PennyMac Mortgage Investment Trust (PMT) — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. PMT is a specialty finance company investing mainly in residential mortgage assets, including mortgage servicing rights (MSRs), mortgage-backed securities (MBS), and credit risk transfer (CRT) investments. It also acquires and resells newly originated loans. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Prior comparable period / year-end |
|---|---|---|
| Net investment income | $90.4 million | $81.8 million in Q1 2022 |
| Pretax income | $38.8 million | $18.1 million in Q1 2022 |
| Net income (loss) | $60.7 million | $(19.1) million in Q1 2022 |
| Net income (loss) attributable to common shareholders | $50.2 million; diluted EPS $0.50 | $(29.6) million; diluted loss per share $0.32 |
| Common dividend declared per share | $0.40 | $0.47 in Q1 2022 |
| Total assets | $15.36 billion | $13.92 billion at December 31, 2022 |
| Shareholders’ equity | $1.97 billion | $1.96 billion at December 31, 2022 |
| Book value per common share | $15.96 | $15.78 at December 31, 2022 |
- Net gains on investments and financings were $125.8 million, versus losses of $229.1 million a year earlier. MBS gains were $78.2 million; CRT arrangements contributed $46.3 million.
- Net servicing fees were a loss of $23.7 million, compared with income of $304.2 million in Q1 2022, as MSR fair-value changes and hedging results weighed on results. MSR fair value was $4.0 billion.
- Interest income was $153.0 million and interest expense $179.1 million, producing net interest expense of $26.1 million, versus $12.5 million in Q1 2022. Higher rates lifted yields but also raised financing costs.
- Total expenses were $51.6 million, down 19% year over year. No conventional revenue or operating-margin measure is presented; correspondent-production gain-on-sale results improved modestly.
- Cash was $118.7 million and short-term investments $292.2 million. Operating cash flow was negative $1.28 billion, investing cash flow negative $122.7 million, and financing cash flow positive $1.41 billion; cash increased $6.8 million to $118.7 million.
- Total debt was $12.88 billion, including $8.11 billion of repurchase-agreement borrowings and $4.76 billion of long-term debt. Debt-to-equity was 6.5:1, or 5.8:1 excluding non-recourse debt. Repurchase borrowings had a 5.80% weighted-average rate at quarter-end; secured notes backed by CRT and servicing assets had a 7.84% weighted-average rate.
- Reported repurchase-agreement borrowing capacity was $3.29 billion, of which $3.25 billion was uncommitted. PMT reported compliance with debt covenants and Agency requirements; Agency actual liquidity was $385.5 million against a $79.9 million requirement.
Material changes versus Q1 2022 and year-end 2022
- Results improved substantially year over year, primarily from reversing prior-year MBS and CRT fair-value losses, plus a $21.9 million income-tax benefit. The improvement was partly offset by MSR valuation and hedge losses.
- Correspondent loan purchases fell to $20.4 billion from $23.3 billion, while total loan sales fell to $19.0 billion from $25.1 billion. Loan inventory rose to $3.14 billion from $1.82 billion at year-end, contributing to the swing in operating cash flow.
- Assets grew 10% from year-end, primarily due to higher loans acquired for sale and MBS. Repurchase-agreement debt increased about $1.50 billion; total liabilities rose to $13.39 billion from $11.96 billion.
- MSR fair value declined by $37.7 million from year-end, while its underlying servicing portfolio UPB increased to $231.6 billion from $230.0 billion. MBS fair value rose to $4.63 billion from $4.46 billion.
Outlook, management commentary, risks and unusual items
- Management cited inflation, Federal Reserve rate increases, and a slowing economy as pressures on mortgage originations. It referenced an industry 2023 origination forecast of $1.6–$1.8 trillion, down from an estimated $2.2 trillion in 2022; this is an industry estimate, not PMT earnings guidance.
- Management said it intended to continue selling conventional loans to PennyMac Financial Services, Inc. (PFSI) in Q2 to optimize capital allocation. It noted that exits by other market participants could create correspondent-market opportunities, while increased Agency cash-window activity could adversely affect the business.
- Key exposures include interest-rate and prepayment changes affecting MBS and MSR values; credit deterioration, delinquencies and home-price declines affecting CRT and subordinate securities; financing costs, short-term funding renewals, margin calls and liquidity; and reliance on affiliated manager and servicer PFSI entities.
- Fair-value estimates are significant and include Level 3 inputs, notably for MSRs and CRT positions. Q1 results included substantial noncash valuation items; management reported that noncash items represented 63% of net investment income.
- PMT disclosed $1.81 billion of commitments to purchase loans and a $39.4 million liability for representations and warranties. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material legal proceedings as of March 31.
- LIBOR-based contracts and preferred-share terms face transition risk as key U.S. dollar LIBOR settings were scheduled to cease or become nonrepresentative after June 30, 2023. The filing notes possible effects on earnings, financing costs, asset values, and contract interpretation.
- After quarter-end, PMT issued $235 million of secured term notes, extended two secured-note maturities to 2025, and reported that repurchase agreements maturing before the filing date had been renewed, extended, or replaced. No specific company earnings or dividend guidance was provided.
Most important facts for investors to verify
- Whether MSR fair-value movements and hedges, and the comparatively favorable MBS and CRT marks, persist or reverse; assess the sensitivity of results to rates, prepayments, spreads, and home prices.
- Funding availability, borrowing costs, margin-call exposure, and renewal of short-term facilities—particularly given substantial uncommitted repo capacity and leverage.
- Loan-inventory turnover, correspondent production volumes, and the economics and concentration of sales to affiliated PFSI.
- Credit performance and delinquency trends in CRT reference pools and servicing portfolios, alongside the adequacy of representations-and-warranties reserves.
- How the $21.9 million tax benefit affects comparability and whether future taxable-subsidiary results support realization of deferred tax assets.
- Whether the $0.40 common dividend remains supportable given REIT distribution requirements, cash flows, and the company’s investment and financing needs.