PennyMac Mortgage Investment Trust — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. PMT is an externally managed mortgage finance REIT with correspondent loan production and mortgage investment activities; operations rely substantially on affiliates PennyMac Financial Services, Inc. (PFSI) and PennyMac Loan Services, LLC (PLS).
Financial results and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net investment income | $248.8 million | $356.7 million |
| Net income | $90.1 million | $194.5 million |
| Diluted earnings per share | $1.16 | $2.47 |
| Net interest income | $76.6 million | $86.8 million |
| Net interest margin / spread | 1.68% / 1.23% | 2.32% / 1.60% |
| Cash dividends declared per share | $2.16 | $2.40 |
- Fourth quarter: Net investment income was $50.6 million, net income $15.7 million, and diluted EPS $0.21, versus $53.1 million, $26.5 million, and $0.34, respectively, in Q4 2014.
- Cash flow: Operating activities used $863.2 million; investing activities provided $11.5 million; financing activities provided $833.4 million. Cash decreased $18.3 million to $58.1 million. Management said liquidity was sufficient for current needs, while noting cash flows depend on asset sales, financing, and investment activity.
- Balance sheet at year-end: Assets were $5.83 billion, liabilities $4.33 billion, and shareholders’ equity $1.50 billion. Cash plus short-term investments totaled about $100.0 million. Borrowings totaled approximately $4.19 billion, including $3.13 billion under repurchase agreements, $183 million in Federal Home Loan Bank advances, $236 million in notes payable, $150 million owed to PFSI, $248 million of VIE financing, and $245 million carrying value of exchangeable notes.
- Repurchase agreements are largely short-term and subject to collateral valuation, margin calls, covenants, and renewal risk. Total contractual obligations were $5.62 billion, including loan purchase commitments and expected interest, with $4.69 billion due within one year.
- About 46% of 2015 net investment income reflected non-cash valuation and interest items. Level 3 fair-value assets were $3.32 billion, or 57% of total assets, making reported results sensitive to management estimates and model inputs.
Material changes versus the prior year
- Net income fell approximately 54% and diluted EPS approximately 53%. Investment-activities pretax income declined to $40.4 million from $170.6 million, mainly as distressed-loan valuation gains moderated and rising interest rates hurt some securities and VIE-held loans. Correspondent-production pretax income increased to $32.9 million from $8.8 million.
- Correspondent loan purchases rose to $46.4 billion from $28.4 billion, driven especially by government-insured or guaranteed loans. Year-end loans acquired for sale more than doubled to $1.28 billion.
- Net interest income declined, while interest expense rose to $124.7 million from $85.6 million as borrowings and higher-cost MSR/ESS financing increased. Net interest margin narrowed to 1.68% from 2.32%.
- Investment in ESS increased to $412.4 million from $191.2 million; MSRs increased to $459.7 million from $357.8 million. Distressed mortgage loans and REO totaled $2.45 billion at fair value/carrying value, versus $2.50 billion in 2014; nonperforming loans declined to $1.22 billion from $1.54 billion.
- Year-end book value per share decreased to $20.28 from $21.18; year-end share price declined to $15.26 from $21.09. Quarterly declared dividends were reduced from $0.61 to $0.47 in the second half of 2015.
Outlook, commentary, risks, and unusual items
- PMT reported no specific company earnings or dividend guidance. It intends to distribute at least 90% of REIT taxable income, but the board sets future dividend amounts at its discretion. FY2015 declared dividends exceeded GAAP diluted EPS; taxable income and cash available for distribution differ from GAAP earnings.
- Management described housing conditions as improving but said distressed-loan opportunities remained available at generally less attractive pricing; it planned to remain selective. Industry forecasts cited in the filing anticipated U.S. mortgage originations declining from about $1.7 trillion in 2015 to $1.5 trillion in 2016. PMT highlighted potential growth in CRT and MSRs, subject to market opportunity and financing capacity.
- Key risks include interest-rate and prepayment volatility; borrower defaults, property values, and foreclosure delays; illiquid assets and uncertain fair values; short-term funding, margin calls, and counterparty concentration; dependence on PFSI/PCM/PLS; regulatory and Agency eligibility requirements; and REIT and Investment Company Act compliance. Management cautioned that fair-value estimates may differ materially from realizable values.
- Representations-and-warranties liability was $20.2 million, against $41.8 billion of UPB subject to those provisions. Mortgage loan repurchases by PMT totaled $19.8 million UPB in 2015; management noted recourse to correspondent sellers may not fully protect PMT.
- CRT guarantees covered $4.55 billion UPB at year-end and were secured by $147.0 million of restricted cash; PMT reported no settlements of guarantee losses in 2015. The filing notes uncertainty around the investment’s modeled returns and REIT eligibility.
- In January 2016, new FHFA rules required termination of the captive insurer’s FHLB membership. PMT repaid $83 million of advances and expected to repay the remaining $100 million by March 3, 2016. In February 2016, PMT repurchased 2.9 million shares for $34.1 million and increased its repurchase authorization to $200 million.
- No material legal proceedings were reported at December 31, 2015. The auditor gave an unqualified opinion on the financial statements and internal controls; management reported effective controls.
Most important facts for investors to verify
- Whether asset valuation gains, distressed-loan resolution proceeds, and cash generation support dividend sustainability, given FY2015 cash used in operations and dividends declared above GAAP EPS.
- Funding capacity and covenant headroom after the FHLB advance repayment, including short-term repo renewals, collateral haircuts, and potential margin calls.
- Fair-value assumptions and sensitivity for Level 3 loans, MSRs, and ESS, and the extent to which reported income is non-cash.
- Performance and concentration of government correspondent production, affiliate transactions, and the $1.28 billion year-end loan inventory awaiting sale.
- Credit-loss, repurchase, and indemnity exposure, including CRT guarantees and recoverability from correspondent sellers.
- Any subsequent changes to dividends, buybacks, Agency liquidity requirements, or the availability and cost of financing.