PennyMac Mortgage Investment Trust — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted. PMT is an externally managed specialty finance company investing mainly in residential mortgage assets, with credit-sensitive investments, interest-rate-sensitive investments, correspondent loan production, and corporate activities.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net investment income | $558.3 | $96.4 | $51.8 | $203.0 |
| Net income (loss) | $464.6 | $44.2 | $(130.1) | $97.8 |
| Net income (loss) attributable to common shareholders | $458.4 | $38.0 | $(142.5) | $85.3 |
| Diluted EPS | $4.51 | $0.50 | $(1.43) | $1.17 |
| Common dividends declared per share | $0.40 | $0.47 | $0.65 | $0.94 |
- Quarterly rebound: Q2 net income increased $420.4 million year over year, primarily from a partial recovery in CRT-related fair values and strong correspondent production gains. Net gain on investments was $488.9 million versus $87.8 million; net gain on loans acquired for sale was $162.2 million versus $34.2 million.
- First-half loss: Six-month net investment income fell to $51.8 million from $203.0 million, and PMT reported a $130.1 million net loss. Credit-sensitive strategies recorded a $501.7 million pretax loss for the half, including adverse CRT and purchase-commitment valuations; gains in correspondent production and interest-rate-sensitive strategies partly offset this.
- Servicing and margins: Q2 net loan servicing fees were negative $102.7 million, including a $170.8 million MSR fair-value decline and $50.7 million of adverse hedging results. Six-month servicing fees were positive $141.9 million, supported by $716.5 million of hedging gains. Net interest expense was $20.2 million in Q2 and $29.2 million for the half; net interest margin was negative 0.84% for Q2 and negative 0.65% for the half, versus positive 0.24% and 0.44%, respectively, in 2019.
Financial position, cash flow and liquidity
- At June 30, total assets were $9.08 billion, down from $11.77 billion at December 31, 2019. Shareholders’ equity was $2.24 billion, down from $2.45 billion; book value per common share was $19.39, compared with $21.37.
- Cash was $346.0 million and short-term investments were $273.6 million. Total liabilities were $6.85 billion. Debt and financing balances summarized by management totaled $6.40 billion; leverage was 2.86 times equity, down from 3.75 times at year-end.
- For the first half, operating cash flow was $2.61 billion, investing cash flow was $490.8 million, and financing cash flow was negative $2.86 billion, producing a $242.0 million increase in cash. Operating cash flow reflected loan-sale inventory movements and should not be read as a direct measure of recurring earnings.
- Repurchase-agreement borrowings were $3.98 billion at quarter-end, with $3.29 billion of stated available capacity, including $2.75 billion uncommitted. These facilities are collateralized, short-term, and subject to margin calls and renewal risk.
Material changes and management commentary
- Correspondent loan purchases were $64.2 billion for the first half, up from $37.6 billion a year earlier; loan sales were $66.0 billion versus $38.8 billion. Management attributed higher volumes and unusually strong gain-on-sale margins to low mortgage rates, demand, and industry capacity constraints.
- Management expects correspondent gain-on-sale margins to return toward historically normal levels as competition increases. Its cited industry forecasts estimated mortgage originations of about $3.0 trillion in 2020 and $2.3 trillion in 2021; these are market forecasts, not PMT guidance.
- MSRs were valued at $1.19 billion, down from $1.54 billion at year-end, despite growth in the servicing portfolio. Lower rates and faster prepayments, along with higher market discount rates and servicing-cost assumptions, pressured MSR value. PMT noted its hedges may not fully offset such changes.
- FHFA had directed the GSEs to wind down new lender risk-sharing transactions such as CRT investments by the end of 2020. PMT held $1.67 billion of deposits securing CRT arrangements and had a $1.79 billion face-amount commitment to purchase CRT securities; that commitment was carried as a $191.2 million liability.
- Management said the pandemic’s effects remain highly uncertain. It expected forbearance-related delinquencies to increase servicing advances and expenses and reduce servicing income and custodial-deposit placement fees. At June 30, 6% of PMT’s MSR portfolio was in COVID-19 forbearance plans and delinquent.
- On June 30, PMT renewed key management, servicing, and mortgage-banking agreements for five-year terms. Effective July 1, the quarterly compensation reimbursement to its manager increased from $120,000 to $165,000; the MSR recapture fee became tiered, with rates of 40%, 35%, or 30% depending on the monthly recapture rate.
Risks, contingencies and unusual items
- CARES Act forbearances may trigger losses under certain CRT agreements even if borrowers later resume payments. Management’s June 30 CRT valuations assumed, in part, that some forbearance loans would not generate losses or that contractual treatment could be amended; if those assumptions do not hold, future fair-value losses could be material.
- Management reported $491.6 million of first-half fair-value losses on CRT arrangements and $39.9 million of losses on initial recognition of firm commitments to purchase CRT securities. Q2 gains partly reversed the severe Q1 market dislocation, but recovery remained incomplete.
- A substantial portion of reported earnings comes from noncash fair-value movements and recognition of MSRs in loan sales. Noncash items were $679.0 million in Q2 against $558.3 million of net investment income; for the first half, noncash items were negative $722.1 million against $51.8 million of net investment income.
- PMT reported no material legal proceedings and no off-balance-sheet arrangements. It recorded a $10.2 million liability for representations-and-warranties losses; future repurchase activity and losses may rise with loan volume, loan seasoning, or changes in counterparties’ ability to reimburse PMT.
- PMT reported compliance with stated Fannie Mae and Freddie Mac seller-servicer net-worth and liquidity requirements at June 30. Financing covenants, collateral values, margin calls, short-term facility renewals, and access to capital remain important liquidity risks.
Investor facts to verify
- How much of the Q2 profit reflects sustainable production and servicing economics versus volatile, noncash fair-value gains, particularly the CRT rebound?
- Whether CARES Act forbearance loans trigger contractual CRT losses, and whether the Agencies amend applicable CRT terms.
- Whether liquidity, collateral headroom, and financing facilities remain adequate if margin calls rise or lenders reduce or do not renew capacity.
- Whether faster prepayments, higher servicing costs, and delinquencies continue to pressure MSR values and servicing cash flows, and whether hedges offset those effects.
- Whether production margins normalize as management expects, and how the July 2020 related-party fee changes affect costs and MSR recapture income.