

    

2017

 

 

 

(in thousands, except share amounts)

 

ASSETS

 

 

 

 

 

 

 

Cash (includes $152,382 and $20,765 pledged to creditors)

 

 $

189,663

 

 $

37,725

 

Short-term investments at fair value

 

 

98,571

 

 

170,080

 

Mortgage loans held for sale at fair value (includes $2,498,583 and $3,081,987 pledged to creditors)

 

 

2,527,231

 

 

3,099,103

 

Derivative assets

 

 

92,471

 

 

78,179

 

Servicing advances, net (includes valuation allowance of $61,825 and $59,958; $94,715 and $114,643 pledged to creditors)

 

 

258,900

 

 

318,066

 

Carried Interest due from Investment Funds pledged to creditors

 

 

370

 

 

8,552

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,424

 

 

1,205

 

Mortgage servicing rights (includes $2,486,157 and $638,010 at fair value; $2,333,750 and $2,098,067 pledged to creditors)

 

 

2,486,157

 

 

2,119,588

 

Real estate acquired in settlement of loans

 

 

2,300

 

 

2,447

 

Furniture, fixtures, equipment and building improvements, net (includes $20,656 and $23,915 pledged to creditors)

 

 

29,607

 

 

29,453

 

Capitalized software, net (includes $1,347 and $1,568 pledged to creditors)

 

 

31,913

 

 

25,729

 

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

 

 

138,582

 

 

144,128

 

Receivable from PennyMac Mortgage Investment Trust

 

 

19,661

 

 

27,119

 

Receivable from Investment Funds

 

 

12

 

 

417

 

Mortgage loans eligible for repurchase

 

 

879,621

 

 

1,208,195

 

Other 

 

 

85,223

 

 

98,107

 

Total assets

 

 $

6,841,706

 

 $

7,368,093

 

LIABILITIES

 

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

1,825,813

 

 $

2,381,538

 

Mortgage loan participation purchase and sale agreements

 

 

528,368

 

 

527,395

 

Notes payable

 

 

1,140,546

 

 

891,505

 

Obligations under capital lease

 

 

13,032

 

 

20,971

 

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

 

 

229,470

 

 

236,534

 

Derivative liabilities

 

 

4,094

 

 

5,796

 

Accounts payable and accrued expenses

 

 

114,005

 

 

106,716

 

Mortgage servicing liabilities at fair value

 

 

10,253

 

 

14,120

 

Payable to Investment Funds

 

 

404

 

 

2,427

 

Payable to PennyMac Mortgage Investment Trust 

 

 

99,309

 

 

136,998

 

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

 

 

46,903

 

 

44,011

 

Income taxes payable

 

 

67,357

 

 

52,160

 

Liability for mortgage loans eligible for repurchase

 

 

879,621

 

 

1,208,195

 

Liability for losses under representations and warranties  

 

 

20,587

 

 

20,053

 

Total liabilities

 

 

4,979,762

 

 

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, 25,008,655 and 23,529,970 shares, respectively

 

 

 3

 

 

 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

 

 

229,941

 

 

204,103

 

Retained earnings

 

 

299,951

 

 

265,306

 

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

 

 

529,895

 

 

469,411

 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

1,332,049

 

 

1,250,263

 

Total stockholders' equity

 

 

1,861,944

 

 

1,719,674

 

Total liabilities and stockholders’ equity

 

 $

6,841,706

 

 $

7,368,093

 

 

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

5


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

  

Six months ended June 30, 

 

 

 

2018

 

2017

  

2018

 

2017

 

 

 

(in thousands, except earnings per share)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

46,019

 

$

99,597

 

$

105,047

 

$

188,248

 

From PennyMac Mortgage Investment Trust

 

 

14,927

 

 

(1,506)

 

 

27,313

 

 

(3,201)

 

 

 

 

60,946

 

 

98,091

 

 

132,360

 

 

185,047

 

Mortgage loan origination fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

22,886

 

 

28,303

 

 

46,241

 

 

52,498

 

From PennyMac Mortgage Investment Trust

 

 

1,542

 

 

1,890

 

 

2,750

 

 

3,269

 

 

 

 

24,428

 

 

30,193

 

 

48,991

 

 

55,767

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

14,559

 

 

21,107

 

 

26,503

 

 

37,677

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

138,871

 

 

112,348

 

 

274,354

 

 

218,815

 

From PennyMac Mortgage Investment Trust

 

 

9,431

 

 

10,099

 

 

20,450

 

 

20,585

 

From Investment Funds

 

 

 3

 

 

543

 

 

 3

 

 

1,039

 

Ancillary and other fees

 

 

13,637

 

 

11,202

 

 

27,808

 

 

23,068

 

 

 

 

161,942

 

 

134,192

 

 

322,615

 

 

263,507

 

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

 

 

(47,257)

 

 

(94,435)

 

 

(84,220)

 

 

(152,360)

 

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

 

 

(996)

 

 

7,156

 

 

(7,917)

 

 

9,929

 

 

 

 

(48,253)

 

 

(87,279)

 

 

(92,137)

 

 

(142,431)

 

Net mortgage loan servicing fees

 

 

113,689

 

 

46,913

 

 

230,478

 

 

121,076

 

Management fees, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,728

 

 

5,638

 

 

11,424

 

 

10,646

 

From Investment Funds

 

 

(64)

 

 

369

 

 

15

 

 

735

 

 

 

 

5,664

 

 

6,007

 

 

11,439

 

 

11,381

 

Carried Interest from Investment Funds

 

 

(168)

 

 

241

 

 

(348)

 

 

113

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

53,206

 

 

32,948

 

 

93,845

 

 

55,002

 

From PennyMac Mortgage Investment Trust

 

 

1,898

 

 

2,025

 

 

3,874

 

 

3,830

 

 

 

 

55,104

 

 

34,973

 

 

97,719

 

 

58,832

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

28,706

 

 

32,511

 

 

61,517

 

 

57,338

 

To PennyMac Mortgage Investment Trust

 

 

3,910

 

 

4,366

 

 

7,844

 

 

9,013

 

 

 

 

32,616

 

 

36,877

 

 

69,361

 

 

66,351

 

Net interest income (expense)

 

 

22,488

 

 

(1,904)

 

 

28,358

 

 

(7,519)

 

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

 

 

108

 

 

76

 

 

290

 

 

215

 

Results of real estate acquired in settlement of loans

 

 

13

 

 

(119)

 

 

(15)

 

 

(144)

 

Other

 

 

2,571

 

 

1,116

 

 

4,443

 

 

2,581

 

Total net revenues

 

 

244,298

 

 

201,721

 

 

482,499

 

 

406,194

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

98,540

 

 

82,967

 

 

200,553

 

 

168,207

 

Servicing

 

 

28,490

 

 

24,702

 

 

54,789

 

 

51,545

 

Technology

 

 

15,154

 

 

11,581

 

 

29,774

 

 

22,937

 

Occupancy and equipment

 

 

6,507

 

 

5,965

 

 

12,884

 

 

11,007

 

Professional services

 

 

5,587

 

 

4,523

 

 

11,325

 

 

8,341

 

Loan origination

 

 

5,144

 

 

5,116

 

 

7,259

 

 

9,249

 

Marketing

 

 

2,218

 

 

2,483

 

 

4,379

 

 

4,219

 

Other

 

 

7,960

 

 

6,424

 

 

13,842

 

 

10,697

 

Total expenses

 

 

169,600

 

 

143,761

 

 

334,805

 

 

286,202

 

Income before provision for income taxes

 

 

74,698

 

 

57,960

 

 

147,694

 

 

119,992

 

Provision for income taxes

 

 

6,293

 

 

7,214

 

 

12,363

 

 

14,860

 

Net income

 

 

68,405

 

 

50,746

 

 

135,331

 

 

105,132

 

Less: Net income attributable to noncontrolling interest

 

 

50,568

 

 

40,267

 

 

100,875

 

 

83,774

 

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

 

$

17,837

 

$

10,479

 

$

34,456

 

$

21,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.71

 

$

0.45

 

$

1.41

 

$

0.93

 

Diluted

 

$

0.70

 

$

0.44

 

$

1.38

 

$

0.91

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,959

 

 

23,388

 

 

24,399

 

 

23,006

 

Diluted

 

 

78,825

 

 

77,650

 

 

78,947

 

 

77,641

 

 

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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

34,456

 

 

100,875

 

 

135,331

Stock and unit-based compensation

 

230

 

 

 —

 

 

7,728

 

 

 —

 

 

8,340

 

 

16,068

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

 

 —

 

 

 —

 

 

51

 

 

 —

 

 

109

 

 

160

Repurchase of Class A common stock

 

(236)

 

 

 —

 

 

(4,826)

 

 

 —

 

 

 —

 

 

(4,826)

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

 

1,485

 

 

 1

 

 

28,124

 

 

 —

 

 

(28,125)

 

 

 —

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

 

 —

 

 

 —

 

 

(5,239)

 

 

 —

 

 

 —

 

 

(5,239)

Balance at June 30, 2018

 

25,009

 

$

 3

 

$

229,941

 

$

299,951

 

$

1,332,049

 

$

1,861,944

 

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, 

 

 

    

2018

    

2017

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net income

 

$

135,331

 

$

105,132

 

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

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(132,360)

 

 

(185,047)

 

Accrual of servicing rebate payable to Investment Funds

 

 

 —

 

 

100

 

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

 

 

92,137

 

 

142,431

 

Carried Interest from Investment Funds

 

 

348

 

 

(113)

 

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

 

 

(39,390)

 

 

(21,615)

 

Accrual of interest on excess servicing spread financing

 

 

7,844

 

 

9,013

 

Amortization of premiums and debt issuance costs

 

 

(13,385)

 

 

7,122

 

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

 

 

(219)

 

 

(144)

 

Results of real estate acquired in settlement in loans

 

 

15

 

 

144

 

Stock-based compensation expense

 

 

12,235

 

 

10,390

 

Provision for servicing advance losses

 

 

12,097

 

 

18,030

 

Loss from disposition of fixed assets and impairment of capitalized software

 

 

 —

 

 

377

 

Depreciation and amortization

 

 

5,647

 

 

4,117

 

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

 

 

(19,267,316)

 

 

(21,244,194)

 

Originations of mortgage loans held for sale

 

 

(2,518,992)

 

 

(2,353,899)

 

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

 

 

(2,002,582)

 

 

(1,814,080)

 

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

 

 

22,832,809

 

 

24,497,179

 

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

 

 

1,427,637

 

 

40,222

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(12,974)

 

 

(11,520)

 

Settlement of repurchase agreeement derivatives

 

 

7,478

 

 

 —

 

Decrease in servicing advances

 

 

47,980

 

 

38,821

 

Collection of Carried Interest

 

 

7,834

 

 

 —

 

Sale of real estate acquired in settlement of loans

 

 

2,130

 

 

 —

 

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

 

5,873

 

 

(1,092)

 

Decrease (increase)  in receivable from Investment Funds

 

 

405

 

 

(211)

 

Decrease (increase) in other assets

 

 

7,792

 

 

(29,492)

 

Increase (decrease) in accounts payable and accrued expenses

 

 

5,349

 

 

(30,395)

 

Decrease in payable to Investment Funds

 

 

(2,023)

 

 

(5,157)

 

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(38,580)

 

 

(37,650)

 

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

 

 

 —

 

 

(6,221)

 

Increase in income taxes payable

 

 

12,778

 

 

14,824

 

Net cash provided by (used in) operating activities

 

 

595,898

 

 

(852,928)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

 

71,509

 

 

(59,476)

 

Net settlement of derivative financial instruments used for hedging

 

 

(126,918)

 

 

(30,949)

 

Purchase of mortgage servicing rights

 

 

(30,129)

 

 

(159,465)

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(4,321)

 

 

(4,668)

 

Acquisition of capitalized software

 

 

(7,664)

 

 

(7,719)

 

Net change in assets purchased from PMT under agreement to resell

 

 

5,546

 

 

 —

 

Increase in margin deposits

 

 

(3,774)

 

 

(12,071)

 

Net cash used in investing activities

 

 

(95,751)

 

 

(274,348)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

20,763,584

 

 

13,332,610

 

Repurchase of assets sold under agreements to repurchase

 

 

(21,319,387)

 

 

(12,046,244)

 

Issuance of mortgage loan participation certificates

 

 

12,486,542

 

 

10,491,796

 

Repayment of mortgage loan participation certificates

 

 

(12,485,880)

 

 

(10,919,650)

 

Advances on notes payable

 

 

650,000

 

 

435,000

 

Repayment of notes payable

 

 

(400,000)

 

 

(153,073)

 

Advances of obligations under capital lease

 

 

 —

 

 

10,298

 

Repayment of obligations under capital lease

 

 

(7,939)

 

 

(7,081)

 

Repayment of excess servicing spread financing

 

 

(24,309)

 

 

(28,910)

 

Payment of debt issuance costs

 

 

(9,788)

 

 

(11,059)

 

Issuance of common stock pursuant to exercise of stock options

 

 

3,833

 

 

316

 

Repurchase of common stock

 

 

(4,826)

 

 

 —

 

Net cash (used in) provided by financing activities

 

 

(348,170)

 

 

1,104,003

 

Net increase (decrease) in cash and restricted cash

 

 

151,977

 

 

(23,273)

 

Cash and restricted cash at beginning of period

 

 

38,173

 

 

99,642

 

Cash and restricted cash at end of period

 

$

190,150

 

$

76,369

 

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

 

 

 

 

 

 

 

Cash

 

$

189,663

 

$

75,978

 

Restricted cash included in Other assets

 

 

487

 

 

391

 

 

 

$

190,150

 

$

76,369

 

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 a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC (the “Registered Fund”) and PNMAC Mortgage Opportunity Fund, L.P. (the “Master Fund”), both formerly registered under the Investment Company Act of 1940, as amended, an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (the Private Fund”) (collectively, the “Investment Funds”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.” In 2017 and through the six months ended June 30, 2018, the Investment Funds sold or liquidated all of their remaining investments. The Registered Fund and the Master Fund obtained orders of de-registration on July 25, 2018, and the management agreements with the Registered Fund, the Master Fund and the Private Fund expired or were otherwise terminated on or before August 2, 2018. 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 PMT, 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 six months ended June 30, 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,  Transfers and Servicing,  Financial Instruments and  Derivatives and Hedging topics of the ASC.

 

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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 InvestmentsEquity 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

 

Six months ended

Income statement line

 

June 30, 2018