PennyMac Mortgage Investment Trust — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. PMT is a specialty finance company investing in residential mortgage assets, including mortgage servicing rights (MSRs), credit risk transfer (CRT) investments and mortgage-backed securities (MBS), and operates correspondent loan production. It is externally managed by PCM and serviced by PLS, both PFSI affiliates.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net investment income | $47.9 | $221.0 | $370.8 | $272.8 |
| Pretax income (loss) | $(40.7) | $122.2 | $64.2 | $5.8 |
| Net income (loss) | $(36.0) | $99.5 | $73.7 | $(30.5) |
| Net income (loss) attributable to common shareholders | $(43.9) | $93.3 | $53.3 | $(49.2) |
| Basic and diluted EPS | $(0.45) | $0.94 | $0.54 | $(0.50) |
| Net interest expense | $(17.2) | $1.6 | $(91.4) | $(27.6) |
- Q3 drivers: Net loan servicing fees were a loss of $53.3 million versus income of $60.4 million a year earlier, reflecting MSR valuation and hedging losses. Net gains on loans acquired for sale fell to $16.2 million from $98.4 million. Net investment gains rose to $57.3 million from $19.6 million, including $73.9 million of Q3 gains on CRT arrangements.
- Margins and costs: Net interest margin was -0.65% in Q3 2021 versus 0.05% in Q3 2020; for the nine-month periods it was -1.29% versus -0.40%. Total expenses were $88.5 million in Q3 and $306.6 million year to date, compared with $98.8 million and $267.0 million, respectively.
- Balance sheet at September 30, 2021: Assets were $13.87 billion, liabilities $11.39 billion, and shareholders’ equity $2.48 billion. Cash was $131.7 million and short-term investments $116.1 million. Key holdings included $2.83 billion of MSRs, $2.47 billion of MBS, $4.98 billion of loans acquired for sale, and $1.96 billion of deposits securing CRT arrangements. Book value per common share was $19.79, versus $20.30 at year-end 2020.
- Debt and liquidity: Total borrowings were approximately $11.06 billion, including $7.03 billion under repurchase agreements and $3.99 billion of long-term debt. Leverage, defined as borrowings divided by shareholders’ equity, was 4.46x, up from 3.78x at December 31, 2020. Reported available borrowing capacity under repurchase agreements was $4.78 billion, including $4.68 billion uncommitted. Management stated it was in compliance with debt covenants at quarter-end.
- Cash flow for nine months: Operating cash outflow was $2.71 billion, investing cash inflow $1.10 billion, and financing cash inflow $1.69 billion; cash increased $74.0 million to $131.7 million. Operating cash use primarily reflected growth in loans held for sale and related production inventory, rather than solely operating losses.
- Distributions and capital: Common dividends were $0.47 per share in Q3 and $1.41 year to date. PMT issued $250 million of Series C preferred shares in August 2021. Its common-share repurchase authorization was increased to $400 million; $17.7 million of shares were repurchased during the first nine months.
Material changes and management commentary
- Q3 net income declined $135.5 million year over year. Management cited lower CRT gains than during the prior-year market recovery, MSR valuation and hedge losses, and lower correspondent gain-on-sale margins.
- For the first nine months, results improved by $104.2 million year over year, mainly because CRT investments recovered from the pandemic-driven 2020 market dislocation. This benefit was partly offset by weaker MSR and hedging results, lower MBS gains, higher net interest expense, and lower correspondent margins.
- MSRs grew to $2.83 billion in fair value from $1.76 billion at year-end, with servicing portfolio UPB of $212.0 billion. Management attributed pressure on MSR value to higher expected prepayments, including the anticipated effect of removal of the FHFA adverse market refinance fee; rising benchmark rates provided some offset. MSR hedging produced a $73.8 million Q3 loss.
- PMT said it was no longer creating new CRT investments after FHFA directed Fannie Mae and Freddie Mac to wind down new front-end lender risk-sharing transactions by the end of 2020. Nine-month CRT gains were $325.9 million; deposits securing CRT arrangements declined to $1.96 billion from $2.80 billion at year-end.
- Beginning in Q2, PMT invested in subordinate securities backed by loans on investment properties and consolidated related VIEs. At quarter-end, loans in those VIEs had fair value of $811.7 million, with $771.9 million of associated asset-backed financing. These subordinate interests absorb credit losses before senior securities.
Outlook, risks and contingencies
- The filing provides no company-specific earnings or dividend guidance. Management cited third-party forecasts of a $3.8 trillion to approximately $4.5 trillion U.S. mortgage origination market for 2021 and said correspondent lending competition and gain-on-sale margins had returned to more historical levels.
- Management said future portfolio growth may depend on additional equity capital and continued access to financing; no assurance was given that additional financing efforts would succeed. Short-term repo funding, collateral values, lender margin calls, refinancing and interest-rate movements are material liquidity and earnings sensitivities.
- Key risks include mortgage prepayments and MSR valuation, borrower credit and CRT losses, housing and market volatility, leverage, counterparty and funding availability, and effects of COVID-19 forbearance. As of September 30, 0.8% of loans in the MSR portfolio were in COVID-related forbearance. Delinquency and forbearance balances in the servicing portfolio had declined from year-end 2020.
- Q3 results included substantial non-cash fair-value movements; management reported non-cash items equal to 491% of net investment income. A significant portion of assets and liabilities is Level 3 and relies on unobservable valuation assumptions, so reported earnings and book value can be volatile.
- The representations-and-warranties liability was $40.9 million, up from $21.9 million at year-end 2020; estimates may change and repurchase or indemnification losses could increase. Management reported no material legal proceedings and no off-balance-sheet arrangements as of quarter-end.
- PMT’s TRS valuation allowance for deferred tax assets increased to $22.0 million from $0.1 million at year-end, following TRS losses. The company stated its disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor verification priorities
- Review the drivers and sustainability of MSR valuation and hedge losses, including prepayment assumptions and the sensitivity disclosures.
- Assess whether CRT gains, collateral deposits, underlying loan performance and remaining credit exposure support the reported investment value.
- Verify funding headroom, the committed versus uncommitted nature of repo capacity, maturity and extension terms, collateral requirements, and covenant buffers.
- Reconcile cash flows with loan-production inventory growth and distinguish fair-value/non-cash earnings from realized cash generation available for dividends.
- Track correspondent margins, the representations-and-warranties reserve, TRS deferred-tax-asset recoverability, and the potential diluted-share impact of ASU 2020-06 adoption in 2022.