PennyMac Mortgage Investment Trust — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone quarterly filing; selected unaudited fourth-quarter results are also disclosed. PMT is an externally managed mortgage finance company focused on distressed residential mortgage investments and correspondent lending. Amounts below are in U.S. dollars.
Business context
PMT invests in distressed mortgage loans, mortgage servicing rights (MSRs), excess servicing spread, mortgage-backed securities and related assets. Its correspondent lending business buys newly originated loans and sells them to agencies or other investors, often retaining servicing rights. Affiliates PNMAC Capital Management and PennyMac Loan Services manage and service the business; PMT has no employees. PMT has elected REIT tax treatment.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net investment income | $405.5 million | $303.5 million |
| Income before taxes | $214.6 million | $186.8 million |
| Net income | $200.2 million | $138.2 million |
| EPS, basic / diluted | $3.13 / $2.96 | $3.14 / $3.14 |
| Net interest income | $57.6 million | $40.8 million |
| Dividends declared per share | $2.87 | $2.22 |
- Net investment income comprised $207.8 million net gains on investments, $98.7 million gains on mortgage loans acquired for sale, $57.6 million net interest income and $32.8 million net servicing fees. Reported investment gains include substantial noncash fair-value changes.
- Correspondent loan purchases totaled $32.0 billion at fair value, up from $22.4 billion. Distressed mortgage investment purchases were $1.31 billion, versus $542.8 million in 2012.
- At year-end, total assets were $4.31 billion, total liabilities $2.84 billion and shareholders’ equity $1.47 billion. Cash was $27.4 million and short-term investments were $92.4 million.
- Year-end borrowings included $2.04 billion under repurchase agreements, $226.6 million under forward purchase agreements, $165.4 million of asset-backed financing and $250 million of exchangeable senior notes. The notes bear 5.375% interest and mature in 2020.
- Cash flows were negative $242.8 million from operations and negative $1.03 billion from investing, offset by $1.27 billion from financing; cash declined $6.3 million to $27.4 million. The filing identifies portfolio growth and loan inventory as significant uses of cash.
- Net interest income yield/cost was reported as 1.57% for 2013. No conventional operating margin is provided.
Changes versus prior period
- Net income rose 45%, while diluted EPS declined to $2.96 from $3.14, reflecting a larger share base and dilution from the exchangeable notes.
- Asset growth and improved mortgage-loan investment gains lifted investment income. Net gains on mortgage investments rose to $207.8 million from $103.6 million, including $181.0 million of valuation gains on mortgage loans and forward-purchase loans.
- Correspondent lending gains fell 33% to $98.7 million despite higher loan volume. Rising rates, narrower secondary-market spreads and increased competition compressed margins; the company reported a $49.0 million year-over-year reduction in gains on loans acquired for sale.
- Expenses increased 64% to $190.9 million, driven by business growth, higher fulfillment and servicing costs, and $12.8 million of performance incentive fees following a management agreement amendment.
- MSRs grew to $290.6 million from $126.8 million; REO rose to $148.1 million from $88.1 million. REO results shifted to a $13.5 million loss from a $1.4 million gain, primarily due to valuation reductions and property-protection advances.
- The declared 2013 dividend was $2.87 per share; the fourth-quarter amount of $1.16 included two declarations ($0.57 and $0.59) because of a timing shift.
Outlook, risks and unusual items
- Management described expectations, not formal company earnings guidance: industry forecasts cited in the filing projected 2014 mortgage originations of about $1.2 trillion, down from an estimated $1.9 trillion in 2013. PMT expected secondary spreads to continue normalizing toward long-term averages and noted lower refinancing activity and correspondent volumes after rates rose.
- Management saw ongoing distressed-loan sale opportunities and potential longer-term opportunity in jumbo lending, while noting limited investor demand and weaker pricing for non-agency securitizations in the second half of 2013. PMT said it did not plan further private-label securitizations until market conditions improved.
- Key risks include leverage and short-term repo funding, collateral margin calls, interest-rate and prepayment volatility, borrower defaults, uncertain foreclosure timelines, and significant reliance on agency secondary markets. Many assets are illiquid and valued using Level 3 assumptions; valuation changes can materially affect reported earnings without generating immediate cash.
- PMT depends on affiliated manager PCM and servicer PLS, with related-party fees and potential conflicts. A substantial portion of distressed-loan acquisitions came from or through Citigroup subsidiaries. The filing also highlights regulatory and REIT qualification risks, loan repurchase claims, and exposure to changes in Fannie Mae, Freddie Mac, Ginnie Mae and CFPB rules.
- At year-end, about 72% of the fair value of the mortgage-loan portfolio was nonperforming; 39% of those nonperforming loans had current loan-to-value ratios of at least 120%. PMT reported $10.1 million in its representations-and-warranties liability and $15.1 million UPB of loans subject to pending repurchase claims.
- Subsequent events included settlement in January 2014 of a $233.3 million UPB reperforming-loan sale, a new at-the-market equity program of up to $200 million, and a new RBS facility with up to $500 million capacity, of which $250 million was committed for 364 days. The company guaranteed the RBS sellers’ obligations.
- No material legal proceedings were reported. Management and Deloitte concluded internal control over financial reporting was effective; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- How much of 2013 earnings came from noncash fair-value gains, and how reliably those gains convert to realized cash through loan resolutions and sales.
- Current borrowing availability, maturities, covenant headroom, collateral haircuts and liquidity needs under adverse valuation or margin-call scenarios.
- Whether correspondent lending margins and volumes can stabilize as rates, competition and agency requirements change.
- Credit quality, resolution timelines and realized recoveries for nonperforming loans, REO and modified loans, including the concentration of distressed purchases sourced through Citigroup affiliates.
- MSR and excess-servicing-spread valuation assumptions, refinancing sensitivity, and the impact of affiliate servicing arrangements and related fees.
- Dividend sustainability in light of cash generation, REIT distribution requirements, debt covenants and the board’s discretion over future distributions.