PennyMac Mortgage Investment Trust — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. PMT is an externally managed specialty finance company operating in correspondent mortgage production and mortgage investment activities. Financial statements are unaudited.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net investment income | $69.8 million | $120.6 million | $107.4 million | $197.2 million |
| Net interest income | $15.6 million | $26.7 million | $30.5 million | $46.2 million |
| Net income | $28.1 million | $75.2 million | $35.6 million | $113.1 million |
| Diluted earnings per share | $0.36 | $0.93 | $0.46 | $1.44 |
| Dividends declared per share | $0.61 | $0.59 | $1.22 | $1.18 |
| Net interest margin | 1.38% | 2.77% | 1.40% | 2.53% |
| Net interest spread | 0.98% | 1.94% | 0.93% | 1.62% |
- At June 30, total assets were $6.68 billion, total liabilities $5.15 billion, and shareholders’ equity $1.53 billion. Assets increased 36% from December 31, 2014, driven principally by correspondent loan inventory and increased ESS holdings.
- Cash was $114.7 million and short-term investments $32.4 million, versus $76.4 million and $139.9 million, respectively, at year-end.
- Borrowings included $3.50 billion under repurchase agreements, $649.1 million of credit-risk-transfer financing, $244.6 million carrying value of exchangeable notes, and newly added FHLB advances, Citibank financing, and PFSI financing. Total reported borrowings were approximately $5.0 billion.
- Six-month operating cash use was $1.66 billion, investing cash use $46.7 million, and financing cash provided $1.75 billion; cash rose $38.3 million to $114.7 million. Operating cash use largely reflected growth in loans held for sale.
Changes versus comparable periods
- Net income and diluted EPS fell sharply year over year. Management attributed the decline mainly to lower investment-segment earnings and reduced fair-value gains on mortgage loans, alongside weaker net interest income.
- Q2 investment-segment pretax income declined to $19.9 million from $70.9 million; correspondent-production pretax income rose to $5.2 million from $2.4 million.
- Correspondent loan purchases rose to $12.5 billion in Q2 and $20.8 billion for the half, compared with $7.3 billion and $12.3 billion. Ending loans acquired for sale increased to $2.21 billion from $637.7 million at year-end.
- Distressed-loan purchases were $242.0 million for the first half, below $287.5 million a year earlier; none were purchased in Q2. ESS purchases increased to $187.3 million for the half from $73.4 million.
- Interest expense increased as financing supported balance-sheet growth. Total expenses edged down to $44.7 million for Q2 from $47.3 million; higher fulfillment costs were offset by lower servicing and incentive management fees.
Outlook, risks, and unusual items
- No specific company earnings or dividend guidance is provided. Management anticipated relatively flat 2015 mortgage originations, citing industry forecasts averaging $1.4 trillion, and expected purchase loans to represent a greater share of future originations. It described correspondent production competition as increasing and distressed-loan pricing as less attractive, and said it would remain selective.
- Management reported improving housing indicators but continued elevated delinquencies and foreclosure activity. It noted that distressed assets can take longer to resolve and generate cash, and that earnings include substantial noncash fair-value estimates.
- Fair-value gains are exposed to home prices, discount rates, prepayments, defaults, and other model assumptions; substantial portfolio valuations use Level 3 inputs. Q2 net gains on investments were $22.6 million versus $73.1 million a year earlier.
- Funding and liquidity risks include short-term repurchase financing, lender margin calls, collateral requirements, refinancing availability, and covenant limits. The company reported a 3.12x leverage ratio, up from 2.01x at year-end, and 98% of assets in the financed asset classes pledged, versus 96%.
- New financing arrangements included a Fannie Mae credit-risk-transfer program (reported as secured financing at quarter-end pending completion of aggregation and sale), $138.4 million of FHLB advances, and a $192.4 million Citibank MSR note. PMT also had $52.5 million outstanding under an ESS financing arrangement with affiliate PFSI.
- Dividend declarations exceeded reported earnings per share in both periods. PMT states it must generally distribute at least 90% of taxable income to retain REIT status; distributions are not necessarily equivalent to GAAP earnings.
- Management reported no material adverse litigation, no material change in risk factors, and effective disclosure controls. Subsequent to quarter-end, repurchase facility limits with Morgan Stanley and Bank of America were temporarily increased by $100 million each on an uncommitted basis.
Important facts for investors to verify
- How much of reported earnings and net investment income reflects realized cash versus noncash Level 3 valuation movements, and how sensitive are key asset values to changed assumptions?
- What are the maturity, renewal, margin-call, and collateral terms of repurchase facilities and other borrowings, and is liquidity adequate under stressed markets?
- Can the company sustain dividends given reported earnings, cash generation, REIT distribution requirements, and the timing of distressed-asset liquidations?
- How are returns and risks affected by related-party transactions with PFSI, including ESS purchases, servicing, management fees, and affiliate financing?
- What are the ultimate accounting and financing outcomes of the credit-risk-transfer transaction, and how will its retained credit exposure affect results?