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PennyMac Mortgage Investment Trust Reports Third Quarter 2019 Results

October 31, 2019 4:30 PM

WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)-- PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income attributable to common shareholders of $63.8 million, or $0.71 per common share on a diluted basis for the third quarter of 2019, on net investment income of $130.8 million. PMT previously announced a cash dividend for the third quarter of 2019 of $0.47 per common share of beneficial interest, which was declared on September 24, 2019 and paid on October 30, 2019 to common shareholders of record as of October 14, 2019.

Third Quarter 2019 Highlights

Financial results:

Other investment and financing highlights:

Notable activity after quarter end:

1 Annualized return on average common equity is calculated based on annualized quarterly net income attributable to common shareholders as a percentage of monthly average common equity during the period
2 Consists of delegated and non-delegated conventional conforming and non-Agency loans and includes conventional loans acquired from PennyMac Financial Services, Inc. (NYSE: PFSI).

“Strong execution in the lower interest rate environment drove record levels of conventional loan production in the third quarter, further accelerating our capital deployment into long-term organic investments in CRT securities and MSRs,” said President and CEO David Spector. “Our CRT investments continued to see strong performance, driven by strong credit markets as evidenced by spread tightening. Our focus on interest rate risk management substantially offset fair value losses on our MSR investments, and the lower rates also drove strong profits in our Correspondent Production segment. As a result PMT produced strong quarterly earnings and book value growth despite the volatile market environment. Looking ahead, we remain confident in PMT’s ability to leverage its market position and the expertise of its manager and service provider, PennyMac Financial, to continue deploying capital in new investments and providing attractive risk-adjusted returns to its shareholders.”

The following table presents the contributions of PMT’s segments, consisting of Credit Sensitive Strategies, Interest Rate Sensitive Strategies, Correspondent Production, and Corporate:

Quarter ended September 30, 2019
Credit sensitive
strategies		 Interest rate
sensitive strategies		 Correspondent
production		 Corporate Consolidated
(in thousands)
Net gain (loss) on investments:
CRT investments

$

50,860

$

-

$

-

$

-

$

50,860

Loans at fair value

(1,178

)

-

-

-

(1,178

)

Loans held by variable interest entity net of
asset-backed secured financing

-

(352

)

-

-

(352

)

Mortgage-backed securities

-

13,450

-

-

13,450

Hedging derivatives

1,833

(15,389

)

-

-

(13,556

)

Excess servicing spread investments

-

(3,435

)

-

-

(3,435

)

51,515

(5,726

)

-

-

45,789

Net gain on loans acquired for sale

10,522

-

38,738

-

49,260

Net loan servicing fees

-

5,159

-

-

5,159

Net interest income (expense)
Interest income

12,421

41,494

33,244

642

87,801

Interest expense

(20,916

)

(37,777

)

(25,536

)

-

(84,229

)

(8,495

)

3,717

7,708

642

3,572

Other income

1,453

-

25,522

5

26,980

54,995

3,150

71,968

647

130,760

Expenses:
Loan fulfillment and servicing fees
payable to PennyMac Financial Services, Inc.

855

12,109

45,149

-

58,113

Management fees payable to
PennyMac Financial Services, Inc.

-

-

-

10,098

10,098

Other

2,277

1,142

5,035

5,962

14,416

$

3,132

$

13,251

$

50,184

$

16,060

$

82,627

Pretax income (loss)

$

51,863

$

(10,101

)

$

21,784

$

(15,413

)

$

48,133

Credit Sensitive Strategies Segment

The Credit Sensitive Strategies segment primarily includes results from CRT, distressed mortgage loans and non-Agency subordinated bonds. Pretax income for the segment was $51.9 million on revenues of $55.0 million, up from pretax income of $33.0 million on revenues of $35.8 million in the prior quarter.

The Credit Sensitive Strategies segment recorded a net gain on loans acquired for sale of $10.5 million, down slightly from $11.4 million in the prior quarter. These amounts represent the recognition of the fair value of firm commitments to acquire CRT securities for deliveries during the third quarter; an additional $15.4 million was attributed to the Correspondent Production segment, up from $9.4 million in the prior quarter.

Net gain on investments in the segment was $51.5 million, up from $25.4 million in the prior quarter.

Net gain on CRT investments for the quarter was $50.9 million, up from $30.8 million in the prior quarter, and included $8.7 million in valuation-related gains driven by credit spread tightening on CRT investments. The prior quarter included $3.6 million in valuation-related losses related to credit spread widening. Net gain on CRT investments also included $45.6 million in realized gains and carry, up from $35.3 million in the prior quarter. Recognized losses were $1.7 million, up from $0.9 million in the prior quarter, reflecting portfolio seasoning and in line with expectations.

PMT’s distressed mortgage loan portfolio generated realized and unrealized losses totaling $1.2 million, compared to losses of $5.5 million in the prior quarter. Fair value losses on performing loans in the distressed portfolio were $1.3 million, while fair value losses on nonperforming loans were $0.5 million. The distressed mortgage loan portfolio also generated realized gains related to payoffs and loan sales of $0.6 million.

Net interest expense for the segment totaled $8.5 million, compared to $4.3 million in the prior quarter. Interest income totaled $12.4 million, up from $9.6 million in the prior quarter, driven by a larger CRT investment. Interest expense totaled $20.9 million, up from $14.0 million in the prior quarter, driven by increased financing costs related to the larger CRT investment.

Other investment income in the segment was $1.5 million, down from $3.3 million in the prior quarter, driven by the continued liquidation of the real estate acquired in the settlement of loans (REO) portfolio and seasonal factors. At quarter end, PMT’s inventory of REO properties totaled $79.2 million, down from $97.8 million at June 30, 2019.

Segment expenses were $3.1 million, up slightly from $2.8 million in the prior quarter.

Interest Rate Sensitive Strategies Segment

The Interest Rate Sensitive Strategies segment includes results from investments in MSRs, excess servicing spread (ESS), Agency mortgage-backed securities (MBS), non-Agency senior MBS and interest rate hedges. Pretax loss for the segment was $10.1 million on revenues of $3.2 million, compared to a pretax loss of $1.9 million on revenues of $9.6 million in the prior quarter. The segment includes investments that typically have offsetting fair value exposures to changes in interest rates. For example, in a period with decreasing interest rates, MSRs and ESS typically decrease in fair value whereas Agency MBS typically increase in fair value.

The results in the Interest Rate Sensitive Strategies segment consist of net gains and losses on investments, net interest income and net loan servicing fees, as well as associated expenses.

Net loss on investments for the segment was $5.7 million, and primarily consisted of $15.4 million of losses in the value of hedging derivatives and a $3.4 million loss in the value of ESS investments, partially offset by $13.5 million of gains on MBS.

Net loan servicing fees were $5.2 million, versus a loss of $53.6 million in the prior quarter. Net loan servicing fees included $76.4 million in servicing fees and $7.0 million in other fees, reduced by $55.7 million in realization of MSR cash flows, which increased 20 percent from the prior quarter. Net loan servicing fees also included a $157.9 million decrease in the fair value of MSRs, $133.9 million of related hedging gains and $1.5 million of MSR recapture income. PMT’s hedging activities are intended to manage the Company’s net exposure across all interest rate sensitive strategies, which include MSRs, ESS and MBS.

The following schedule details net loan servicing fees:

Quarter ended
September 30, 2019 June 30, 2019 September 30, 2018
(in thousands)
From non-affiliates:
Servicing fees1

$

76,377

$

66,919

$

49,864

Other fees

6,994

6,408

3,111

Effect of MSRs:
Carried at fair value—change in fair value
Realization of cashflows

(55,673

)

(46,580

)

(30,053

)

Other

(157,928

)

(136,887

)

33,127

(213,601

)

(183,467

)

3,074

Loss on sale

-

-

(123

)

Gains (losses) on hedging derivatives

133,921

55,536

(12,093

)

(79,680

)

(127,931

)

(9,142

)

3,691

(54,604

)

43,833

From PFSI—MSR recapture income

1,468

1,015

561

Net loan servicing fees

$

5,159

$

(53,589

)

$

44,394

1 Includes contractually specified servicing fees

MSR and ESS valuation losses were primarily driven by a decrease in interest rates during the quarter, resulting in expectations for elevated prepayment activity in the future, partially offset by higher recapture income from PFSI for increased prepayment activity during the quarter. PMT generally benefits from recapture income when the prepayment of a loan underlying PMT’s ESS results from refinancing by PFSI.

Net interest income for the segment was $3.7 million, up from $0.9 million in the prior quarter. Interest income totaled $41.5 million, up from $35.9 million in the prior quarter, primarily driven by higher interest income related to custodial deposits. Interest expense totaled $37.8 million, up from $35.0 million in the prior quarter, primarily driven by interest shortfall expense from higher prepayment activity.

Segment expenses were $13.3 million, up from $11.5 million in the prior quarter, primarily driven by increased expenses from a larger MSR portfolio.

Correspondent Production Segment

PMT acquires newly originated loans from correspondent sellers and typically sells or securitizes the loans, resulting in current-period income and ongoing investments in MSRs and CRT related to a portion of its production. PMT’s Correspondent Production segment generated pretax income of $21.8 million, up from $16.2 million in the prior quarter.

Through its correspondent production activities, PMT acquired $31.5 billion in UPB of loans originated by nonaffiliates, up 45 percent from the prior quarter and 90 percent from the third quarter of 2018. Of total correspondent acquisitions, conventional conforming and jumbo acquisitions from nonaffiliates totaled $16.6 billion, and government-insured or guaranteed and non-delegated acquisitions totaled $14.9 billion, compared to $10.7 billion and $11.0 billion, respectively, in the prior quarter. PMT also acquired $1.4 billion of conventional loans originated by PennyMac Financial, up from $1.1 billion in the prior quarter. Interest rate lock commitments on conventional loans totaled $19.5 billion, up from $12.6 billion in the prior quarter and $8.4 billion in the third quarter of 2018.

Segment revenues were $72.0 million, a 46 percent increase from the prior quarter and included net gain on loans acquired for sale of $38.7 million, other income of $25.5 million, which primarily consists of volume-based origination fees, and net interest income of $7.7 million. Net gain on loans acquired for sale in the quarter increased by $15.9 million from the prior quarter, driven by higher production volumes and higher CRT-related gains, as noted earlier. Net interest income decreased $1.2 million from the prior quarter and $2.0 million from the third quarter of 2018. Net interest income in the third quarter included $1.0 million in incentives which the Company was entitled to receive under one of its master repurchase agreements to finance mortgage loans that satisfied certain consumer relief characteristics, down from $2.3 million and $5.0 million in the second quarter of 2019 and the third quarter of 2018, respectively. As expected, the lender completed the orderly wind down of the incentive program during the quarter ended September 30, 2019. The related master repurchase agreement expired on August 31, 2019.

Segment expenses were $50.2 million, up from $33.2 million in the prior quarter driven by the increase in production activity, partially offset by a slight decrease in the weighted average fulfillment fee during the quarter. The weighted average fulfillment fee rate in the third quarter was 27 basis points, down from 28 basis points in the prior quarter.

Corporate Segment

The Corporate segment includes interest income from cash and short-term investments, management fees, and corporate expenses.

Segment revenues were $0.6 million, down from $1.6 million in the prior quarter.

Management fees were $10.1 million, up 14 percent from the prior quarter driven by increased incentive fees paid to PFSI based on PMT’s profitability and an increase in base management fees as a result of PMT’s increased average shareholders’ equity.

Other segment expenses were $6.0 million, down from $6.7 million in the prior quarter.

Taxes

PMT recorded a $21.9 million income tax benefit driven by fair value declines in MSRs held in PMT’s taxable subsidiary.

“Our results reflect continued strong performance from PMT’s unique investment strategies,” commented Executive Chairman Stanford L. Kurland. “The third quarter also represents the third consecutive quarter we have prudently raised capital in the equity markets, as we continue to source attractive organic investment opportunities in CRT and interest rate sensitive investments from our leadership position in the conventional correspondent market. We continue to see compelling opportunities for new investments in CRT and MSRs, and expect to benefit from greater economies of scale as we leverage our larger capital base. As a result, we remain optimistic about our ability to continue to provide strong shareholder returns.”

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at www.pennymac-REIT.com beginning at 1:30 p.m. (Pacific Time) on Thursday, October 31, 2019.

About PennyMac Mortgage Investment Trust

PennyMac Mortgage Investment Trust is a mortgage real estate investment trust (REIT) that invests primarily in residential mortgage loans and mortgage-related assets. PMT is externally managed by PNMAC Capital Management, LLC, a wholly-owned subsidiary of PennyMac Financial Services, Inc. (NYSE: PFSI). Additional information about PennyMac Mortgage Investment Trust is available at www.PennyMac-REIT.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections and assumptions with respect to, among other things, the Company’s financial results, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like “believe,” “expect,” “anticipate,” “promise,” “plan,” and other expressions or words of similar meanings, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: changes in the Company’s investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject it to additional risks; the occurrence of natural disasters or other events or circumstances that could impact the Company’s operations; volatility in the Company’s 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 and housing markets or otherwise have a broad impact on financial and housing 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 domestic and international 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 the Company’s investment objectives; the inherent difficulty in winning bids to acquire mortgage loans, and the Company’s success in doing so; the concentration of credit risks to which the Company is exposed; the degree and nature of the Company’s competition; the Company’s dependence on its 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 its manager, servicer or their affiliates; the availability, terms and deployment of short-term and long-term capital; the adequacy of the Company’s cash reserves and working capital; the Company’s ability to maintain the desired relationship between its financing and the interest rates and maturities of its assets; the timing and amount of cash flows, if any, from the Company’s 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 the Company’s servicer, which also provides the Company 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 the Company’s customers and counterparties; the Company’s indemnification and repurchase obligations in connection with mortgage loans it purchases and later sells or securitizes; the quality and enforceability of the collateral documentation evidencing the Company’s ownership and rights in the assets in which it invests; increased rates of delinquency, default and/or decreased recovery rates on the Company’s investments; the performance of mortgage loans underlying mortgage-backed securities in which the Company retains credit risk; the Company’s ability to foreclose on its investments in a timely manner or at all; increased prepayments of the mortgages and other loans underlying the Company’s mortgage-backed securities or relating to the Company’s mortgage servicing rights, excess servicing spread and other investments; the degree to which the Company’s hedging strategies may or may not protect it from interest rate volatility; the effect of the accuracy of or changes in the estimates the Company makes about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon the Company’s financial condition and results of operations; the Company’s ability to maintain appropriate internal control over financial reporting; the Company’s exposure to risks of loss and disruptions in operations resulting from adverse weather conditions and man-made or natural disasters; technologies for loans and the Company’s ability to mitigate security risks and cyber intrusions; the Company’s ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct its business; the Company’s ability to detect misconduct and fraud; the Company’s ability to comply with various federal, state and local laws and regulations that govern its business; developments in the secondary markets for the Company’s 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, the Federal Housing Administration or the Veterans Administration, the U.S. Department of Agriculture, or government-sponsored entities such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or such changes that increase the cost of doing business with such entities; the Dodd-Frank Wall Street Reform and Consumer Protection 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 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 the Company’s business and its ability to satisfy complex rules for it to qualify as a REIT for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of the Company’s subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes, as applicable, and the Company’s ability and the ability of its 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); the Company’s ability to make distributions to its shareholders in the future; the Company’s failure to deal appropriately with issues that may give rise to reputational risk; and the Company’s organizational structure and certain requirements in its charter documents. You should not place undue reliance on any forward-looking statement and should consider all of the uncertainties and risks described above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30, 2019

June 30, 2019

September 30, 2018

(in thousands except share amounts)

ASSETS
Cash

$

113,651

$

77,676

$

88,929

Short-term investments

74,895

76,731

26,736

Mortgage-backed securities at fair value

2,325,010

2,600,357

2,126,507

Loans acquired for sale at fair value

3,947,368

2,477,267

1,949,432

Loans at fair value

290,527

358,570

633,168

Excess servicing spread received from
PennyMac Financial Services, Inc.

183,141

194,156

223,275

Derivative and credit risk transfer strip assets

274,444

258,782

143,577

Firm commitment to purchase
credit risk transfer securities at fair value

54,734

15,581

18,749

Real estate acquired in settlement of loans

79,201

97,808

95,605

Real estate held for investment

-

-

45,971

Deposits securing credit risk transfer arrangements

2,044,250

2,060,612

662,624

Mortgage servicing rights

1,162,714

1,126,427

1,109,741

Servicing advances

32,057

35,143

48,056

Due from PennyMac Financial Services, Inc.

4,993

1,485

2,351

Other assets

157,624

85,194

92,857

Total assets

$

10,744,609

$

9,465,789

$

7,267,578

LIABILITIES
Assets sold under agreements to repurchase

$

6,355,476

$

5,364,551

$

4,394,500

Mortgage loan participation and sale agreements

-

-

31,578

Exchangeable senior notes

249,269

248,958

248,053

Notes payable

1,361,142

1,370,074

445,318

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

261,209

270,077

278,113

Interest-only security payable at fair value

24,729

26,356

8,821

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

107,678

118,716

133,128

Derivative liabilities

9,160

22,454

11,880

Accounts payable and accrued liabilities

108,913

36,373

70,362

Due to PennyMac Financial Services, Inc.

39,744

34,695

27,467

Income taxes payable

-

21,873

52,382

Liability for losses under representations and warranties

7,678

7,728

7,413

Total liabilities

8,524,998

7,521,855

5,709,015

SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest

299,707

299,707

299,707

Common shares of beneficial interest—authorized, 500,000,000 common
shares of $0.01 par value; issued and outstanding 90,345,127, 78,607,436
and 60,951,444 common shares, respectively

903

786

610

Additional paid-in capital

1,901,852

1,647,186

1,284,537

Retained earnings (accumulated deficit)

17,149

(3,745

)

(26,291

)

Total shareholders' equity

2,219,611

1,943,934

1,558,563

Total liabilities and shareholders' equity

$

10,744,609

$

9,465,789

$

7,267,578

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Quarterly Periods ended

September 30, 2019

June 30, 2019

September 30, 2018

(in thousands, expect per share amounts)
Investment Income
Net gain (loss) on investments:
From nonaffiliates

$

49,224

$

90,965

$

7,977

From PennyMac Financial Services, Inc.

(3,435

)

(3,211

)

1,706

45,789

87,754

9,683

Net gain on loans acquired for sale:
From nonaffiliates

45,054

31,089

22,121

From PennyMac Financial Services, Inc.

4,206

3,155

2,689

49,260

34,244

24,810

Loan origination fees

25,470

17,630

12,424

Net loan servicing fees:
From nonaffiliates

76,377

66,919

49,864

Other fees

6,994

6,408

3,111

83,371

73,327

52,975

Change in fair value of mortgage servicing rights

(79,680

)

(127,931

)

(9,142

)

3,691

(54,604

)

43,833

From PennyMac Financial Services, Inc.

1,468

1,015

561

5,159

(53,589

)

44,394

Interest income:
From nonaffiliates

85,510

69,026

58,584

From PennyMac Financial Services, Inc.

2,291

2,767

3,740

87,801

71,793

62,324

Interest expense:
To nonaffiliates

82,702

64,204

44,797

To PennyMac Financial Services, Inc.

1,527

1,692

1,812

84,229

65,896

46,609

Net interest income

3,572

5,897

15,715

Results of real estate acquired in settlement of loans

702

2,075

(310

)

Other

808

2,390

1,785

Net investment income

130,760

96,401

108,501

Expenses
Earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees

45,149

29,590

26,256

Loan servicing fees

12,964

11,568

10,071

Management fees

10,098

8,832

6,482

Loan origination

4,328

3,118

2,136

Compensation

1,644

1,771

1,924

Professional services

1,430

1,733

2,616

Loan collection and liquidation

1,551

1,247

2,747

Other

5,463

5,172

4,607

Total expenses

82,627

63,031

56,839

Income before (benefit from) provision for
income taxes

48,133

33,370

51,662

(Benefit from) provision for income taxes

(21,867

)

(10,863

)

5,100

Net income

70,000

44,233

46,562

Dividends on preferred shares

6,234

6,234

6,235

Net income attributable to common shareholders

$

63,766

$

37,999

$

40,327

Earnings per share
Basic

$

0.75

$

0.52

$

0.66

Diluted

$

0.71

$

0.50

$

0.62

Weighted average shares outstanding
Basic

84,367

73,425

60,950

Diluted

92,834

81,892

69,417

Dividends declared per common share

$

0.47

$

0.47

$

0.47

Media

Janis Allen

(805) 330-4899

Investors

Isaac Garden

(818) 224-7028

Source: PennyMac Mortgage Investment Trust

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