10-Q 1 pmt-10q_20180331.htm 10-Q pmt-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

Or

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

For the transition period from                      to                     

Commission file number: 001-34416

 

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)

 

 

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)

(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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

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

 

Class

 

Outstanding at May 4, 2018

Common Shares of Beneficial Interest, $0.01 par value

 

60,882,954

 

 


PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 2018

TABLE OF CONTENTS

 

 

 

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

 

56

 

 

Our Company

 

56

 

 

Results of Operations

 

60

 

 

Net Investment Income

 

60

 

 

Expenses

 

72

 

 

Balance Sheet Analysis

 

75

 

 

Asset Acquisitions

 

76

 

 

Investment Portfolio Composition

 

77

 

 

Cash Flows

 

83

 

 

Liquidity and Capital Resources

 

84

 

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

86

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

88

Item 4.

 

Controls and Procedures

 

90

PART II. OTHER INFORMATION

 

91

Item 1.

 

Legal Proceedings

 

91

Item 1A.

 

Risk Factors

 

91

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

91

Item 3.

 

Defaults Upon Senior Securities

 

91

Item 4.

 

Mine Safety Disclosures

 

91

Item 5.

 

Other Information

 

91

Item 6.

 

Exhibits

 

92

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

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

 

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

 

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

 

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.

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

 

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;

 

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

 

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;

1


 

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;

2


 

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;

 

our failure to deal appropriately with issues that may give rise to reputational risk; 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.

 

 

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except share information)

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

102,167

 

 

$

77,647

 

Short-term investments

 

 

71,044

 

 

 

18,398

 

Mortgage-backed securities at fair value pledged to creditors

 

 

1,436,456

 

 

 

989,461

 

Mortgage loans acquired for sale at fair value (includes $1,097,266 and $1,249,277

   pledged to creditors, respectively)

 

 

1,115,534

 

 

 

1,269,515

 

Mortgage loans at fair value (includes $770,911 and $1,081,893 pledged to creditors,

   respectively)

 

 

779,489

 

 

 

1,089,473

 

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

   pledged to secure assets sold to PennyMac Financial Services, Inc. under agreements to repurchase

 

 

236,002

 

 

 

236,534

 

Derivative assets (includes $24,423 and $26,058 pledged to creditors, respectively)

 

 

122,518

 

 

 

113,881

 

Real estate acquired in settlement of loans (includes $105,484 and $124,532

   pledged to creditors, respectively)

 

 

141,506

 

 

 

162,865

 

Real estate held for investment (includes $31,899 and $31,128 pledged to creditors, respectively)

 

 

45,790

 

 

 

44,224

 

Mortgage servicing rights (includes $957,013 and $91,459 at fair value;

   $941,686 and $831,892 pledged to creditors)

 

 

957,013

 

 

 

844,781

 

Servicing advances

 

 

63,352

 

 

 

77,158

 

Deposits securing credit risk transfer agreements (includes $392,453 and $400,778

   pledged to creditors, respectively)

 

 

622,330

 

 

 

588,867

 

Due from PennyMac Financial Services, Inc.

 

 

313

 

 

 

4,154

 

Other

 

 

96,972

 

 

 

87,975

 

Total assets

 

$

5,790,486

 

 

$

5,604,933

 

LIABILITIES

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

3,408,283

 

 

$

3,180,886

 

Mortgage loan participation purchase and sale agreements

 

 

 

 

 

44,488

 

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

 

 

296,982

 

 

 

307,419

 

Exchangeable senior notes

 

 

247,471

 

 

 

247,186

 

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

 

 

142,938

 

 

 

144,128

 

Interest-only security payable at fair value

 

 

7,796

 

 

 

7,070

 

Derivative liabilities

 

 

3,636

 

 

 

1,306

 

Accounts payable and accrued liabilities

 

 

63,196

 

 

 

64,751

 

Due to PennyMac Financial Services, Inc.

 

 

27,356

 

 

 

27,119

 

Income taxes payable

 

 

42,321

 

 

 

27,317

 

Liability for losses under representations and warranties

 

 

8,249

 

 

 

8,678

 

Total liabilities

 

 

4,248,228

 

 

 

4,060,348

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies — Note 18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares,

   issued and outstanding 12,400,000 shares, liquidation preference $310,000,000

 

 

299,707

 

 

 

299,707

 

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

   par value; issued and outstanding, 60,882,954 and 61,334,087 common shares, respectively

 

 

609

 

 

 

613

 

Additional paid-in capital

 

 

1,281,115

 

 

 

1,290,931

 

Accumulated deficit

 

 

(39,173

)

 

 

(46,666

)

Total shareholders’ equity

 

 

1,542,258

 

 

 

1,544,585

 

Total liabilities and shareholders’ equity

 

$

5,790,486

 

 

$

5,604,933

 

 

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

4


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Mortgage loans at fair value

 

$

311,102

 

 

$

321,040

 

Derivative assets

 

 

103,995

 

 

 

98,640

 

Deposits securing credit risk transfer agreements

 

 

622,330

 

 

 

588,867

 

Other—interest receivable

 

 

893

 

 

 

904

 

 

 

$

1,038,320

 

 

$

1,009,451

 

LIABILITIES

 

 

 

 

 

 

 

 

Asset-backed financing at fair value

 

$

296,982

 

 

$

307,419

 

Interest-only security payable at fair value

 

 

7,796

 

 

 

7,070

 

Accounts payable and accrued liabilities—interest payable

 

 

893

 

 

 

904

 

 

 

$

305,671

 

 

$

315,393

 

 

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

 

 

5


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Quarter ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share amounts)

 

Net investment income

 

 

 

 

 

 

 

 

Net gain on mortgage loans acquired for sale:

 

 

 

 

 

 

 

 

From nonaffiliates

 

$

4,986

 

 

$

16,624

 

From PennyMac Financial Services, Inc.

 

 

2,641

 

 

 

2,401

 

 

 

 

7,627

 

 

 

19,025

 

Mortgage loan origination fees

 

 

7,037

 

 

 

8,290

 

Net gain (loss) on investments:

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

(7,733

)

 

 

18,091

 

From PennyMac Financial Services, Inc.

 

 

7,751

 

 

 

(1,370

)

 

 

 

18

 

 

 

16,721

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

55,560

 

 

 

11,460

 

From PennyMac Financial Services, Inc.

 

 

595

 

 

 

292

 

 

 

 

56,155

 

 

 

11,752

 

Interest income:

 

 

 

 

 

 

 

 

From nonaffiliates

 

 

37,046

 

 

 

43,453

 

From PennyMac Financial Services, Inc.

 

 

3,934

 

 

 

4,647

 

 

 

 

40,980

 

 

 

48,100

 

Interest expense:

 

 

 

 

 

 

 

 

To nonaffiliates

 

 

32,840

 

 

 

35,374

 

To PennyMac Financial Services, Inc.

 

 

1,976

 

 

 

1,805

 

 

 

 

34,816

 

 

 

37,179

 

Net interest income

 

 

6,164

 

 

 

10,921

 

Results of real estate acquired in settlement of loans

 

 

(3,226

)

 

 

(4,246

)

Other

 

 

1,898

 

 

 

2,011

 

Net investment income

 

 

75,673

 

 

 

64,474

 

Expenses

 

 

 

 

 

 

 

 

Earned by PennyMac Financial Services, Inc.:

 

 

 

 

 

 

 

 

Mortgage loan fulfillment fees

 

 

11,944

 

 

 

16,570

 

Mortgage loan servicing fees

 

 

11,019

 

 

 

10,486

 

Management fees

 

 

5,696

 

 

 

5,008

 

Mortgage loan collection and liquidation

 

 

2,229

 

 

 

354

 

Real estate held for investment

 

 

1,438

 

 

 

1,088

 

Professional services

 

 

1,319

 

 

 

1,453

 

Compensation

 

 

1,268

 

 

 

1,892

 

Mortgage loan origination

 

 

272

 

 

 

1,512

 

Other

 

 

2,650

 

 

 

3,503

 

Total expenses

 

 

37,835

 

 

 

41,866

 

Income before provision for (benefit from) income taxes

 

 

37,838

 

 

 

22,608

 

Provision for (benefit from) income taxes

 

 

9,652

 

 

 

(6,129

)

Net income

 

 

28,186

 

 

 

28,737

 

Dividends on preferred shares

 

 

6,234

 

 

 

571

 

Net income attributable to common shareholders

 

$

21,952

 

 

$

28,166

 

Earnings per common share

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.42

 

Diluted

 

$

0.35

 

 

$

0.40

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

60,761

 

 

 

66,719

 

Diluted

 

 

69,875

 

 

 

75,186

 

Dividends declared per common share

 

$

0.47

 

 

$

0.47

 

 

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

6


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

 

Preferred shares

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

Number

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

of

 

 

Par

 

 

paid-in

 

 

Accumulated

 

 

 

 

 

 

 

shares

 

 

Amount

 

 

shares

 

 

value

 

 

capital

 

 

deficit

 

 

Total

 

 

 

(in thousands, except per share amounts)

 

 

 

Balance at December 31, 2016

 

 

 

 

$

 

 

 

66,697

 

 

$

667

 

 

$

1,377,171

 

 

$

(26,724

)

 

$

1,351,114

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,737

 

 

 

28,737

 

Share-based compensation

 

 

 

 

 

 

 

 

153

 

 

 

1

 

 

 

1,526

 

 

 

 

 

 

1,527

 

Issuance of preferred shares

 

 

4,600

 

 

 

115,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

115,000

 

Issuance costs relating to preferred shares

 

 

 

 

 

(3,828

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,828

)

Common share dividends ($0.47 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,653

)

 

 

(31,653

)

Repurchase of common shares

 

 

 

 

 

 

 

 

(139

)

 

 

(1

)

 

 

(2,306

)

 

 

 

 

 

(2,307

)

Balance at March 31, 2017

 

 

4,600

 

 

$

111,172

 

 

 

66,711

 

 

$

667

 

 

$

1,376,391

 

 

$

(29,640

)

 

$

1,458,590

 

Balance at December 31, 2017

 

 

12,400

 

 

$

299,707

 

 

 

61,334

 

 

$

613

 

 

$

1,290,931

 

 

$

(46,666

)

 

$

1,544,585

 

Cumulative effect of a change in accounting

   principle - Adoption of fair value

   accounting for mortgage servicing rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,361

 

 

 

14,361

 

Balance at January 1, 2018

 

 

12,400

 

 

 

299,707

 

 

 

61,334

 

 

 

613

 

 

 

1,290,931

 

 

 

(32,305

)

 

 

1,558,946

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,186

 

 

 

28,186

 

Share-based compensation

 

 

 

 

 

 

 

 

220

 

 

 

2

 

 

 

897

 

 

 

 

 

 

899

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares ($0.47 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,818

)

 

 

(28,818

)

Preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,236

)

 

 

(6,236

)

Repurchase of common shares

 

 

 

 

 

 

 

 

(671

)

 

 

(6

)

 

 

(10,713

)

 

 

 

 

 

(10,719

)

Balance at March 31, 2018

 

 

12,400

 

 

$

299,707

 

 

 

60,883

 

 

$

609

 

 

$

1,281,115

 

 

$

(39,173

)

 

$

1,542,258

 

 

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

 

 

7


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Quarter ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

28,186

 

 

$

28,737

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Net gain on mortgage loans acquired for sale at fair value

 

 

(7,627

)

 

 

(19,025

)

Net gain on investments

 

 

(18

)

 

 

(16,721

)

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

 

 

(5,125

)

 

 

27,046

 

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

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

 

 

507

 

 

 

1,406

 

Capitalization of interest, advances and fees on mortgage loans at fair value

 

 

(2,180

)

 

 

(9,903

)

Accrual of interest on excess servicing spread purchased from PennyMac Financial

   Services, Inc.

 

 

(3,934

)

 

 

(4,647

)

Amortization of debt issuance costs and premiums, net

 

 

236

 

 

 

3,596

 

Results of real estate acquired in settlement of loans

 

 

3,226

 

 

 

4,246

 

Share-based compensation expense

 

 

899

 

 

 

1,527

 

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

 

 

(13,524,468

)

 

 

(14,474,654

)

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

   Services, Inc.

 

 

(781,326

)

 

 

(21,530

)

Repurchase of mortgage loans subject to representation and warranties

 

 

(2,830

)

 

 

(4,111

)

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

 

 

5,200,584

 

 

 

4,858,845

 

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

 

 

9,212,188

 

 

 

10,016,788

 

Decrease in servicing advances

 

 

17,204

 

 

 

6,187

 

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

 

 

3,767

 

 

 

(3,995

)

(Increase) decrease in other assets

 

 

(25,462

)

 

 

30,948

 

Decrease in accounts payable and accrued liabilities

 

 

(1,229

)

 

 

(27,536

)

Increase in due to PennyMac Financial Services, Inc.

 

 

237

 

 

 

4,340

 

Increase (decrease) in income taxes payable

 

 

9,652

 

 

 

(6,161

)

Net cash provided by operating activities

 

 

122,487

 

 

 

395,383

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net (increase) decrease in short-term investments

 

 

(52,646

)

 

 

102,205

 

Purchase of mortgage-backed securities at fair value

 

 

(500,573

)

 

 

(251,872

)

Sale and repayment of mortgage-backed securities at fair value

 

 

30,741

 

 

 

26,123

 

Sale and repayment of mortgage loans at fair value

 

 

276,467

 

 

 

127,556

 

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

 

 

12,291

 

 

 

14,632

 

Net settlement of derivative financial instruments

 

 

(2,329

)

 

 

(28

)

Sale of real estate acquired in settlement of loans

 

 

32,437

 

 

 

63,224

 

Purchase of mortgage servicing rights

 

 

 

 

 

(62

)

Deposit of cash securing credit risk transfer agreements

 

 

(41,789

)

 

 

(15,793

)

Distribution from credit risk transfer agreements

 

 

27,655

 

 

 

12,305

 

Increase in margin deposits

 

 

(9,823

)

 

 

(36,267

)

Net cash (used in) provided by investing activities

 

 

(227,569

)

 

 

42,023

 

 

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

8


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Quarter ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

17,446,171

 

 

 

17,770,687

 

Repurchase of assets sold under agreements to repurchase

 

 

(17,218,539

)

 

 

(18,054,705

)

Issuance of mortgage loan participation certificates

 

 

1,208,189

 

 

 

1,559,494

 

Repayment of mortgage loan participation certificates

 

 

(1,252,708

)

 

 

(1,512,435

)

Repayments of assets sold to PennyMac Financial Services, Inc. under

   agreement to repurchase

 

 

(3,483

)

 

 

(175,000

)

Repayment of asset-backed financing of a variable interest entity at fair value

 

 

(3,915

)

 

 

(13,944

)

Advances under assets sold to to PennyMac Financial Services, Inc. under

   agreement to repurchase

 

 

2,293

 

 

 

 

Payment of debt issuance costs

 

 

(2,306

)

 

 

(3,140

)

Issuance of preferred shares

 

 

 

 

 

115,000

 

Payment of issuance costs related to preferred shares

 

 

 

 

 

(3,828

)

Repurchase of common shares

 

 

(10,719

)

 

 

(2,307

)

Payment of dividends to preferred shareholders

 

 

(6,236

)

 

 

 

Payment of dividends to common shareholders

 

 

(29,145

)

 

 

(31,655

)

Net cash provided by (used in) financing activities

 

 

129,602

 

 

 

(351,833

)

Net increase in cash and restricted cash

 

 

24,520

 

 

 

85,573

 

Cash and restricted cash at beginning of quarter

 

 

77,647

 

 

 

34,476

 

Cash and restricted cash at end of quarter

 

$

102,167

 

 

$

120,049

 

 

 

 

 

 

 

 

 

 

Cash

 

$

102,167

 

 

$

120,049

 

Restricted cash

 

 

 

 

 

 

Total cash and restricted cash shown in the statement of cash flows

 

$

102,167

 

 

$

120,049

 

 

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

 

 

9


PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) was organized in Maryland on May 18, 2009, and commenced operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest (“common shares”). The Company is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets.

The Company operates in four segments: correspondent production, credit sensitive strategies, interest rate sensitive strategies and corporate:

 

The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

Most of the mortgage loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

 

The credit sensitive strategies segment represents the Company’s investments in distressed mortgage loans, real estate acquired in settlement of mortgage loans (“REO”), real estate held for investment, credit risk transfer agreements (“CRT Agreements”), non-Agency subordinated bonds and small balance commercial real estate mortgage loans.

 

The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”), Agency and senior non-Agency MBS and the related interest rate hedging activities.  

 

The corporate segment includes certain interest income, management fee and corporate expense amounts.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, beginning with its taxable period ended on December 31, 2009. To maintain its tax status as a REIT, the Company has to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

 

Note 2—Basis of Presentation and Accounting Changes

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 Securities and Exchange Commission’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 fiscal year ended December 31, 2017.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires the Manager 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.

10


Mortgage Servicing Rights

Effective January 1, 2018, the Company has elected to change the accounting for the classes of MSRs it accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Manager determined that a single accounting treatment across all MSRs is consistent with lender valuation under its financing arrangements and simplifies hedging activities. As the result of this change, the Company recorded an adjustment to increase its investment in MSRs by $19.7 million, an increase in its liability for income taxes payable of $5.3 million and in increase in shareholders’ equity of $14.4 million.

Revenue

As disclosed in Note 33 – Recently Issued Accounting Pronouncements to the consolidated financial statements included in the Company’s Annual Report of form 10-K for the fiscal year ended December 31, 2017, the Manager has concluded that the Company’s revenues are not subject to ASU 2014-09 as they are financial instruments or other contractual rights and obligations accounted for under the Receivables, Investments and Debt and Equity Securities, Transfers and Servicing, Financial Instruments and Derivatives and Hedging topics of the FASB’s ASC.

Cash Flows

During the quarter ended March 31, 2018, the Company adopted FASB Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, the Company retrospectively changed the presentation of its statements of cash flows to conform to the requirements of ASU 2016-18. The adoption of ASU 2016-18 had no effect on previously reported statements of cash flows.

Note 3—Concentration of Risks

As discussed in Note 1 — Organization above, PMT’s operations and investing activities are centered in residential mortgage-related assets, including distressed mortgage loans and CRT Agreements.

Due to the nature of the Company’s investments in distressed mortgage loans, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks associated with loan performance and resolution, including that borrowers may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and that fluctuations in the residential real estate market may affect the performance of its investments. Factors influencing these risks include, but are not limited to:

 

changes in the overall economy, unemployment rates and residential real estate fair values in the markets where the properties securing the Company’s distressed mortgage loans are located;

 

PCM’s ability to identify and PLS’ ability to execute optimal resolutions of distressed mortgage loans;

 

the accuracy of valuation information obtained during the Company’s due diligence activities;

 

PCM’s ability to effectively model, and to develop appropriate model inputs that properly anticipate, future outcomes;

 

the level of government support for resolution of distressed mortgage loans and the effect of current and future proposed and enacted legislative and regulatory changes on the Company’s ability to effect cures or resolutions to distressed mortgage loans; and

 

regulatory, judicial and legislative support of the foreclosure process, and the resulting effect on the Company’s ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT’s behalf will prevent significant losses arising from the Company’s investments in real estate-related assets.

11


As detailed in Note 5 Loan Sales and Variable Interest Entities, the Company invests in CRT Agreements whereby it sells pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans (“Recourse Obligations”) as part of the retention of an interest-only (“IO”) ownership interest in such mortgage loans. The Company’s retention of credit risk subjects it to risks associated with delinquency and foreclosure similar to the risks associated with owning the underlying mortgage loans, and exposes the Company to risk of loss greater than the risks associated with selling the mortgage loans to Fannie Mae without the retention of such credit risk. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated with owning the underlying mortgage loans because the structure of certain of the CRT Agreements provides that the Company may be required to realize losses in the event of delinquency or foreclosure even where there is ultimately no loss realized with respect to the underlying loan (e.g., as a result of a borrower’s re-performance). In addition to the risks specific to credit, the Company is exposed to market risk and, as a result of prevailing market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of the CRT Agreements.

Most of the distressed mortgage loans and REO has been acquired by the Company in prior years from or through one or more subsidiaries of JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corporation, as presented in the following summary:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

JPMorgan Chase & Co.

 

 

 

 

 

 

 

 

Mortgage loans at fair value

 

$

185,224

 

 

$

315,437

 

REO

 

 

59,178

 

 

 

66,294

 

 

 

 

244,402

 

 

 

381,731

 

Citigroup Inc.

 

 

 

 

 

 

 

 

Mortgage loans at fair value

 

 

181,334

 

 

 

280,488

 

REO

 

 

21,091

 

 

 

26,702