Pennymac Mortgage Investment Trust — Q1 2018 Form 10-Q
Business context and reporting period. The specialty finance REIT invests primarily in residential mortgage-related assets. Its activities span correspondent loan production, credit-sensitive investments, interest-rate-sensitive investments and corporate operations. The unaudited quarter ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior date |
|---|---|---|
| Net investment income | $75.7 million | $64.5 million, Q1 2017 |
| Expenses | $37.8 million | $41.9 million, Q1 2017 |
| Income before taxes | $37.8 million | $22.6 million, Q1 2017 |
| Net income | $28.2 million | $28.7 million, Q1 2017 |
| Net income attributable to common shareholders | $22.0 million per statement of operations | $28.2 million, Q1 2017 |
| Diluted earnings per common share | $0.35 | $0.40, Q1 2017 |
| Common dividend declared per share | $0.47 | $0.47, Q1 2017 |
| Net interest income / margin | $6.2 million / 0.61% | $10.9 million / 0.96%, Q1 2017 |
| Operating / investing / financing cash flows | $122.5 million / $(227.6) million / $129.6 million | $395.4 million / $42.0 million / $(351.8) million, Q1 2017 |
| Cash and short-term investments | $173.2 million | $96.0 million, December 31, 2017 |
| Total assets / shareholders’ equity | $5.79 billion / $1.54 billion | $5.60 billion / $1.54 billion, December 31, 2017 |
| Borrowings and leverage | About $4.10 billion of reported borrowings; leverage ratio 2.66x | Leverage ratio 2.55x, December 31, 2017 |
| Book value per common share | $20.24 | $20.13, December 31, 2017 |
The income statement reports $22.0 million of income attributable to common shareholders, while the EPS note shows $21.75 million after allocation to participating securities; diluted EPS is reported as $0.35. The filing does not reconcile these figures in the excerpt.
Material changes versus the prior comparable period
- Net investment income rose 17%, but net income was broadly flat and diluted EPS declined from $0.40 to $0.35. Preferred dividends increased to $6.2 million from $0.6 million, reducing earnings available to common shareholders.
- Earnings composition shifted toward servicing: net mortgage loan servicing fees increased to $56.2 million from $11.8 million, reflecting portfolio growth and MSR fair-value gains. Correspondent loan gains fell to $7.6 million from $19.0 million.
- Net gains on investments fell to $18,000 from $16.7 million. Q1 2018 included $22.4 million of MBS valuation losses and $10.0 million of distressed-loan valuation losses, partly offset by CRT-related gains.
- Net interest income declined 44%, mainly because the distressed-loan portfolio and its yield decreased. The average cost of interest-bearing liabilities increased to 3.43% from 3.29%.
- Mortgage loan and REO liquidation proceeds totaled $305.2 million, including $258.2 million of bulk distressed-loan sales. The company made no distressed-loan acquisitions in the quarter.
- Assets increased 3% from year-end, chiefly from higher MBS, MSRs and CRT deposits. Mortgage loans at fair value and loans held for sale decreased.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or dividend guidance is provided. Management said liquidity was sufficient for current needs and expected investment capacity over time to depend on financing access and, potentially, additional equity. It described distressed assets as no longer a primary focus for new investment.
- MSR accounting change: Effective January 1, 2018, the company moved all MSRs to fair-value accounting. The transition increased MSR assets by $19.7 million, income taxes payable by $5.3 million and shareholders’ equity by $14.4 million. The change also makes period-to-period servicing income less directly comparable.
- Fair-value and interest-rate exposure: A substantial portion of assets is valued using Level 3, unobservable inputs. Rising rates supported MSR and ESS valuations but weighed on MBS values; falling rates could reduce MSR values through refinancing. Reported Q1 noncash items were 133% of net investment income, including MSR fair-value gains.
- Funding and liquidity: Repurchase borrowing was $3.41 billion, backed by pledged assets and subject to margin calls. Available repurchase capacity was approximately $2.44 billion, including $1.67 billion uncommitted. Short-term funding renewal, collateral values, and cash needed for CRT commitments are material liquidity considerations. The company reported $553.0 million of unfunded CRT deposit commitments and $1.07 billion of commitments to purchase loans.
- Post-quarter financing: On April 25, 2018, a subsidiary issued $450 million of secured term notes at one-month LIBOR plus 2.35%, maturing in 2023, with a possible extension to 2025. The filing also reports expanded or new repurchase facilities after quarter-end; matured repurchase agreements were extended or renewed.
- Other risks and items: CRT agreements expose the company to credit losses on underlying loans; distressed-loan returns depend on borrower resolution, foreclosure, property values and liquidation timing. Mortgage-loan sales carry representation-and-warranty repurchase or indemnification exposure. Management identified no material litigation, no material change to the risk factors in its 2017 Form 10-K, and no material internal-control change during the quarter.
Most important facts for investors to verify
- Reconcile common-shareholder income in the statements with the EPS note’s participating-security allocation, and assess the $0.47 dividend against reported common earnings and cash generation.
- Separate recurring cash servicing revenue from noncash MSR fair-value gains, hedging losses and other fair-value movements; review the new MSR accounting basis when comparing periods.
- Check repurchase-facility renewal terms, committed versus uncommitted borrowing availability, margin-call exposure and liquidity after the subsequent $450 million term-note issuance.
- Monitor CRT delinquency, loss settlements, remaining unfunded deposit commitments and the sensitivity of valuations to credit spreads and loan performance.
- Review distressed-asset liquidation outcomes and Level 3 valuation assumptions, including housing-price forecasts, discount rates and expected resolution timelines.