Pennymac Mortgage Investment Trust annual report, FY2020

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

MetricFY2020 / year-endFY2019 / 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

  1. Reconcile the CRT loss disclosures, remaining contractual exposure, delinquency/forbearance data and treatment of CARES Act borrowers in each CRT structure.
  2. Assess the assumptions and sensitivity of MSR and CRT fair values, hedging effectiveness, and the extent to which reported earnings depend on noncash estimates.
  3. Verify current borrowing availability, collateral eligibility, margin-call exposure, covenant headroom and cash available after Agency and servicing liquidity requirements.
  4. Track correspondent production margins, fulfillment costs, representations-and-warranties provisions and repurchase activity as unusually high volumes normalize.
  5. Evaluate dividend sustainability against taxable income, cash generation, preferred dividends, REIT distribution requirements and the board’s discretion; confirm the differing reported forbearance percentages.