PennyMac Mortgage Investment Trust — Q3 2020 Form 10-Q
Business context and reporting period
PMT is an externally managed mortgage finance company investing in residential mortgage assets. Its businesses include credit-sensitive strategies, interest-rate-sensitive strategies, correspondent loan production and corporate activities. This unaudited report covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net investment income | $221.0 million | $130.8 million | $272.8 million | $333.8 million |
| Pretax income | $122.2 million | $48.1 million | $5.8 million | $131.4 million |
| Net income (loss) | $99.5 million | $70.0 million | $(30.5) million | $167.8 million |
| Net income (loss) attributable to common shareholders | $93.3 million | $63.8 million | $(49.2) million | $149.1 million |
| Basic EPS | $0.94 | $0.75 | $(0.50) | $2.00 |
| Common dividend declared per share | $0.40 | $0.47 | $1.05 | $1.41 |
- Revenue drivers: Q3 net gain on loans acquired for sale was $98.4 million, versus $49.3 million; net loan servicing fees were $60.4 million, versus $5.2 million. Nine-month loan-sale gains rose to $309.4 million from $104.8 million, while servicing fees improved to $202.3 million from a loss of $79.5 million.
- Investment and servicing effects: Q3 net gain on investments was $19.6 million, down from $45.8 million; the period included $37.9 million of MBS valuation losses, partly offset by CRT-related gains. Nine-month net investment losses were $306.6 million, including significant CRT and CRT purchase-commitment fair-value losses. MSR fair-value losses were $66.5 million in Q3 and $864.5 million for nine months; hedging results partially offset them.
- Margins and interest: Q3 net interest income was $1.6 million, compared with $3.6 million; reported net interest margin was 0.05% and net interest spread was -0.86%. Nine-month net interest expense was $27.6 million, versus income of $17.8 million. Lower yields on cash and CRT deposits, reduced custodial placement fees, and higher Agency-loan payoff shortfalls weighed on interest income.
- Cash flow: For nine months, operating activities provided $652.6 million, investing activities provided $1.24 billion and financing activities used $1.72 billion. Cash increased $174.4 million to $278.5 million. Cash flow is affected by the large, rapidly turning correspondent loan-purchase and sale business.
- Balance sheet and leverage: Total assets were $10.46 billion, down 11% from year-end 2019; shareholders’ equity was $2.28 billion, versus $2.45 billion. Book value per common share was $19.95, down from $21.37. The reported leverage ratio was 3.33 times, compared with 3.75 times at year-end. Repurchase-agreement debt was $5.44 billion; total debt was approximately $7.59 billion.
- Liquidity: Cash was $278.5 million and short-term investments were $81.6 million. Agency seller/servicer measures exceeded stated minimums at September 30: net worth $1.13 billion versus $393.7 million required; tangible-net-worth-to-assets ratio 16% versus 6%; and liquidity $270.8 million versus $52.7 million.
Material changes versus comparable periods
- Q3 common earnings and EPS increased year over year, supported by stronger correspondent production and improved servicing results. Management attributed production gains to low mortgage rates, high loan demand and industry capacity constraints; gain-on-sale margins moderated as competitors returned.
- The first-quarter market disruption and COVID-19 uncertainty drove substantial CRT valuation losses, producing a nine-month net loss despite stronger production and servicing results. Management reported a $565.4 million reduction in CRT arrangements and initial CRT purchase commitments in the credit-sensitive segment for the nine-month comparison.
- Correspondent loan purchases for sale were $110.7 billion for nine months, versus $69.8 billion. Average MSR servicing portfolio UPB increased to $142.9 billion from $103.4 billion for the comparable period.
- MSR fair value fell to $1.39 billion from $1.54 billion at year-end, despite receipt of $717.2 million of MSRs through loan sales. MBS holdings fell to $2.40 billion from $2.84 billion as PMT restructured the portfolio to reduce prepayment and price risk.
Outlook, risks, contingencies and unusual items
- Management provided no specific company earnings or dividend guidance. It cited mortgage origination-market forecasts of approximately $3.6 trillion for 2020 and $2.6 trillion for 2021, and said it expects COVID-related servicing-income and expense pressures and possible MSR valuation pressure, partly offset by servicing-portfolio growth.
- COVID-19 and CARES Act forbearance are material risks. At September 30, 3.4% of loans in PMT’s MSR portfolio were both in COVID-19 forbearance and delinquent. Forbearances can increase servicing advances and costs; certain CRT contracts may treat delinquency as a loss trigger even if a borrower later resumes payments.
- CRT exposure is significant: deposits securing CRT arrangements totaled $1.42 billion, while related derivatives and CRT strips were a net liability of $134.7 million and the firm commitment to purchase CRT securities was a $148.8 million liability. FHFA had instructed the government-sponsored enterprises to wind down new lender risk-sharing transactions by the end of 2020.
- Funding and market risks include short-term repo maturities, lender margin calls, collateral-value volatility and reliance on continued access to debt and equity markets. Repo agreements had $2.03 billion of available uncommitted borrowing capacity; capacity depends on eligible collateral and the ability to meet margin requirements. Management said agreements maturing before filing were renewed or extended.
- Contractual commitments included $12.45 billion to purchase loans and a $1.70 billion face amount commitment to purchase CRT securities. The representation-and-warranty liability was $14.6 million, up from $7.6 million at year-end; future repurchase losses could increase. Management reported no material legal proceedings and no off-balance-sheet arrangements.
- Fair-value results rely materially on Level 3 estimates. The nine-month results also included a $1.7 million gain on early extinguishment of debt. Adoption of the current expected credit loss standard on January 1, 2020 had no effect on reported operations, equity or cash flows.
Important facts for investors to verify
- Whether COVID-era delinquencies and forbearances lead to realized CRT losses, greater servicing advances or further MSR impairment.
- How much reported Q3 and year-to-date earnings depend on noncash fair-value changes and MSR/loan-sale accounting; the filing says noncash items were 71% of Q3 net investment income and negative 207% for the nine-month period.
- Whether repo and other financing facilities are renewed on acceptable terms, and whether margin calls or collateral requirements constrain liquidity.
- How the large loan-purchase and CRT commitments are funded and settled, and whether correspondent gain-on-sale margins remain sustainable as competition returns.
- Whether dividends remain supported by taxable income and cash generation, given the lower year-to-date common dividend and nine-month loss attributable to common shareholders.