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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, 2019

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: 001-38727

 


 

PennyMac Financial Services, Inc.

(formerly known as New PennyMac Financial Services, Inc.)

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

83-1098934

(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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, $0.0001 par value

 

PFSI

 

New York Stock Exchange

 

 

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 every Interactive Data File required to be submitted 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 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  

 

                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 November 1, 2019

Common Stock, $0.0001 par value

 

78,448,596

 

 

 

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

September 30, 2019

 

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

9

 

Notes to Consolidated Financial Statements

10

Item 2. 

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

60

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

77

Item 4. 

Controls and Procedures

78

 

 

 

PART II. OTHER INFORMATION 

80

 

 

 

Item 1. 

Legal Proceedings

80

Item 1A. 

Risk Factors

80

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3. 

Defaults Upon Senior Securities

80

Item 4. 

Mine Safety Disclosures

80

Item 5. 

Other Information

80

Item 6. 

Exhibits

81

 

 

 

2

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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, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

changes to government mortgage modification programs;

 

·

certain banking regulations that may limit our business activities;

 

·

foreclosure delays and changes in foreclosure practices;

 

·

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

 

·

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

 

·

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

 

·

difficulties inherent in growing loan production volume;

3

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·

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

 

·

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 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 exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

 

·

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

 

·

our obligation to indemnify PMT 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 PMT;

 

·

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 effectively deploy new information technology applications and infrastructure;

 

·

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

    

2019

    

2018

 

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Cash (includes $101,773 and $108,174 pledged to creditors)

 

 $

201,268

 

 $

155,289

Short-term investments at fair value

 

 

90,663

 

 

117,824

Loans held for sale at fair value (includes $4,481,210 and $2,478,858 pledged to creditors)

 

 

4,522,971

 

 

2,521,647

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

 

 

107,678

 

 

131,025

Derivative assets

 

 

232,948

 

 

96,347

Servicing advances, net (includes valuation allowance of $73,024 and $70,582; $181,747 and $162,895 pledged to creditors)

 

 

271,501

 

 

313,197

Mortgage servicing rights at fair value (includes $2,550,602 and $2,807,333 pledged to creditors)

 

 

2,556,253

 

 

2,820,612

Real estate acquired in settlement of loans

 

 

20,328

 

 

2,250

Operating lease right-of-use assets

 

 

53,384

 

 

 —

Furniture, fixtures, equipment and building improvements, net (includes $22,172 and $16,281 pledged to creditors)

 

 

32,221

 

 

33,374

Capitalized software, net (includes $14,090 and $1,017 pledged to creditors)

 

 

57,975

 

 

39,748

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,667

 

 

1,397

Receivable from PennyMac Mortgage Investment Trust

 

 

39,744

 

 

33,464

Loans eligible for repurchase

 

 

892,631

 

 

1,102,840

Other 

 

 

221,967

 

 

109,559

Total assets

 

 $

9,303,199

 

 $

7,478,573

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

3,538,889

 

 $

1,933,859

Mortgage loan participation purchase and sale agreements

 

 

514,625

 

 

532,251

Obligations under capital lease

 

 

23,881

 

 

6,605

Notes payable

 

 

1,293,625

 

 

1,292,291

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

 

 

183,141

 

 

216,110

Derivative liabilities

 

 

14,035

 

 

3,064

Operating lease liabilities

 

 

72,160

 

 

 —

Accounts payable and accrued expenses

 

 

215,379

 

 

156,212

Mortgage servicing liabilities at fair value

 

 

34,294

 

 

8,681

Payable to PennyMac Mortgage Investment Trust 

 

 

61,862

 

 

104,631

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

 

 

46,537

 

 

46,537

Income taxes payable

 

 

480,559

 

 

400,546

Liability for loans eligible for repurchase

 

 

892,631

 

 

1,102,840

Liability for losses under representations and warranties  

 

 

19,968

 

 

21,155

Total liabilities

 

 

7,391,586

 

 

5,824,782

 

 

 

 

 

 

 

Commitments and contingencies  –  Note 14

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding,  78,434,556 and 77,494,332 shares, respectively

 

 

 8

 

 

 8

Additional paid-in capital

 

 

1,328,166

 

 

1,310,648

Retained earnings

 

 

583,439

 

 

343,135

Total stockholders' equity

 

 

1,911,613

 

 

1,653,791

Total liabilities and stockholders’ equity

 

 $

9,303,199

 

 $

7,478,573

 

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 September 30, 

  

Nine months ended September 30, 

 

 

2019

 

2018

  

2019

 

2018

 

 

(in thousands, except earnings per share)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

175,070

 

$

38,349

 

$

345,045

 

$

143,396

From PennyMac Mortgage Investment Trust

 

 

60,662

 

 

18,565

 

 

122,996

 

 

45,878

 

 

 

235,732

 

 

56,914

 

 

468,041

 

 

189,274

Loan origination fees:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

45,212

 

 

24,366

 

 

100,721

 

 

70,607

From PennyMac Mortgage Investment Trust

 

 

4,222

 

 

2,119

 

 

9,567

 

 

4,869

 

 

 

49,434

 

 

26,485

 

 

110,288

 

 

75,476

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

45,149

 

 

26,256

 

 

102,313

 

 

52,759

Net loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

185,967

 

 

147,182

 

 

533,510

 

 

421,536

From PennyMac Mortgage Investment Trust

 

 

12,964

 

 

10,071

 

 

35,102

 

 

30,521

From Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Other fees

 

 

26,018

 

 

17,009

 

 

74,043

 

 

44,817

 

 

 

224,949

 

 

174,262

 

 

642,655

 

 

496,877

Change in fair value of mortgage servicing rights and mortgage servicing liabilities

 

 

(162,584)

 

 

(63,450)

 

 

(448,240)

 

 

(147,670)

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

 

 

3,864

 

 

(1,109)

 

 

11,519

 

 

(9,026)

 

 

 

(158,720)

 

 

(64,559)

 

 

(436,721)

 

 

(156,696)

Net loan servicing fees

 

 

66,229

 

 

109,703

 

 

205,934

 

 

340,181

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

81,925

 

 

59,152

 

 

207,670

 

 

152,997

From PennyMac Mortgage Investment Trust

 

 

1,527

 

 

1,812

 

 

5,015

 

 

5,686

 

 

 

83,452

 

 

60,964

 

 

212,685

 

 

158,683

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

54,089

 

 

35,035

 

 

138,723

 

 

96,552

To PennyMac Mortgage Investment Trust

 

 

2,291

 

 

3,740

 

 

8,124

 

 

11,584

 

 

 

56,380

 

 

38,775

 

 

146,847

 

 

108,136

Net interest income

 

 

27,072

 

 

22,189

 

 

65,838

 

 

50,547

Management fees, net:

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

10,098

 

 

6,482

 

 

26,178

 

 

17,906

From Investment Funds

 

 

 —

 

 

(11)

 

 

 —

 

 

 4

 

 

 

10,098

 

 

6,471

 

 

26,178

 

 

17,910

Carried Interest from Investment Funds

 

 

 —

 

 

(17)

 

 

 —

 

 

(365)

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

 

 

66

 

 

129

 

 

377

 

 

419

Results of real estate acquired in settlement of loans

 

 

188

 

 

194

 

 

1,205

 

 

179

Other

 

 

2,379

 

 

2,605

 

 

6,855

 

 

7,048

Total net revenues

 

 

436,347

 

 

250,929

 

 

987,029

 

 

733,428

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

141,132

 

 

103,364

 

 

362,449

 

 

303,917

Servicing

 

 

47,909

 

 

40,797

 

 

107,210

 

 

95,586

Loan origination

 

 

34,851

 

 

7,203

 

 

72,419

 

 

14,462

Technology

 

 

20,385

 

 

15,273

 

 

52,431

 

 

45,047

Occupancy and equipment

 

 

7,257

 

 

7,117

 

 

21,075

 

 

20,001

Professional services

 

 

9,682

 

 

7,117

 

 

21,876

 

 

18,442

Other

 

 

8,934

 

 

8,361

 

 

23,491

 

 

26,582

Total expenses

 

 

270,150

 

 

189,232

 

 

660,951

 

 

524,037

Income before provision for income taxes

 

 

166,197

 

 

61,697

 

 

326,078

 

 

209,391

Provision for income taxes

 

 

44,724

 

 

5,545

 

 

85,774

 

 

17,908

Net income

 

 

121,473

 

 

56,152

 

 

240,304

 

 

191,483

Less: Net income attributable to noncontrolling interest

 

 

 —

 

 

41,663

 

 

 —

 

 

142,538

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

 

$

121,473

 

$

14,489

 

$

240,304

 

$

48,945

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.55

 

$

0.58

 

$

3.08

 

$

1.99

Diluted

 

$

1.51

 

$

0.57

 

$

3.01

 

$

1.94

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

78,361

 

 

25,125

 

 

78,119

 

 

24,644

Diluted

 

 

80,382

 

 

78,913

 

 

79,821

 

 

78,954

Dividend declared per share of Class A common stock

 

$

 —

 

$

0.40

 

$

 —

 

$

0.40

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance, June 30, 2019

 

78,305

 

$

 8

 

$

1,317,023

 

$

461,966

 

$

1,778,997

Net income

 

 —

 

 

 —

 

 

 —

 

 

121,473

 

 

121,473

Stock-based compensation

 

128

 

 

 —

 

 

11,095

 

 

 —

 

 

11,095

Issuance of common stock in settlement of directors' fees

 

 2

 

 

 —

 

 

48

 

 

 —

 

 

48

Balance, September 30, 2019

 

78,435

 

$

 8

 

$

1,328,166

 

$

583,439

 

$

1,911,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

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, June 30, 2018

 

25,009

 

$

 3

 

$

229,941

 

$

299,951

 

$

1,332,049

 

$

1,861,944

Net income

 

 —

 

 

 —

 

 

 —

 

 

14,489

 

 

41,663

 

 

56,152

Stock and unit-based compensation

 

55

 

 

 —

 

 

2,944

 

 

 —

 

 

6,472

 

 

9,416

Class A common stock dividends ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(10,054)

 

 

 —

 

 

(10,054)

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

 

 —

 

 

 —

 

 

28

 

 

 —

 

 

57

 

 

85

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

 

131

 

 

 —

 

 

4,377

 

 

 —

 

 

(4,377)

 

 

 —

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.

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

 —

 

 

(833)

Balance, September 30, 2018

 

25,195

 

$

 3

 

$

236,457

 

$

304,386

 

$

1,375,864

 

$

1,916,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance, December 31, 2018

 

77,494

 

$

 8

 

$

1,310,648

 

$

343,135

 

$

1,653,791

Net income

 

 —

 

 

 —

 

 

 —

 

 

240,304

 

 

240,304

Stock-based compensation

 

984

 

 

 —

 

 

18,390

 

 

 —

 

 

18,390

Issuance of common stock in settlement of directors' fees

 

 8

 

 

 —

 

 

184

 

 

 —

 

 

184

Repurchase of common stock

 

(51)

 

 

 —

 

 

(1,056)

 

 

 —

 

 

(1,056)

Balance, September 30, 2019

 

78,435

 

$

 8

 

$

1,328,166

 

$

583,439

 

$

1,911,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

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, 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, January 1, 2018

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

48,945

 

 

142,538

 

 

191,483

Stock and unit-based compensation

 

285

 

 

 —

 

 

7,400

 

 

 —

 

 

18,084

 

 

25,484

Class A common stock dividends ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(10,054)

 

 

 —

 

 

(10,054)

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

 

 —

 

 

 —

 

 

79

 

 

 —

 

 

166

 

 

245

Repurchase of Class A common stock

 

(236)

 

 

 —

 

 

(1,554)

 

 

 —

 

 

(3,272)

 

 

(4,826)

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

 

1,616

 

 

 1

 

 

32,501

 

 

 —

 

 

(32,502)

 

 

 —

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.

 

 —

 

 

 —

 

 

(6,072)

 

 

 —

 

 

 —

 

 

(6,072)

Balance, September 30, 2018

 

25,195

 

$

 3

 

$

236,457

 

$

304,386

 

$

1,375,864

 

$

1,916,710

 

 

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, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flow from operating activities

 

 

 

 

 

 

Net income

 

$

240,304

 

$

191,483

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

 

 

 

 

 

 

Net gains on loans held for sale at fair value

 

 

(468,041)

 

 

(189,274)

Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

 

 

436,721

 

 

156,696

Capitalization of interest on loans held for sale at fair value

 

 

(56,800)

 

 

(67,025)

Accrual of interest on excess servicing spread financing

 

 

8,124

 

 

11,584

Amortization of net debt issuance (premiums) and costs

 

 

(6,601)

 

 

(19,198)

Carried Interest from Investment Funds

 

 

 —

 

 

365

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

 

 

(270)

 

 

(313)

Results of real estate acquired in settlement in loans

 

 

(1,205)

 

 

(179)

Stock-based compensation expense

 

 

19,124

 

 

20,766

Provision for servicing advance losses

 

 

19,973

 

 

24,046

Depreciation and amortization

 

 

10,650

 

 

9,046

Amortization of right-of-use assets

 

 

7,258

 

 

 —

Purchase of loans held for sale from PennyMac Mortgage Investment Trust

 

 

(32,619,639)

 

 

(28,584,762)

Origination of loans held for sale

 

 

(7,249,762)

 

 

(3,640,045)

Purchase of loans held for sale from nonaffiliates

 

 

(1,132,749)

 

 

(409,546)

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

 

 

(4,172,281)

 

 

(3,342,029)

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

 

 

39,084,441

 

 

34,208,217

Sale of loans held for sale to PennyMac Mortgage Investment Trust

 

 

4,095,079

 

 

2,336,162

Repurchase of loans subject to representations and warranties

 

 

(15,427)

 

 

(24,891)

Settlement of repurchase agreement derivatives

 

 

31,993

 

 

19,460

(Increase) decrease in servicing advances

 

 

(9,871)

 

 

35,813

Sale of real estate acquired in settlement of loans

 

 

17,141

 

 

3,004

Increase in receivable from PennyMac Mortgage Investment Trust

 

 

(9,598)

 

 

(2,825)

(Increase) decrease in other assets

 

 

(22,415)

 

 

9,291

Decrease in operating lease liabilities

 

 

(9,234)

 

 

 —

Increase in accounts payable and accrued expenses

 

 

78,800

 

 

14,021

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(45,869)

 

 

(46,731)

Increase in income taxes payable

 

 

80,013

 

 

19,448

Net cash (used in) provided by operating activities

 

 

(1,690,141)

 

 

732,584

Cash flow from investing activities

 

 

 

 

 

 

Decrease in short-term investments

 

 

27,161

 

 

24,604

Net change in assets purchased from PMT under agreement to resell

 

 

23,347

 

 

11,000

Net settlement of derivative financial instruments used for hedging

 

 

542,139

 

 

(182,402)

Purchase of mortgage servicing rights

 

 

(227,445)

 

 

(180,139)

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(5,534)

 

 

(8,919)

Acquisition of capitalized software

 

 

(22,190)

 

 

(13,091)

Increase in margin deposits

 

 

(168,062)

 

 

(836)

Net cash provided by (used in) investing activities

 

 

169,416

 

 

(349,783)

Cash flow from financing activities

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

41,296,345

 

 

31,318,277

Repurchase of assets sold under agreements to repurchase

 

 

(39,692,086)

 

 

(31,960,304)

Issuance of mortgage loan participation purchase and sale certificates

 

 

17,498,589

 

 

19,398,281

Repayment of mortgage loan participation purchase and sale certificates

 

 

(17,516,431)

 

 

(19,401,301)

Advance of obligations under capital lease

 

 

25,123

 

 

 —

Repayment of obligations under capital lease

 

 

(7,847)

 

 

(11,341)

Advance on notes payable

 

 

 —

 

 

1,300,000

Repayment of notes payable

 

 

 —

 

 

(900,000)

Repayment of excess servicing spread financing

 

 

(30,901)

 

 

(35,852)

Payment of debt issuance costs

 

 

(4,489)

 

 

(15,320)

Issuance of common stock pursuant to exercise of stock options

 

 

3,900

 

 

4,718

Repurchase of common stock

 

 

(1,056)

 

 

(4,826)

Payment of withholding taxes relating to stock-based compensation

 

 

(4,634)

 

 

 —

Payment of dividend to Class A common stockholders

 

 

 —

 

 

(10,054)

Net cash provided by (used in) financing activities

 

 

1,566,513

 

 

(317,722)

Net increase in cash and restricted cash

 

 

45,788

 

 

65,079

Cash and restricted cash at beginning of period

 

 

155,924

 

 

38,173

Cash and restricted cash at end of period

 

$

201,712

 

$

103,252

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

 

 

 

 

 

 

Cash

 

$

201,268

 

$

102,627

Restricted cash included in Other assets

 

 

444

 

 

625

 

 

$

201,712

 

$

103,252

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”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, 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 and home equity loan production and loan servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of an investment vehicle that invests in residential mortgage and home equity 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. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”). The Investment Funds were dissolved during 2018.

 

·

PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage and home equity loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage and home equity 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 (“FHA”) 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”).

 

On November 1, 2018, the Company completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place before the Reorganization. The predecessor holding company became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, the predecessor holding company's historical consolidated financial statements remain the Company’s historical financial statements. The details of the Reorganization are more fully described in Note 1 – Organization to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements

 

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, 2018.

 

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, 2019. 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 Change

 

Effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), using the modified retrospective approach. As the result of this adoption, the Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not adjust amounts reported in the prior comparative period. The adoption of ASU 2016-02 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.

As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:

·

to retain its existing classification of existing leases; and

·

to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to 12 months.

The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet. Operating lease right-of-use assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to make the payments required by the leases.

As most of the Company’s leases do not provide an implicit discount rate, PFSI uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also reflect any lease payments made and are reduced by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.

The Company has lease agreements that include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease component. Detailed lease disclosures are included in Note 10‒Leases.

 

 

Note 3—Concentration of Risk

 

A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan servicing fees, loan origination fees, fulfillment fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled 32% and 25% of total net revenue for the quarters ended September 30, 2019 and 2018, respectively, and 31% and 19% for the nine months ended September 30, 2019 and 2018, respectively.

 

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Note 4—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities and MSR Recapture

 

The Company sells newly originated loans to PMT under a 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. In the third quarter of 2017, the Company began selling conventional conforming balance mortgage loans to PMT under the agreement.

 

Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated effective September 12, 2016, if the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. The MSR recapture 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.

 

Pursuant to a mortgage banking services agreement, which was amended and restated effective September 12, 2016, the Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the 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.

 

Following is a summary of loan production activities, including MSR recapture between the Company and PMT: