PennyMac Mortgage Investment Trust — Q2 2022 Form 10-Q
Business context and reporting period. Specialty finance REIT investing primarily in residential mortgage assets, with credit-sensitive strategies, interest-rate-sensitive strategies, correspondent production and corporate operations. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net investment income | $21.5 million | $121.6 million | $103.3 million | $323.0 million |
| Pretax income (loss) | ($39.9 million) | $13.8 million | ($21.8 million) | $104.8 million |
| Net income (loss) | ($70.7 million) | $38.1 million | ($89.9 million) | $109.7 million |
| Net income (loss) attributable to common shareholders | ($81.2 million) | $31.9 million | ($110.8 million) | $97.2 million |
| Basic and diluted EPS | ($0.88) | $0.32 | ($1.19) | $0.99 |
| Expenses | $61.4 million | $107.8 million | $125.1 million | $218.1 million |
- Income drivers and margins: Q2 net servicing fees were $217.3 million, including positive MSR fair-value effects, versus a $44.9 million loss in Q2 2021. Net investment income includes substantial noncash fair-value changes. Net interest margin was 0.58% in Q2 versus negative 1.57% a year earlier; for the first half it was 0.00% versus negative 1.66%.
- Cash flow: For the six months, operating cash flow was $1.68 billion, investing cash outflow $785.1 million and financing cash outflow $619.4 million; cash increased $273.0 million to $332.0 million. Operating cash flow is strongly affected by changes in loans held for sale and is not equivalent to earnings.
- Balance sheet and leverage: June 30 assets were $13.22 billion, liabilities $11.15 billion and shareholders’ equity $2.07 billion, versus $13.77 billion, $11.41 billion and $2.37 billion at year-end. Debt was $10.58 billion; reported debt-to-equity was 5.1:1 including non-recourse debt and 4.4:1 excluding it. Book value per common share was $16.59, down from $19.05.
- Liquidity: Cash was $332.0 million and short-term investments $88.8 million. Reported available repurchase-agreement capacity was $5.77 billion, including $4.93 billion of uncommitted capacity, subject to collateral and other conditions. Management reported compliance with debt covenants and Agency capital and liquidity requirements at June 30.
- Shareholder distributions: Common dividends were $0.47 per share in Q2, unchanged from Q2 2021. Preferred dividends were $10.5 million. The company repurchased 3.90 million common shares for $60.2 million during the first half.
Material changes and management commentary
- Results deteriorated year over year amid sharply rising interest rates and wider credit spreads. First-half correspondent loan purchases fell to $44.6 billion from $101.6 billion; Q2 purchases were $21.3 billion versus $48.4 billion.
- First-half net losses on investments and financings were $459.7 million, compared with gains of $211.6 million in 2021. This included $369.0 million of MBS valuation losses and $78.0 million of CRT losses. CRT-related investment losses were $75.4 million for the first half.
- MSR fair value rose to $3.70 billion from $2.89 billion, supported by valuation changes associated with expectations for slower prepayments as rates rose. Hedging losses partly offset this benefit. Net gains on loans acquired for sale fell to $11.6 million for the first half from $80.7 million.
- Management cited Federal Reserve rate increases and expected continued rate increases and balance-sheet reduction. It relayed an industry forecast of $2.4–$2.8 trillion in 2022 mortgage originations, down from $4.4 trillion in 2021; this is market commentary, not company earnings guidance. Lower production and increased competition were expected, while slower refinancing was expected to reduce MSR prepayments.
- There was no specific company earnings or dividend guidance in the provided filing text. Management stated it expects to rely on portfolio cash flows, business activity, asset sales, borrowings and potentially equity offerings for liquidity and investment capacity.
Risks, contingencies and unusual items
- Interest-rate, prepayment, market-spread, credit, real-estate and liquidity risks are significant. MSRs, MBS and CRT positions are fair-value sensitive; substantial Level 3 valuations depend on unobservable assumptions. Hypothetical sensitivity analyses are not earnings forecasts.
- Repurchase facilities create short-term refinancing and margin-call exposure. A decline in collateral values can require rapid cash or additional collateral. The company noted that some lenders’ positive-income funding conditions had been waived and future waivers may be needed.
- Higher rates and a potential economic slowdown could increase borrower defaults and repurchase claims, while weakening correspondent sellers’ ability to reimburse the company. The representations-and-warranties liability was $39.4 million; management considered it adequate but acknowledged future losses could rise.
- At June 30, commitments to purchase loans were $1.94 billion. Litigation in the ordinary course was disclosed, but management said no material legal actions were pending and did not expect known matters to have a material adverse effect. No material changes to previously reported risk factors were identified.
- Adoption of ASU 2020-06 on January 1, 2022 changed accounting for exchangeable notes, including a $50.3 million reclassification and a $9.4 million accumulated-deficit adjustment; it reduced first-half interest expense by about $3.5 million. The company also disclosed ongoing LIBOR replacement exposure in certain debt and preferred-share terms.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states matured repurchase agreements were extended or renewed by the report date.
Important facts for investors to verify
- How much of MSR fair-value gains and reported earnings is noncash, and how sensitive are valuations and hedges to further rate or prepayment changes?
- Whether repo and other financing capacity remains available on acceptable terms, including uncommitted capacity, covenant waivers, refinancing maturities and margin-call requirements.
- Whether CRT credit spreads, borrower performance and property values improve or lead to additional valuation losses or realized credit costs.
- Whether lower mortgage production and margins, and changes in correspondent-channel competition, affect future cash generation and the common dividend.
- Whether representations-and-warranties claims, seller recoveries and loan repurchases materially exceed the recorded liability, and how LIBOR transitions affect financing and preferred dividends.