pfsi_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

Or

 

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

 

For the transition period from           to           

 

Commission file number: 001-35916

 


 

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

80-0882793

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

3043 Townsgate Road, Westlake Village, California

 

91361

(Address of principal executive offices)

 

(Zip Code)

 

(818) 224-7442

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

 

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

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at August 8, 2016

Class A Common Stock, $0.0001 par value

 

22,193,572

Class B Common Stock, $0.0001 par value

 

49

 

 

 

 

 


 

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PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

June 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements (Unaudited):

 

Consolidated Balance Sheets

 

Consolidated Statements of Income

 

Consolidated Statements of Changes in Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

Item 2. 

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

56 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

80 

Item 4. 

Controls and Procedures

80 

 

 

 

PART II. OTHER INFORMATION 

82 

 

 

 

Item 1. 

Legal Proceedings

82 

Item 1A. 

Risk Factors

82 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

82 

Item 3. 

Defaults Upon Senior Securities

82 

Item 4. 

Mine Safety Disclosures

82 

Item 5. 

Other Information

82 

Item 6. 

Exhibits

83 

 

 

 

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

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

 

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

·

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

·

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

·

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

·

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

 

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

 

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2016.

 

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

·

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

·

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

·

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

·

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

·

changes to government mortgage modification programs;

·

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

·

foreclosure delays and changes in foreclosure practices;

·

certain banking regulations that may limit our business activities;

·

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

·

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

·

difficulties inherent in growing loan production volume;

·

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

·

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

·

changes in prevailing interest rates;

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·

increases in loan delinquencies and defaults;

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

the effect of public opinion on our reputation;

·

our recent growth;

·

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

·

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

·

our ability to detect misconduct and fraud; and

·

our ability to mitigate cybersecurity risks and cyber incidents.

 

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

 

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

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2016

   

2015

 

 

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Cash (includes $124,026 and $93,757 pledged to creditors)

 $

143,715

     

 $

105,472

 

Short-term investments at fair value

 

41,063

 

 

46,319

 

Mortgage loans held for sale at fair value (includes $2,071,968 and $1,079,489 pledged to creditors)

 

2,097,138

 

 

1,101,204

 

Derivative assets

 

124,542

 

 

50,280

 

Servicing advances, net (includes $38,647 and $33,458 valuation allowance)

 

296,581

 

 

299,354

 

Carried Interest due from Investment Funds pledged to creditors

 

70,763

 

 

69,926

 

Investment in PennyMac Mortgage Investment Trust at fair value

 

1,217

 

 

1,145

 

Mortgage servicing rights (includes $526,294 and $660,247 at fair value; $1,285,700 and $803,560 pledged to creditors)

 

1,290,928

 

 

1,411,935

 

Real estate acquired in settlement of loans

 

1,394

 

 

 —

 

Furniture, fixtures, equipment and building improvements, net (includes $27,240 and $14,034 pledged to creditors)

 

27,851

 

 

16,311

 

Capitalized software, net (includes $986 and $783 pledged to creditors)

 

6,209

 

 

3,025

 

Note receivable from PennyMac Mortgage Investment Trust

 

150,000

 

 

150,000

 

Receivable from PennyMac Mortgage Investment Trust

 

22,054

 

 

18,965

 

Receivable from Investment Funds

 

1,288

 

 

1,316

 

Deferred tax asset

 

4,878

 

 

18,378

 

Mortgage loans eligible for repurchase

 

286,048

 

 

166,070

 

Other 

 

50,651

 

 

45,594

 

Total assets

 $

4,616,320

 

 $

3,505,294

 

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 $

1,591,798

 

 $

1,166,731

 

Mortgage loan participation and sale agreement

 

737,176

 

 

234,872

 

Notes payable

 

114,235

 

 

61,136

 

Obligations under capital lease

 

22,886

 

 

13,579

 

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

 

294,551

 

 

412,425

 

Derivative liabilities

 

3,734

 

 

9,083

 

Accounts payable and accrued expenses

 

102,310

 

 

89,915

 

Mortgage servicing liabilities at fair value

 

4,681

 

 

1,399

 

Payable to Investment Funds

 

28,209

 

 

30,429

 

Payable to PennyMac Mortgage Investment Trust 

 

160,712

 

 

162,379

 

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

 

74,850

 

 

74,315

 

Liability for mortgage loans eligible for repurchase

 

286,048

 

 

166,070

 

Liability for losses under representations and warranties  

 

24,277

 

 

20,611

 

Total liabilities

 

3,445,467

 

 

2,442,944

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,189,337 and 21,990,831 shares, respectively

 

2

 

 

2

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 50 and 51 shares, respectively

 

 —

 

 

 —

 

Additional paid-in capital

 

176,742

 

 

172,354

 

Retained earnings

 

118,120

 

 

98,470

 

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

 

294,864

 

 

270,826

 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

875,989

 

 

791,524

 

Total stockholders' equity

 

1,170,853

 

 

1,062,350

 

Total liabilities and stockholders’ equity

 $

4,616,320

 

 $

3,505,294

 

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

    

$

132,118

     

$

85,411

    

$

225,594

     

$

162,078

 

Recapture payable to PennyMac Mortgage Investment Trust

 

 

(1,915)

 

 

(1,456)

 

 

(3,867)

 

 

(2,745)

 

 

 

 

130,203

 

 

83,955

 

 

221,727

 

 

159,333

 

Mortgage loan origination fees

 

 

28,907

 

 

24,421

 

 

51,341

 

 

41,103

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

19,111

 

 

15,333

 

 

32,046

 

 

28,199

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

92,770

 

 

66,867

 

 

184,097

 

 

116,968

 

From PennyMac Mortgage Investment Trust

 

 

16,427

 

 

12,136

 

 

27,880

 

 

22,806

 

From Investment Funds

 

 

723

 

 

153

 

 

1,424

 

 

1,121

 

Ancillary and other fees

 

 

10,818

 

 

11,850

 

 

22,270

 

 

23,035

 

 

 

 

120,738

 

 

91,006

 

 

235,671

 

 

163,930

 

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

 

 

(111,611)

 

 

(15,324)

 

 

(228,474)

 

 

(69,008)

 

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

 

 

17,428

 

 

(7,133)

 

 

36,877

 

 

403

 

 

 

 

(94,183)

 

 

(22,457)

 

 

(191,597)

 

 

(68,605)

 

Net mortgage loan servicing fees

 

 

26,555

 

 

68,549

 

 

44,074

 

 

95,325

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

5,199

 

 

5,779

 

 

10,551

 

 

12,782

 

From Investment Funds

 

 

531

 

 

1,184

 

 

1,091

 

 

2,670

 

 

 

 

5,730

 

 

6,963

 

 

11,642

 

 

15,452

 

Carried Interest from Investment Funds

 

 

244

 

 

182

 

 

837

 

 

1,415

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

18,332

 

 

12,651

 

 

30,259

 

 

21,584

 

From PennyMac Mortgage Investment Trust

 

 

2,222

 

 

533

 

 

3,824

 

 

533

 

 

 

 

20,554

 

 

13,184

 

 

34,083

 

 

22,117

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

19,753

 

 

10,531

 

 

33,725

 

 

18,608

 

To PennyMac Mortgage Investment Trust

 

 

5,713

 

 

5,818

 

 

12,728

 

 

9,570

 

 

 

 

25,466

 

 

16,349

 

 

46,453

 

 

28,178

 

Net interest expense

 

 

(4,912)

 

 

(3,165)

 

 

(12,370)

 

 

(6,061)

 

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

 

 

229

 

 

(244)

 

 

143

 

 

(137)

 

Result of real estate acquired in settlement of loans

 

 

393

 

 

 —

 

 

(42)

 

 

 —

 

Other

 

 

1,346

 

 

357

 

 

1,809

 

 

2,036

 

Total net revenue

 

 

207,806

 

 

196,351

 

 

351,207

 

 

336,665

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

83,147

 

 

70,422

 

 

151,445

 

 

128,566

 

Servicing

 

 

13,430

 

 

28,603

 

 

34,317

 

 

38,338

 

Technology

 

 

7,733

 

 

6,490

 

 

14,580

 

 

11,428

 

Loan origination

 

 

4,910

 

 

4,148

 

 

9,096

 

 

8,499

 

Professional services

 

 

4,559

 

 

4,074

 

 

8,292

 

 

6,907

 

Other

 

 

9,769

 

 

7,815

 

 

19,080

 

 

14,890

 

Total expenses

 

 

123,548

 

 

121,552

 

 

236,810

 

 

208,628

 

Income before provision for income taxes

 

 

84,258

 

 

74,799

 

 

114,397

 

 

128,037

 

Provision for income taxes

 

 

9,963

 

 

8,619

 

 

13,559

 

 

14,733

 

Net income

 

 

74,295

 

 

66,180

 

 

100,838

 

 

113,304

 

Less: Net income attributable to noncontrolling interest

 

 

59,820

 

 

53,431

 

 

81,188

 

 

91,527

 

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

 

$

14,475

 

$

12,749

 

$

19,650

 

$

21,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

$

0.59

 

$

0.89

 

$

1.01

 

Diluted

 

$

0.65

 

$

0.59

 

$

0.89

 

$

1.01

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,078

 

 

21,700

 

 

22,042

 

 

21,647

 

Diluted

 

 

76,280

 

 

76,105

 

 

76,236

 

 

76,063

 

 

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, 2014

    

21,578

    

$

2

    

    

$

162,720

    

$

51,242

    

$

593,302

    

$

807,266

 

Net income

 

 —

 

 

 —

 

 

 

 —

 

 

21,777

 

 

91,527

 

 

113,304

 

Stock and unit-based compensation

 

72

 

 

 —

 

 

 

2,452

 

 

 —

 

 

6,146

 

 

8,598

 

Distributions

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(9,627)

 

 

(9,627)

 

Issuance of common stock in settlement of directors' fees

 

8

 

 

 —

 

 

 

149

 

 

 —

 

 

 —

 

 

149

 

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

 

133

 

 

 —

 

 

 

2,432

 

 

 —

 

 

(2,432)

 

 

 —

 

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.

 

 —

 

 

 —

 

 

 

(217)

 

 

 —

 

 

 —

 

 

(217)

 

Balance at June 30, 2015

 

21,791

 

$

2

 

 

$

167,536

 

$

73,019

 

$

678,916

 

$

919,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

21,991

 

$

2

 

 

$

172,354

 

$

98,470

 

$

791,524

 

$

1,062,350

 

Net income

 

 —

 

 

 —

 

 

 

 —

 

 

19,650

 

 

81,188

 

 

100,838

 

Stock and unit-based compensation

 

93

 

 

 —

 

 

 

2,119

 

 

 —

 

 

5,917

 

 

8,036

 

Issuance of common stock in settlement of directors' fees

 

12

 

 

 —

 

 

 

149

 

 

 —

 

 

 —

 

 

149

 

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to

Class A common stock of PennyMac Financial Services, Inc.

 

93

 

 

 —

 

 

 

2,640

 

 

 —

 

 

(2,640)

 

 

 —

 

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

 

 —

 

 

 —

 

 

 

(520)

 

 

 —

 

 

 —

 

 

(520)

 

Balance at June 30, 2016

 

22,189

 

$

2

 

 

$

176,742

 

$

118,120

 

$

875,989

 

$

1,170,853

 

 

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, 

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Cash flow from operating activities

 

 

                              

 

 

                              

 

Net income

 

$

100,838

 

$

113,304

 

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

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(221,727)

 

 

(159,333)

 

Accrual of servicing rebate payable to Investment Funds

 

 

148

 

 

1,114

 

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

 

 

191,597

 

 

68,605

 

Carried Interest from Investment Funds

 

 

(837)

 

 

(1,415)

 

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

 

 

5,215

 

 

3,631

 

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

 

 

(13,513)

 

 

(4,745)

 

Accrual of interest on excess servicing spread financing

 

 

12,728

 

 

9,570

 

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

 

 

(72)

 

 

275

 

Results of real estate acquired in settlement in loans

 

 

42

 

 

 —

 

Stock and unit-based compensation expense

 

 

8,036

 

 

8,598

 

Provision for servicing advance losses

 

 

12,519

 

 

16,013

 

Depreciation and amortization

 

 

2,274

 

 

911

 

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

 

 

(16,783,840)

 

 

(13,514,568)

 

Originations of mortgage loans held for sale

 

 

(2,730,709)

 

 

(2,052,648)

 

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

 

 

(703,464)

 

 

(531,842)

 

Purchase of commercial real estate loans from non-affiliates

 

 

(5,912)

 

 

 —

 

Sale and principal payments of mortgage loans held for sale

 

 

19,176,697

 

 

15,619,191

 

Sale of loans held for sale to PennyMac Mortgage Investment Trust

 

 

8,139

 

 

10,828

 

Repurchase of mortgage loans and real estate acquired in settlement of loans subject to representations and warranties

 

 

(11,399)

 

 

(11,567)

 

Increase in servicing advances

 

 

(11,182)

 

 

(32,189)

 

Increase in receivable from Investment Funds

 

 

(120)

 

 

(971)

 

(Increase) decrease in receivable from PennyMac Mortgage Investment Trust

 

 

(2,056)

 

 

9,175

 

Decrease in deferred tax asset

 

 

13,515

 

 

12,826

 

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

 

 

 —

 

 

(4,299)

 

Increase in other assets

 

 

(10,941)

 

 

(14,282)

 

Increase in accounts payable and accrued expenses

 

 

9,781

 

 

20,941

 

Decrease in payable to Investment Funds

 

 

(2,220)

 

 

(4,653)

 

(Decrease) increase in payable to PennyMac Mortgage Investment Trust

 

 

(2,332)

 

 

16,120

 

Net cash used in operating activities

 

 

(958,795)

 

 

(421,410)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

 

5,256

 

 

(1,890)

 

Advance on note receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

(71,072)

 

Repayment of note receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

18,546

 

Purchase of mortgage servicing rights

 

 

(11)

 

 

(270,133)

 

Net settlement of derivative financial instruments used for hedging

 

 

138,801

 

 

(8,293)

 

Purchase of furniture, fixtures, equipment and building improvements

 

 

(14,459)

 

 

(2,277)

 

Acquisition of capitalized software

 

 

(3,342)

 

 

(860)

 

(Increase) decrease in margin deposits and restricted cash

 

 

(16,443)

 

 

19,932

 

Net cash  provided by (used in) investing activities

 

 

109,802

 

 

(316,047)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

18,461,897

 

 

14,379,136

 

Repurchase of assets sold under agreements to repurchase

 

 

(18,037,356)

 

 

(13,937,711)

 

Issuance of mortgage loan participation certificates

 

 

10,843,858

 

 

7,937,026

 

Repayment of mortgage loan participation certificates

 

 

(10,341,436)

 

 

(7,884,705)

 

Advances on notes payable

 

 

68,000

 

 

129,012

 

Repayment of notes payable

 

 

(15,671)

 

 

(29,411)

 

Issuance of excess servicing spread financing

 

 

 —

 

 

187,287

 

Repayment of excess servicing spread financing

 

 

(38,281)

 

 

(31,083)

 

Repurchase of excess servicing spread financing

 

 

(59,045)

 

 

 —

 

Advances of obligations under capital lease

 

 

12,652

 

 

 —

 

Repayment of obligation under capital lease

 

 

(3,345)

 

 

(5)

 

Payment of debt issuance costs

 

 

(4,037)

 

 

(3,990)

 

Distribution to Private National Mortgage Acceptance Company, LLC members

 

 

 —

 

 

(9,627)

 

Net cash provided by financing activities

 

 

887,236

 

 

735,929

 

Net increase (decrease) in cash

 

 

38,243

 

 

(1,528)

 

Cash at beginning of period

 

 

105,472

 

 

76,256

 

Cash at end of period

 

$

143,715

 

$

74,728

 

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization and Basis of Presentation

 

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac and operates and controls all of the businesses and affairs of PennyMac subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

 

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production (including correspondent production and consumer direct lending) and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of 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 PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”), 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 and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

 

·

PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services residential mortgage loans on behalf of non-affiliates and the Advised Entities, purchases and originates new prime credit quality residential mortgage loans, and engages in other mortgage banking activities for its own account and the account of PMT.

 

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).

 

·

PNMAC Opportunity Fund Associates, LLC (“PMOFA”)—a Delaware limited liability company and the general partner of the Master Fund. PMOFA is entitled to incentive fees representing allocations of profits (“Carried Interest”) from the Master Fund.

 

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

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indicative of the results of operations to be anticipated for the full year ending December 31, 2016. Intercompany accounts and transactions have been eliminated.

 

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

 

Note 2—Concentration of Risk

 

A substantial portion of the Company’s activities relate to the Advised Entities. Fees (generally comprised of fulfillment fees, mortgage loan servicing fees, management fees and Carried Interest) and interest charged to these entities totaled 26% and 10% of total net revenue for the quarters ended June 30, 2016 and 2015, respectively, and 28% and 17% for the six months ended June 30, 2016 and 2015, respectively.

 

Note 3—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

Six months ended June 30, 

 

 

   

2016

   

2015

   

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

19,111

    

$

15,333

    

$

32,046

 

$

28,199

 

Unpaid principal balance of mortgage loans fulfilled for PMT

 

$

5,174,020

 

$

3,579,078

 

$

8,433,383

 

$

6,469,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

2,824

 

$

2,427

 

$

4,773

 

$

3,848

 

Unpaid principal balance of mortgage loans purchased from PMT

 

$

9,409,399

 

$

8,082,764

 

$

15,905,121

 

$

12,818,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of mortgage loans held for sale to PMT

 

$

3,424

 

$

2,423

 

$

8,139

 

$

10,828

 

Tax service fee from PMT

 

$

1,464

 

$

1,113

 

$

2,471

 

$

2,002

 

Mortgage servicing rights and excess servicing spread recapture incurred

 

$

1,915

 

$

1,456

 

$

3,867

 

$

2,745

 

Mortgage banking and warehouse service fees paid by PMT

 

$

1

 

$

 —

 

$

2

 

$

 —

 

 

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Mortgage Loan Servicing Activities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

 

Six months ended June 30, 

 

 

 

2016

   

2015

 

 

2016

   

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

    

$

79

    

$

42

    

 

$

135

    

$

68

 

Activity-based

 

 

172

 

 

59

 

 

 

287

 

 

90

 

 

 

 

251

 

 

101

 

 

 

422

 

 

158

 

Mortgage loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

2,959

 

 

4,210

 

 

 

6,359

 

 

8,272

 

Activity-based

 

 

8,518

 

 

3,093

 

 

 

11,967

 

 

5,987

 

 

 

 

11,477

 

 

7,303

 

 

 

18,326

 

 

14,259

 

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

4,583

 

 

4,627

 

 

 

8,927

 

 

8,253

 

Activity-based

 

 

116

 

 

105

 

 

 

205

 

 

136

 

 

 

 

4,699

 

 

4,732

 

 

 

9,132

 

 

8,389

 

 

 

$

16,427

 

$

12,136

 

 

$

27,880

 

$

22,806

 

 

Investment Management Activities

 

The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

 

Following is a summary of the base management and performance incentive fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 

 

 

Six months ended June 30, 

 

 

   

2016

   

2015

 

 

2016

   

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base management

    

$

5,199

    

$

5,709

    

 

$

10,551

    

$

11,439

 

Performance incentive

 

 

 —

 

 

70

 

 

 

 —

 

 

1,343

 

 

 

$

5,199

 

$

5,779

 

 

$

10,551

 

$

12,782

 

 

The term of the management agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18‑month periods, unless terminated earlier in accordance with the terms of the management agreement.

 

In the event of termination of the management agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period before termination.

 

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Expense Reimbursement

 

PMT reimburses the Company for other expenses, including common overhead expenses incurred on its behalf by the Company, in accordance with the terms of its management agreement. Such amounts are summarized below: