PennyMac Mortgage Investment Trust — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. PMT is a specialty finance company investing primarily in residential mortgage-related assets, including credit risk transfer (CRT) arrangements, mortgage servicing rights (MSRs), mortgage-backed securities (MBS), and correspondent loan production. Comparisons below are with Q1 2019 or December 31, 2019, as applicable. Dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 / March 31, 2020 | Comparable period |
|---|---|---|
| Net investment income (loss) | $(506.5) million | $106.6 million in Q1 2019 |
| Pretax income (loss) | $(584.4) million | $49.9 million in Q1 2019 |
| Net income (loss) | $(594.7) million | $53.5 million in Q1 2019 |
| Net income (loss) attributable to common shareholders | $(600.9) million; $(5.99) per basic and diluted share | $47.3 million; $0.73 basic and $0.68 diluted EPS |
| Common dividend declared per share | $0.25 | $0.47 in Q1 2019 |
| Net interest income (loss) | $(8.9) million; net interest margin of -0.37% | $8.3 million; net interest margin of 0.55% |
| Cash from operating / investing / financing activities | $1,705.3 million / $(604.0) million / $(106.0) million | $144.9 million / $175.5 million / $(311.7) million in Q1 2019 |
| Total assets / shareholders’ equity | $11.92 billion / $1.82 billion | $11.77 billion / $2.45 billion at December 31, 2019 |
| Cash | $1.10 billion | $104.1 million at December 31, 2019 |
| Borrowings and leverage | $9.11 billion in reported debt; leverage ratio 4.99x | $9.17 billion in reported debt; leverage ratio 3.75x at December 31, 2019 |
| Book value per common share | $15.16 | $21.37 at December 31, 2019 |
PMT does not report a conventional consolidated revenue or operating-margin measure in the provided filing text; its results are presented mainly as investment income, servicing fees, loan-sale gains and net interest income.
Key changes and drivers
- PMT reported a $1.0 billion reduction in the value of CRT arrangements and related purchase commitments, as pandemic-driven market disruption increased perceived credit risk and required investor returns. CRT-related investment losses were the principal driver of the quarterly loss.
- Interest-rate-sensitive results partly offset the CRT losses: MBS valuation gains were $116.0 million, and MSR hedging gains exceeded MSR fair-value losses by $140.0 million. MSRs nevertheless fell in carrying value by $378.4 million from year-end, to $1.16 billion.
- Correspondent loan purchases rose to $33.2 billion from $16.4 billion in Q1 2019; loan sales totaled $34.2 billion, and net gains on loans acquired for sale increased to $48.8 million from $21.3 million. Management attributed stronger production and margins to low rates, high loan demand, and reduced industry capacity.
- Expenses increased 37% to $77.9 million, primarily due to higher fulfillment costs from increased production. Net interest income declined, reflecting lower asset yields, a changed financing mix, and the absence of $7.5 million of repo incentives recorded in Q1 2019.
- Operating cash flow was substantially affected by correspondent loan purchases and sales and a decrease in loans held for sale; it should not be read as a proxy for earnings. Non-cash items were reported as 277% of net investment loss.
Liquidity, debt and outlook
- Repurchase-agreement debt was $6.35 billion at quarter-end, with $3.12 billion of stated borrowing capacity, most of it uncommitted. These facilities carry short maturities, collateral requirements and potential margin calls. Total contractual obligations were $16.6 billion, including loan-purchase commitments and CRT-security commitments.
- PMT reported a 4.99x leverage ratio. The filing also describes financing covenants, including minimum cash and tangible-net-worth requirements, and a temporary $100 million liquidity covenant beginning April 30, 2020. Agency seller/servicer liquidity and net-worth measures exceeded stated requirements at March 31, 2020.
- Management increased cash holdings in response to pandemic uncertainty. It cautioned that forbearance-related delinquencies could increase servicing advances and costs, reduce servicing income, impair MSR and CRT values, and create liquidity, financing and covenant risks. It also warned that hedges may not fully offset MSR losses.
- No company earnings or dividend guidance is provided in the supplied filing text. Management cited industry forecasts of mortgage originations of about $2.4 trillion for 2020 and $2.2 trillion for 2021; these are market estimates, not PMT guidance.
- CRT valuations involved significant Level 3 inputs. Management noted that broker valuations appeared to assume that agencies might amend certain CRT loss terms to exclude some COVID-19 forbearance effects; absent such amendments, further losses may result. The filing does not establish that amendments will occur.
- After quarter-end, PMT sold about $1.0 billion of MBS and repaid related repo financing. It repurchased $123.6 million principal of its 2020 exchangeable notes and repaid the remaining $126.4 million at maturity on May 1, 2020. Agreements maturing before the report date were extended or renewed.
- Management reported effective disclosure controls and no material legal proceedings as of March 31, 2020.
Most important facts for investors to verify
- Whether agency or FHFA action changes the treatment of COVID-19 forbearances under CRT agreements, and the resulting effect on CRT valuations and losses.
- Actual borrower delinquency and forbearance trends, servicing advances, and their impact on liquidity and MSR values.
- Availability and terms of short-term repo financing, uncommitted capacity, margin requirements, and compliance with financing covenants.
- Whether subsequent MBS sales, debt repayments and facility renewals materially changed liquidity, leverage or investment exposure after March 31.
- How much of future reported earnings reflects cash generation versus fair-value estimates, hedging results and other non-cash items; also verify the sustainability of the reduced common dividend.