PennyMac Mortgage Investment Trust — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. PMT is a specialty finance company investing primarily in residential mortgage-related assets, including mortgage servicing rights (MSRs), mortgage-backed securities (MBS), credit risk transfer (CRT) investments and correspondent loan production. It is externally managed and serviced by affiliates of PennyMac Financial Services, Inc. (PFSI). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net investment income | $90.5 million | $21.5 million | $180.8 million | $103.3 million |
| Income (loss) before taxes | $46.9 million | $(39.9) million | $85.7 million | $(21.8) million |
| Net income (loss) | $24.6 million | $(70.7) million | $85.3 million | $(89.9) million |
| Net income (loss) attributable to common shareholders | $14.2 million | $(81.2) million | $64.4 million | $(110.8) million |
| Basic / diluted EPS | $0.16 / $0.16 | $(0.88) / $(0.88) | $0.73 / $0.68 | $(1.19) / $(1.19) |
| Common dividend per share | $0.40 | $0.47 | $0.80 | $0.94 |
- Balance sheet at June 30: assets of $13.38 billion, liabilities of $11.45 billion and shareholders’ equity of $1.93 billion. Cash was $238.8 million and short-term investments were $242.0 million.
- Debt and leverage: reported borrowings totaled $11.04 billion, including $5.91 billion under repurchase agreements, $3.16 billion in notes secured by CRT and servicing assets, $1.36 billion in non-recourse VIE asset-backed financings and $547.8 million in exchangeable senior notes. Debt-to-equity was 5.7:1, or 5.0:1 excluding non-recourse debt.
- Liquidity and cash flow, six months: operating cash flow was $743.5 million, investing cash outflow $132.7 million and financing cash outflow $483.9 million, producing a $126.9 million increase in cash. Cash at period-end was $238.8 million. These cash flows reflect substantial loan-purchase and sale activity.
- Portfolio and capital: MSRs were carried at $3.98 billion; MBS at $4.73 billion; loans held for sale at $1.08 billion; and CRT-related net investment was approximately $1.16 billion. Book value per common share was $15.81, compared with $15.78 at year-end 2022.
- PMT reported an annualized return on average common equity of 4.0% for Q2 and 9.0% for the first half. No conventional gross-margin measure is presented.
Material changes versus the prior comparable period
- PMT returned to profitability: Q2 net income was $24.6 million versus a $70.7 million loss a year earlier; first-half net income was $85.3 million versus an $89.9 million loss.
- Improved CRT performance was a major contributor. Management attributed the year-over-year improvement to tighter credit spreads and a more favorable macroeconomic outlook; Q2 CRT arrangements generated $60.5 million in net gains compared with $42.4 million in losses in Q2 2022.
- Net interest expense was $24.7 million in Q2 versus $12.5 million of net interest income in Q2 2022, and $50.8 million for the first half versus approximately breakeven a year earlier. Management said debt costs repriced faster than yields on interest-earning assets. Q2 repo borrowing cost averaged 5.95%, versus 1.75% in Q2 2022.
- MSR fair-value and hedge results weakened: net servicing fees were $108.8 million in Q2 versus $217.3 million, and $85.1 million for the first half versus $521.5 million. First-half MSR fair-value change was a $225.4 million loss, versus a $437.5 million gain in 2022.
- Correspondent production volumes remained substantial but declined: first-half loan purchases were $41.9 billion in fair value, versus $44.6 billion. Loan fulfillment fees fell to $17.4 million from $37.4 million for the first half. PMT sold $11.1 billion of conventional loan UPB to PFSI during the first half.
- Total assets declined $536.6 million from December 31, 2022, primarily as loans held for sale decreased $741.9 million; MBS increased $268.7 million. Reported total debt decreased about $362.9 million.
Outlook, commentary, risks and unusual items
- Management cited higher interest rates, inflation and a slowing economy as headwinds for mortgage origination and production. It referenced an industry 2023 mortgage origination estimate of $1.6–$1.8 trillion, versus $2.3 trillion in 2022; this is an industry estimate, not PMT company guidance. PMT said it expected to continue selling a portion of conventional loans to PLS in Q3 2023 to optimize capital use.
- Management noted that higher rates raise floating-rate funding costs but increase interest income on cash placements and loans held for sale; slower prepayments affect servicing economics. Lower economic activity or home-price weakness could increase delinquencies, defaults and losses on CRT and subordinate securities. Management also cited favorable borrower credit characteristics and low current loan-to-value ratios as potential mitigants.
- Fair-value accounting makes results sensitive to interest rates, prepayment assumptions, servicing costs, credit spreads and home values. A substantial portion of assets and liabilities uses Level 3 inputs. In Q2, 55% of net investment income consisted of identified non-cash items, so reported earnings may not track cash generation.
- Funding and liquidity risks include substantial leverage, short-term repurchase financing, lender margin calls and renewal or replacement of facilities. Management reported compliance with debt covenants and Agency capital/liquidity requirements at June 30; it also said matured repurchase agreements had been renewed or extended by the report date. Revised Agency requirements begin taking effect from September 30, 2023.
- PMT’s REIT status requires distribution of at least 90% of taxable income, subject to applicable rules. The Q2 tax provision was $22.2 million on $46.9 million of consolidated pretax income; management cautioned that the effective tax rate may be volatile.
- Commitments included $1.395 billion of loan-purchase commitments. The representations-and-warranties liability was $37.1 million. Management stated that ordinary-course legal matters were not expected to have a material adverse effect and reported no material legal proceedings at June 30. No material risk-factor changes from the 2022 Form 10-K were reported.
Most important facts for investors to verify
- Whether CRT gains and tighter credit spreads persist, and how underlying borrower performance affects CRT exposure and required settlements.
- Whether MSR valuations and hedge results stabilize; review the sensitivity disclosures for prepayment speeds, pricing spreads and servicing costs.
- How rising funding costs, debt maturities, facility renewals and potential margin calls affect liquidity and leverage.
- Whether correspondent production volumes, sale economics and related-party transactions with PFSI support sustainable earnings and capital efficiency.
- How much reported earnings converts to cash, given material non-cash fair-value items, and whether dividends remain supported by taxable income and liquidity needs.
- Whether PMT and PLS continue to meet debt-covenant and Agency capital/liquidity requirements as revised standards take effect.