Pennymac Mortgage Investment Trust — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. PMT is a mortgage-focused specialty finance company, externally managed by PNMAC Capital Management and serviced by PennyMac Loan Services. Its activities span credit-sensitive investments, interest-rate-sensitive investments, correspondent loan production and corporate operations.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net investment income | $420.3 million | $469.4 million |
| Expenses | $375.6 million | $389.6 million |
| Pretax income | $44.7 million | $79.7 million |
| Net income | $56.9 million | $52.4 million |
| Net income attributable to common shareholders | $26.0 million | $27.4 million |
| Basic and diluted EPS | $0.26 | $0.27 |
| Annualized return on average common equity | 1.3% | 1.4% |
| Common dividends per share | $1.88 | $1.52 |
Net income included a $12.2 million income-tax benefit in 2021, compared with $27.4 million of tax expense in 2020. The filing reports common-shareholder net losses of $43.9 million and $27.3 million in the third and fourth quarters of 2021, respectively.
- Segment pretax income (loss): Credit-sensitive strategies earned $306.6 million, versus a $317.1 million loss in 2020; interest-rate-sensitive strategies lost $290.1 million, versus $105.7 million income; correspondent production earned $86.9 million, versus $344.6 million. Corporate operations recorded a $58.9 million loss.
- Assets and capital at year-end: Total assets were $13.8 billion, up 20% from $11.5 billion; shareholders’ equity was $2.37 billion. Cash was $59.0 million and short-term investments were $168.0 million.
- Debt and leverage: Total borrowings were $11.18 billion, including $6.72 billion short-term and $4.46 billion long-term debt. Debt-to-equity was 4.72:1, up from 3.78:1. The company reported up to $5.2 billion of additional secured financing capacity, subject to facility terms and collateral availability.
- Cash flow: Operating activities used approximately $2.8 billion; investing activities provided approximately $1.1 billion; financing activities provided $1.7 billion. Cash increased by $1.3 million. Operating cash use primarily reflected growth in loans held for sale.
- Margins and portfolio: Net interest income was negative $109.5 million, versus negative $48.6 million; net interest margin was negative 1.15%, versus negative 0.52%. The year-end portfolio included $2.89 billion of MSRs, $2.67 billion of MBS and $1.69 billion of net CRT-related investments.
Material changes versus FY2020
- CRT performance rebounded: PMT recorded $369.0 million of CRT arrangement gains in 2021, compared with a $145.9 million loss in that line in 2020. Management attributed the improvement to recovery from the pandemic-driven credit-market disruption.
- Interest-rate-sensitive results weakened. Net servicing fees fell to negative $36.0 million from positive $153.7 million, reflecting MSR valuation and hedging losses; MBS valuation shifted to a $74.4 million loss from an $87.9 million gain.
- Correspondent production volume grew: loan purchases were $181.4 billion versus $170.0 billion. However, lower gain-on-sale margins contributed to a $257.7 million decline in segment pretax income.
- PMT issued $250 million of Series C preferred shares and $345 million of exchangeable senior notes during 2021. It repurchased $56.9 million of common shares and paid $1.88 per common share in annual dividends.
- PMT began retaining or purchasing subordinate securities backed by investment-property loans in 2021; consolidated loans associated with these transactions totaled approximately $1.5 billion at year-end.
Outlook, risks and notable items
- Management cited an expected contraction in the U.S. mortgage origination market: an estimated $4.8 trillion in 2021 versus forecasts averaging approximately $3.1 trillion for 2022. This is market context, not company-specific earnings guidance.
- New CRT arrangements are no longer being created following FHFA direction to wind down lender risk-sharing transactions. The existing CRT portfolio remains exposed to credit losses, property values and fair-value assumptions.
- Management highlighted gain-on-sale margin pressure from competition, higher interest rates and increased direct GSE competition. Rising rates may also affect MBS values, borrowing costs and mortgage production; faster prepayments can reduce MSR values.
- COVID-19 forbearance continued to pose servicing and CRT risks. At year-end, 0.4% of loans in the MSR portfolio were in COVID-19-related forbearance and delinquent; management reported that delinquency levels had declined during 2021.
- Liquidity and refinancing are important risks: short-term repurchase financing is subject to renewal, collateral valuation and margin calls. Debt agreements include financial covenants and minimum liquidity requirements. The company said agreements maturing before the report date had been renewed, extended or replaced, and it obtained first-quarter 2022 waivers for certain positive-net-income funding conditions.
- Valuation uncertainty is significant: 34% of total assets were measured using Level 3 inputs requiring substantial unobservable assumptions. Deloitte identified MSR and CRT valuations as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- The company relies on affiliated manager and servicer PFSI/PLS, and faces regulatory, counterparty, repurchase-and-indemnification, cybersecurity, climate, REIT-qualification and LIBOR-transition risks. No material legal proceedings were reported as of December 31, 2021.
Investor verification priorities
- Review the audited statements and quarterly filings to reconcile full-year earnings with the reported third- and fourth-quarter common-shareholder losses.
- Assess how much of 2021 earnings depended on CRT fair-value recovery and other non-cash items; the filing states non-cash items were 271% of net investment income.
- Examine MSR valuation assumptions, hedge performance and sensitivity to interest rates, prepayment speeds and servicing costs.
- Check borrowing maturities, committed versus uncommitted capacity, margin-call exposure, covenant compliance and the status of waivers and refinancing after year-end.
- Evaluate the sustainability of the $1.88 annual common dividend against taxable income, cash generation, debt service and REIT distribution requirements.
- Monitor correspondent margins and volumes, the projected market contraction, the runoff of CRT investments and performance of the new subordinate investment-property securities.