☒

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

☐

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

Maryland

27-0186273

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

3043 Townsgate Road, Westlake Village, California

91361

(Address of principal executive offices)

(Zip Code)

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐   (Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐   

Class

Outstanding at August 3, 2017

Common Shares of Beneficial Interest, $0.01 par value

66,842,495

Page

Special Note Regarding Forward-Looking Statements

1

PART I. FINANCIAL INFORMATION

4

Item 1.

Financial Statements (Unaudited):

4

Consolidated Balance Sheets

4

Consolidated Statements of Operations

6

Consolidated Statements of Changes in Shareholders’ Equity

7

Consolidated Statements of Cash Flows

8

Notes to Consolidated Financial Statements

10

Item 2.

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

65

Our Company

65

Results of Operations

67

Net Investment Income

68

Expenses

85

Balance Sheet Analysis

88

Asset Acquisitions

89

Investment Portfolio Composition

90

Cash Flows

96

Liquidity and Capital Resources

96

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

99

Quantitative and Qualitative Disclosures About Market Risk

100

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

103

Item 4.

Controls and Procedures

103

PART II. OTHER INFORMATION

104

Item 1.

Legal Proceedings

104

Item 1A.

Risk Factors

104

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

104

Item 3.

Defaults Upon Senior Securities

104

Item 4.

Mine Safety Disclosures

104

Item 5.

Other Information

104

Item 6.

Exhibits

105

•

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.

•

changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

•

volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

•

events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

•

changes in general business, economic, market, employment and political conditions, or in consumer confidence and spending habits from those expected;

•

declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

•

the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives;

•

the inherent difficulty in winning bids to acquire mortgage loans, and our success in doing so;

•

the concentration of credit risks to which we are exposed;

•

the degree and nature of our competition;

•

our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

•

changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;

•

the availability, terms and deployment of short-term and long-term capital;

•

the adequacy of our cash reserves and working capital;

•

our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

•

the timing and amount of cash flows, if any, from our investments;

•

unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

•

the performance, financial condition and liquidity of borrowers;

•

the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;

•

incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;

•

our indemnification and repurchase obligations in connection with mortgage loans we purchase and later sell or securitize;

•

the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

•

increased rates of delinquency, default and/or decreased recovery rates on our investments;

•

the performance of mortgage loans underlying mortgage-backed securities (“MBS”) in which we retain credit risk;

•

our ability to foreclose on our investments in a timely manner or at all;

•

increased prepayments of the mortgages and other loans underlying our MBS or relating to our mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) and other investments;

•

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•

the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

•

our failure to maintain appropriate internal controls over financial reporting;

•

technologies for loans and our ability to mitigate security risks and cyber intrusions;

•

our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

•

our ability to detect misconduct and fraud;

•

our ability to comply with various federal, state and local laws and regulations that govern our business;

•

developments in the secondary markets for our mortgage loan products;

•

legislative and regulatory changes that impact the mortgage loan industry or housing market;

•

changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”) or the Veterans Administration (the “VA”), the U.S. Department of Agriculture (“USDA”), or government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;

•

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

•

the Consumer Financial Protection Bureau (“CFPB”) and its issued and future rules and the enforcement thereof;

•

changes in government support of homeownership;

•

changes in government or government-sponsored home affordability programs;

•

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 (the “Investment Company Act”) and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries (“TRSs”) for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

•

changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

•

our ability to make distributions to our shareholders in the future;

•

the effect of public opinion on our reputation;

•

the occurrence of natural disasters or other events or circumstances that could impact our operations; and

•

our organizational structure and certain requirements in our charter documents.

June 30,

December 31,

2017

2016

(in thousands, except share information)

ASSETS

Cash

$

69,893

$

34,476

Short-term investments

77,366

122,088

Mortgage-backed securities at fair value (includes $1,065,540 and $863,802 pledged

    to creditors, respectively)

1,065,540

865,061

Mortgage loans acquired for sale at fair value (includes $1,300,596 and $1,653,748

   pledged to creditors, respectively)

1,318,603

1,673,112

Mortgage loans at fair value (includes $1,521,211 and $1,712,190 pledged to creditors,

   respectively)

1,527,812

1,721,741

Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value

   pledged to secure assets sold under agreements to repurchase to

   PennyMac Financial Services, Inc.

261,796

288,669

Derivative assets (includes $19,291 and $9,078 pledged to creditors, respectively)

73,875

33,709

Real estate acquired in settlement of loans (includes $108,353 and $215,713

   pledged to creditors, respectively)

207,034

274,069

Real estate held for investment (includes $13,602 pledged to creditors at June 30, 2017)

40,316

29,324

Mortgage servicing rights (includes $77,624 and $64,136 at fair value;

   $723,896 and $656,567 pledged to creditors)

734,800

656,567

Servicing advances

67,172

76,950

Deposits securing credit risk transfer agreements (includes $410,512 and $414,610

   pledged to creditors, respectively)

503,108

450,059

Due from PennyMac Financial Services, Inc.

5,013

7,091

Other

57,916

124,586

Total assets

$

6,010,244

$

6,357,502

LIABILITIES

Assets sold under agreements to repurchase

$

3,497,999

$

3,784,001

Mortgage loan participation and sale agreements

38,345

25,917

Notes payable

159,980

275,106

Asset-backed financing of a variable interest entity at fair value

329,459

353,898

Exchangeable senior notes

246,629

246,089

Assets sold to PennyMac Financial Services, Inc. under agreement to repurchase

150,000

150,000

Interest-only security payable at fair value

6,577

4,114

Derivative liabilities

8,856

9,573

Accounts payable and accrued liabilities

74,253

107,758

Due to PennyMac Financial Services, Inc.

17,725

16,416

Income taxes payable

14,892

18,166

Liability for losses under representations and warranties

10,697

15,350

Total liabilities

4,555,412

5,006,388

Commitments and contingencies — See Note 19

SHAREHOLDERS’ EQUITY

8.125% Series A fixed-to floating rate redeemable cumulative preferred shares of

   beneficial interest, $0.01 par value per share, 4,600,000 shares issued and outstanding,

   $115,000,000 aggregate liquidation preference

46

—

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01

   par value; issued and outstanding, 66,842,495 and 66,697,286 common shares,

   respectively

668

667

Additional paid-in capital

1,489,116

1,377,171

Accumulated deficit

(34,998

)

(26,724

)

Total shareholders’ equity

1,454,832

1,351,114

Total liabilities and shareholders’ equity

$

6,010,244

$

6,357,502

June 30,

December 31,

2017

2016

(in thousands)

ASSETS

Mortgage loans at fair value

$

343,192

$

367,169

Derivative assets

52,716

15,610

Deposits securing credit risk transfer agreements

503,108

450,059

Other—interest receivable

972

1,058

$

899,988

$

833,896

LIABILITIES

Asset-backed financing at fair value

$

329,459

$

353,898

Interest-only security payable at fair value

6,577

4,114

Accounts payable and accrued liabilities—interest payable

972

1,058

$

337,008

$

359,070

Quarter ended June 30,

Six months ended June 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

Net investment income:

Net gain on mortgage loans acquired for sale:

From nonaffiliates

$

14,088

$

22,095

$

30,252

$

35,582

From PennyMac Financial Services, Inc.

3,204

2,131

6,065

3,693

17,292

24,226

36,317

39,275

Mortgage loan origination fees

10,467

8,519

18,757

15,420

Net gain (loss) on investments:

From nonaffiliates

33,477

337

51,568

14,066

From PennyMac Financial Services, Inc.

(5,885

)

(15,824

)

(7,255

)

(33,451

)

27,592

(15,487

)

44,313

(19,385

)

Net mortgage loan servicing fees:

From nonaffiliates

15,463

15,380

26,923

30,804

From PennyMac Financial Services, Inc.

234

311

526

441

15,697

15,691

27,449

31,245

Interest income:

From nonaffiliates

48,020

46,053

91,473

93,404

From PennyMac Financial Services, Inc.

4,366

5,713

9,013

12,728

52,386

51,766

100,486

106,132

Interest expense:

To nonaffiliates

36,401

34,371

71,775

64,773

To PennyMac Financial Services, Inc.

2,025

2,222

3,830

3,824

38,426

36,593

75,605

68,597

Net interest income

13,960

15,173

24,881

37,535

Results of real estate acquired in settlement of loans

(3,465

)

(2,565

)

(7,711

)

(8,601

)

Other

2,416

2,061

4,427

4,345

Net investment income

83,959

47,618

148,433

99,834

Expenses

Earned by PennyMac Financial Services, Inc.:

Mortgage loan fulfillment fees

21,107

19,111

37,677

32,046

Mortgage loan servicing fees

10,099

16,427

20,585

27,880

Management fees

5,638

5,199

10,646

10,551

Professional services

2,747

2,011

4,200

4,304

Compensation

1,959

2,224

3,851

3,513

Mortgage loan collection and liquidation

3,338

4,290

3,692

6,504

Mortgage loan origination

1,993

1,557

3,505

2,678

Other

5,252

4,958

9,844

9,473

Total expenses

52,133

55,777

94,000

96,949

Income (loss) before benefit from income taxes

31,826

(8,159

)

54,433

2,885

Provision for (benefit from) income taxes

3,046

(2,892

)

(3,083

)

(6,344

)

Net income (loss)

28,780

(5,267

)

57,516

9,229

Dividends on preferred stock

2,336

—

2,907

—

Net income attributable to common shareholders

$

26,444

$

(5,267

)

$

54,609

$

9,229

Earnings (loss) per common share

Basic

$

0.39

$

(0.08

)

$

0.81

$

0.12

Diluted

$

0.38

$

(0.08

)

$

0.78

$

0.12

Weighted-average common shares outstanding

Basic

66,761

68,446

66,740

70,165

Diluted

75,228

68,446

75,207

70,165

Dividends declared per common share

$

0.47

$

0.47

$

0.94

$

0.94

Series A preferred

shares

Common shares

Retained

Number

Number

Additional

earnings

of

Par

of

Par

paid-in

(Accumulated

shares

value

shares

value

capital

deficit)

Total

(in thousands, except per share amounts)

Balance at December 31, 2015

—

$

—

73,767

$

738

$

1,469,722

$

25,653

$

1,496,113

Net income

—

—

—

—

—

9,229

9,229

Share-based compensation

—

—

298

3

3,010

—

3,013

Common share dividends, $0.94 per share

—

—

—

—

—

(64,694

)

(64,694

)

Repurchase of common shares

—

—

(6,342

)

(64

)

(82,770

)

—

(82,834

)

Balance at June 30, 2016

—

$

—

67,723

$

677

$

1,389,962

$

(29,812

)

$

1,360,827

Balance at December 31, 2016

—

$

—

66,697

$

667

$

1,377,171

$

(26,724

)

$

1,351,114

Net income

—

—

—

—

—

57,516

57,516

Share-based compensation

—

—

284

2

3,125

—

3,127

Issuance of Series A preferred shares

4,600

46

—

—

114,954

—

115,000

Issuance costs relating to Series A preferred

   shares

—

—

—

—

(3,828

)

—

(3,828

)

Common share dividends, $0.94 per share

—

—

—

—

—

(63,298

)

(63,298

)

Series A preferred share dividends, $0.54

   per share

—

—

—

—

—

(2,492

)

(2,492

)

Repurchase of common shares

—

—

(139

)

(1

)

(2,306

)

—

(2,307

)

Balance at June 30, 2017

4,600

$

46

66,842

$

668

$

1,489,116

$

(34,998

)

$

1,454,832

Six months ended June 30, 2017

2017

2016

(in thousands)

Cash flows from operating activities

Net income

$

57,516

$

9,229

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Net gain on mortgage loans acquired for sale

(36,317

)

(39,275

)

Net (gain) loss on investments

(44,313

)

19,385

Change in fair value, amortization and impairment of mortgage servicing rights

52,666

29,656

Accrual of unearned discounts and amortization of premiums on mortgage-backed

   securities, mortgage loans at fair value, and asset-backed financing of a variable

   interest entity

3,007

(1,086

)

Capitalization of interest on mortgage loans at fair value

(20,717

)

(39,715

)

Capitalization of interest on excess servicing spread

(9,013

)

(12,728

)

Amortization of debt issuance costs

7,004

6,472

Results of real estate acquired in settlement of loans

7,711

8,601

Share-based compensation expense

3,127

3,013

Purchase of mortgage loans acquired for sale at fair value from nonaffiliates

(31,573,356

)

(25,461,808

)

Purchase of mortgage loans acquired for sale at fair value from PennyMac Financial

   Services, Inc.

(40,222

)

(8,139

)

Repurchase of mortgage loans subject to representation and warranties

(6,079

)

(6,654

)

Sale and repayment of mortgage loans acquired for sale at fair value to nonaffiliates

10,647,450

8,465,753

Sale of mortgage loans acquired for sale to PennyMac Financial Services, Inc.

21,244,194

16,790,189

Decrease in servicing advances

4,218

12,277

Decrease (increase)  in due from PennyMac Financial Services, Inc.

1,800

(2,688

)

Decrease in other assets

23,970

39,774

(Decrease) increase in accounts payable and accrued liabilities

(33,496

)

14,084

Increase in due to PennyMac Financial Services, Inc.

1,309

2,032

Decrease in income taxes payable

(3,274

)

(6,731

)

Net cash provided by (used in) operating activities

287,185

(178,359

)

Cash flows from investing activities

Net decrease in short-term investments

44,722

24,988

Purchase of mortgage-backed securities at fair value

(251,872

)

(249,925

)

Sale and repayment of mortgage-backed securities at fair value

52,753

49,141

Sale and repayment of mortgage loans at fair value

175,016

458,466

Repayment of excess servicing spread by PennyMac Financial Services, Inc.

28,910

38,281

Sale of excess servicing spread to PennyMac Financial Services, Inc.

—

59,045

Net settlement of derivative financial instruments

288

(2,793

)

Sale of real estate acquired in settlement of loans

101,609

135,573

Purchase of mortgage servicing rights

(69

)

(2,602

)

Sale of mortgage servicing rights

—

106

Deposit of cash securing credit risk transfer agreements

(57,148

)

(192,737

)

Distribution from credit risk transfer agreements

29,923

7,320

Decrease (increase) in margin deposits and restricted cash

5,132

(16,769

)

Purchase of Federal Home Loan Bank capital stock

—

(225

)

Redemption of Federal Home Loan Bank capital stock

—

7,320

Net cash provided by investing activities

129,264

315,189

Six months ended