PennyMac Mortgage Investment Trust — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter results filing. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
PennyMac Mortgage Investment Trust (PMT) is an externally managed mortgage-focused specialty finance company and REIT. Its business spans credit-sensitive investments, interest-rate-sensitive investments, correspondent loan production, and corporate activities. PennyMac Financial Services affiliates provide management, loan production and servicing. In 2020, PMT purchased $170.0 billion of correspondent loans and sold or transferred substantially all through Agency channels or to affiliates, retaining mortgage servicing rights (MSRs) and certain credit exposure.
Financial performance and position
| Metric | FY2020 / year-end | FY2019 / prior year-end |
|---|---|---|
| Net investment income | $469.4 million | $488.8 million |
| Pretax income | $79.7 million | $190.6 million |
| Net income | $52.4 million | $226.4 million |
| Net income attributable to common shareholders | $27.4 million | $201.4 million |
| Basic / diluted earnings per common share | $0.27 / $0.27 | $2.54 / $2.42 |
| Common dividends per share | $1.52 | $1.88 |
| Total assets | $11.49 billion | $11.77 billion |
| Shareholders’ equity | $2.30 billion | $2.45 billion |
| Book value per common share | $20.30 | $21.37 |
| Total debt | $8.67 billion | $9.17 billion |
| Cash and short-term investments | $185.0 million | $194.9 million |
- Net interest income turned to an expense of $48.6 million from income of $20.4 million. Net interest margin was -0.52%, versus 0.26%; net interest spread was -1.00%, versus 0.11%.
- Cash from operating activities was $671.7 million, compared with cash used of $3.0 billion in 2019. Investing activities used $15.4 million and financing activities used $702.6 million; cash declined $46.4 million to $57.7 million.
- Year-end leverage, defined by PMT as borrowings divided by shareholders’ equity, was 3.78x, versus 3.75x. Approximately $8.5 billion of debt was secured. The filing reported up to $4.6 billion of additional capacity under secured facilities, subject to eligible collateral and other terms.
- Annualized return on average common equity was 1.4%, versus 12.0%. Reported 2020 earnings include substantial noncash fair-value movements; the filing states that 12% of net investment income consisted of noncash items, versus 121% in 2019.
Material changes versus 2019
- Net income fell by $174.0 million. The credit-sensitive segment swung to a $317.1 million pretax loss from $182.2 million of pretax income, principally reflecting COVID-related credit and valuation deterioration in CRT arrangements and commitments.
- CRT arrangements and related firm commitments generated $267.0 million of fair-value losses in 2020. PMT also reported $115.5 million of payments to settle CRT losses. At year-end, net CRT-related investments were $2.6 billion; loans in funded CRT arrangements included $2.3 billion of unpaid principal balance 180 or more days delinquent.
- Correspondent production pretax income rose to $344.6 million from $64.6 million. Loan purchases increased to $170.0 billion from $114.5 billion, supported by low mortgage rates, high demand and temporary industry capacity constraints. Management said gain-on-sale margins moderated as competitors returned.
- Interest-rate-sensitive strategies produced $105.7 million of pretax income, up from $1.1 million. The servicing portfolio grew, and hedge results improved; nevertheless, MSR fair-value changes were a $938.9 million reduction before $601.7 million of hedging gains.
- Expenses increased 31% to $389.6 million, mainly from higher loan fulfillment and servicing costs associated with higher production and pandemic-related forbearance activity. The income tax provision shifted to $27.4 million from a $35.7 million benefit.
- Total debt declined by $490.9 million, while total assets declined 2%. Common dividends decreased to $1.52 per share from $1.88; PMT repurchased 2.8 million common shares for $37.3 million.
Outlook, commentary and key risks
- Management provided no specific company earnings or dividend guidance. It cited mortgage origination forecasts of approximately $4.0 trillion for 2020 and $3.3 trillion for 2021, and expected pandemic-related servicing income and costs to remain pressured; servicing portfolio growth was expected to partly offset those effects.
- FHFA-directed wind-down of new GSE lender risk-share transactions meant PMT did not expect to make new CRT investments after 2020. Management identified finding comparable-return alternatives as a material challenge.
- CARES Act forbearance elevated delinquencies, servicing advances and expenses. PMT warned that CRT contracts can trigger losses based on delinquency even if a borrower later resumes payments. Its reported MSR forbearance percentage varies within the filing: 2.1% in one risk disclosure and 2.3% in MD&A; verify the applicable portfolio definition and date.
- PMT is highly leveraged and relies on short-term repurchase financing, collateral values, lender renewals and compliance with cash, tangible-net-worth, profitability and leverage covenants. Margin calls, reduced funding access or covenant breaches could force asset sales or impair liquidity.
- Other significant exposures include interest rates, refinancing/prepayment speeds, credit spreads, uncertain fair values (about 42% of assets were Level 3 fair-value assets), Agency and Ginnie Mae dependence, servicing performance, related-party arrangements, REIT compliance and the transition away from LIBOR.
- PMT stated that all repurchase agreements maturing before the report date had been renewed, extended or replaced. It reported no material legal proceedings at year-end. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile the CRT loss disclosures, remaining contractual exposure, delinquency/forbearance data and treatment of CARES Act borrowers in each CRT structure.
- Assess the assumptions and sensitivity of MSR and CRT fair values, hedging effectiveness, and the extent to which reported earnings depend on noncash estimates.
- Verify current borrowing availability, collateral eligibility, margin-call exposure, covenant headroom and cash available after Agency and servicing liquidity requirements.
- Track correspondent production margins, fulfillment costs, representations-and-warranties provisions and repurchase activity as unusually high volumes normalize.
- Evaluate dividend sustainability against taxable income, cash generation, preferred dividends, REIT distribution requirements and the board’s discretion; confirm the differing reported forbearance percentages.