Pennymac Mortgage Investment Trust quarterly report, Q2 FY2021

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PennyMac Mortgage Investment Trust — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions.

Business context

PMT is a specialty finance company investing primarily in residential mortgage-related assets. Its activities span credit-sensitive strategies, interest-rate-sensitive strategies, correspondent loan production, and corporate operations. It is externally managed by PNMAC Capital Management and uses PennyMac Loan Services for servicing and fulfillment. The filing says PMT was no longer creating new credit risk transfer investments after FHFA-directed wind-downs of new front-end risk-sharing transactions.

Financial results and key metrics

  • Q2 earnings: Net investment income was $121.6 million, versus $558.3 million in Q2 2020. Net income was $38.1 million, compared with $464.6 million; net income attributable to common shareholders was $31.9 million, or $0.32 per diluted share, versus $458.4 million, or $4.51 per diluted share.
  • First-half earnings: Net investment income was $323.0 million, versus $51.8 million in the first half of 2020. Net income was $109.7 million, compared with a $130.1 million net loss; diluted earnings were $0.99 per share versus a $1.43 loss per share.
  • Major Q2 income items: Net investment gains were $128.4 million, down from $488.9 million a year earlier. Net gains on loans acquired for sale were $27.7 million, versus $162.2 million. Net loan servicing fees were a loss of $44.9 million, improving from a $102.7 million loss. Net interest expense was $35.5 million, versus $20.2 million.
  • Margins and cash generation: Net interest margin was negative 1.57% in Q2, versus negative 0.84% a year earlier; first-half margin was negative 1.66%, versus negative 0.65%. For the first half, operating cash flow was negative $2.87 billion, investing cash flow was positive $990.7 million, and financing cash flow was positive $1.89 billion. Cash increased $10.9 million to $68.6 million.
  • Balance sheet at June 30: Total assets were $13.60 billion, liabilities $11.25 billion, and shareholders’ equity $2.34 billion. Assets grew 18% from year-end 2020. Debt totaled approximately $10.88 billion, up from $8.67 billion; the reported leverage ratio was 4.63x, versus 3.78x at year-end.
  • Portfolio and distributions: MSRs were $2.55 billion, Agency mortgage-backed securities $2.31 billion, loans acquired for sale $5.54 billion, and deposits securing CRT arrangements $2.26 billion. Q2 common dividends declared were $0.47 per share, compared with $0.40 a year earlier.

Material changes and management commentary

  • Q2 net income fell $426.5 million year over year, mainly because Q2 2020 included a sharp recovery in credit-investment fair values and higher correspondent gain-on-sale margins. Q2 2021 CRT gains were $98.0 million, versus $488.2 million a year earlier.
  • For the first half, results improved by $239.7 million year over year, principally reflecting a $743.7 million improvement in CRT investment gains compared with the severe 2020 market disruption. This was partly offset by weaker MSR results net of hedging, lower MBS gains, and reduced correspondent margins.
  • Correspondent loan purchases were $101.6 billion in the first half, versus $64.2 billion. Loan-sale volumes rose, but management said industry capacity caught up with demand and gain-on-sale margins moderated from 2020’s elevated levels.
  • MSR fair value increased to $2.55 billion from $1.76 billion at year-end, including $820.6 million of MSRs received in loan sales. Q2 MSR valuation changes reduced value by $299.5 million, partly offset by $94.1 million of hedging gains.
  • PMT purchased $1.7 billion and sold $1.3 billion of MBS in the first half; management described the activity as restructuring the portfolio to reduce prepayment and price risk.

Outlook, risks, and unusual items

  • The filing cites an industry mortgage-origination forecast of approximately $3.9 trillion for 2021, compared with an estimated $4.1 trillion in 2020. This is a market forecast, not company earnings or dividend guidance.
  • Elimination of the FHFA 50-basis-point adverse-market refinance fee, effective August 1, 2021, was expected to increase prepayments on loans underlying PMT’s MSRs. PMT estimated that if the fee had been eliminated at June 30, MSR fair value would have declined by about $50 million; the filing cautions that this is not a projection of the actual September-quarter impact.
  • COVID-19 forbearance and delinquencies remain relevant to servicing costs and CRT exposure, although management said delinquency levels had gradually decreased. As of June 30, 1.4% of loans in the MSR portfolio were in COVID-related forbearance.
  • PMT is exposed to interest-rate, prepayment, credit, real-estate-value, financing, counterparty, and fair-value-estimation risks. Many assets and liabilities are carried at fair value, and significant valuations use unobservable Level 3 inputs. Noncash items represented 254% of Q2 net investment income, underscoring the sensitivity of reported results to valuations.
  • Repo and other financing arrangements involve short maturities, collateral requirements, and potential margin calls. Available repo borrowing capacity was $3.79 billion, of which $51.1 million was committed and $3.74 billion uncommitted. Management reported compliance with debt covenants at June 30.
  • PMT recorded a $24.3 million tax benefit in Q2, primarily reflecting MSR-related losses in its taxable REIT subsidiary; the TRS valuation allowance rose to $5.7 million from $0.1 million at year-end. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
  • PMT issued $345 million of 5.50% exchangeable notes in March, bringing exchangeable-note principal to $555 million. It expects to adopt ASU 2020-06 in 2022; the change will require inclusion of exchangeable shares in diluted EPS and alter debt-equity accounting.

Most important facts for investors to verify

  • How much reported earnings came from realized cash flows versus fair-value marks, especially CRT, MSR, and loan-sale items.
  • Whether MSR prepayment assumptions and the removal of the refinance fee produce valuation or earnings effects different from the preliminary $50 million estimate.
  • Trends in CRT collateral delinquencies, forbearance, losses, recoveries, and remaining deposits securing CRT obligations.
  • Availability and renewal terms of short-term and uncommitted financing, margin-call exposure, and compliance with liquidity and covenant requirements.
  • Whether correspondent production margins, servicing costs, and representations-and-warranties reserves remain sustainable as volumes and the loan market change.
  • Dividend coverage and the effect of future exchangeable-note dilution and adoption of ASU 2020-06 on per-share measures.