PennyMac Mortgage Investment Trust Reports Third Quarter 2015 Results

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MOORPARK, Calif.--(BUSINESS WIRE)--

PennyMac Mortgage Investment Trust PMT today reported net income of $38.8 million, or $0.49 per diluted share, for the third quarter of 2015, on net investment income of $90.8 million. PMT previously announced a cash dividend for the third quarter of 2015 of $0.47 per common share of beneficial interest, which was declared on September 21, 2015 and paid on October 29, 2015.

Third Quarter 2015 Highlights

Financial results:

  • Diluted earnings per common share of $0.49, up 36 percent from the prior quarter
  • Net income of $38.8 million, up 38 percent from the prior quarter
  • Net investment income of $90.8 million, up 30 percent from the prior quarter
  • Book value per share of $20.52, up from $20.39 at June 30, 2015
  • Return on average equity of 10 percent, up from 7 percent for the prior quarter1
  • Purchased $16 million in PMT common shares, or 11% of the $150 million authorized under the previously announced share repurchase program

Investment activities and correspondent production results:

  • Mortgage servicing rights (MSR) and excess servicing spread (ESS) investments, related to $94.1 billion in unpaid principal balance (UPB), grew to $842 million at September 30, 2015
    • Added $53 million in new MSR investments resulting from correspondent production activities
    • Invested $84 million in ESS on mini-bulk and flow acquisitions of Agency MSRs acquired by PennyMac Financial Services, Inc. PFSI relating to $10.0 billion in UPB
  • Completed $40 million investment from initial credit risk transfer transaction with Fannie Mae on $1.2 billion of PMT's production and launched a second transaction expected to total $4.0 billion of PMT's production2

"PMT's third quarter earnings were consistent with our expectations from the present investment portfolio and benefited from improved performance in our distressed loan investments, correspondent production, and our interest rate sensitive strategies," said Stanford L. Kurland, PMT's Chairman and Chief Executive Officer. "We completed our first investment in a GSE credit risk transfer on PMT's loan production and launched a second transaction with Fannie Mae which we expect to complete in early 2016. PMT's access to these types of unique and organically sourced mortgage-related investments further distinguishes it from other mortgage REITs. We also deployed capital in repurchasing our common shares at prices that we believe represent an attractive investment opportunity for PMT."

PMT reported pretax income of $45.1 million for the quarter ended September 30, 2015, compared to pretax income of $25.1 million in the second quarter of 2015.

The following table presents the components of net investment income by asset:

  Quarter ended September 30, 2015
Net gain    
(loss) on Interest Total
investments income revenue
Assets: (in thousands)
Short-term investments $ - $ 115 $ 115
Mortgage-backed securities 3,224 2,614 5,838
Mortgage loans:
At fair value 31,909 24,364 56,273
Held by variable interest entity 1,609 5,598 7,207
Asset-backed secured financing   (3,940 )   -   (3,940 )
(2,331 ) 5,598 3,267
Acquired for sale at fair value   13,884     20,704   34,588  
Total mortgage loans   43,462     50,666   94,128  
Excess spread investment (7,844 ) 8,026 182
Other   -     17   17  
$ 38,842   $ 61,438 $ 100,280  
 

The following table presents the contribution of PMT's Investment Activities and Correspondent Production segments:

   

Quarter ended September 30, 2015

Investment
Activities

 

Correspondent
Production

 

Consolidated

Net investment income:

(in thousands)

Net interest income    
Interest income $ 47,690 $ 13,748 $ 61,438
Interest expense   31,390     6,370   37,760
16,300 7,378 23,678
Net loan servicing fees 20,791 - 20,791
Net gain on mortgage loans acquired for sale - 13,884 13,884
Net gain on investments 24,958 - 24,958
Other investment income   (1,691 )   9,154   7,463
  60,358     30,416   90,774
Expenses:
Loan Fulfillment, Servicing and Management fees

payable to PennyMac Financial Services, Inc

16,664 18,367 35,031
Other   8,760     1,876   10,636
  25,424     20,243   45,667
Pretax income $ 34,934   $ 10,173 $ 45,107
 

Investment Activities Segment

The Investment Activities segment generated pretax income of $34.9 million on revenues of $60.4 million in the third quarter, compared to $19.9 million on revenues of $47.0 million in the second quarter. Net gain on investments totaled $25.0 million in the third quarter, compared to $22.6 million in the second quarter. Net gain on investments for the third quarter included valuation gains on distressed loans and mortgage-backed securities (MBS) totaling $35.1 million, partially offset by losses of $10.2 million related to ESS and mortgage loans held by a variable interest entity, net of valuation gains on the related asset-backed secured financing.

Net interest income earned on PMT's investments in distressed loans, ESS, MBS and mortgage loans held by a variable interest entity increased to $40.6 million, a 16 percent increase from the second quarter. Interest income from distressed loans includes capitalized interest from loan modifications, which increases interest income and tends to reduce loan valuation gains, totaling $14.8 million. Other components of interest income include $8.0 million from ESS and $7.0 million on loans delivered into PMT's initial credit risk transfer transaction before sale to Fannie Mae.

Net loan servicing fees were $20.8 million in the third quarter, up from $13.0 million in the second quarter. The higher income was driven by strong hedge results which offset fair value losses and provisioning for impairment on MSRs; these hedging activities are intended to manage PMT's net exposure across all interest rate strategies.

A decline in mortgage rates during the quarter resulted in valuation losses on ESS and MSRs and impairment provisioning due to higher projected prepayment activity. ESS and MSR valuation losses were partially offset by recapture income payable to PMT for prepayment activity during the quarter totaling $2.4 million and $0.7 million, respectively. When prepayments result in a refinancing by PFSI, PMT generally benefits from recapture income.

Other investment losses were $1.7 million, compared to a $13 thousand gain in the second quarter, driven by higher property preservation expenses and servicing advances related to PMT's growing inventory of real estate owned (REO) properties.

During the third quarter, PMT completed the acquisition of a $40.0 million security from its initial credit risk transfer transaction with Fannie Mae. The security represents an investment in the credit risk related to $1.2 billion of conventional conforming loans from PMT's correspondent production business. PMT also entered into a second credit risk transfer transaction with Fannie Mae related to $4.0 billion of loans that is expected to be completed in early 2016.

Segment expenses were $25.4 million in the third quarter, down from $27.1 million in the second quarter due to declines in activity-based special servicing fees and management fees.

Distressed Mortgage Investments

PMT's distressed mortgage loan portfolio generated realized and unrealized gains totaling $31.9 million in the third quarter, compared to $30.1 million in the second quarter. Of the gains in the third quarter, $2.9 million was realized through payoffs in which collections on the loan balances were at levels higher than their recorded fair values.

The following schedule details the realized and unrealized gains on mortgage loans:

  Quarter ended
September 30, 2015   June 30, 2015
(in thousands)
Valuation changes:
Performing loans $ 6,007 $ 3,308
Nonperforming loans   23,051     23,867
29,058 27,175
Gain on payoffs 2,911 2,628
Gain (loss) on sales   (60 )   265
$ 31,909   $ 30,068
 

In the third quarter, the portfolios of performing and nonperforming loans increased in fair value by $6.0 million and $23.1 million, respectively. Valuation gains benefited from higher actual home prices versus prior forecasts, partially offset by a reduction in the outlook for future home price appreciation. Additionally, improving home prices increased the expected realization value of certain properties transitioning from foreclosure to REO status during the third quarter. Expectations for home price appreciation in PMT's distressed loan portfolio over the next twelve months are 3.9%, unchanged from June 30, 20153.

The distressed loan portfolio also experienced valuation gains resulting from improvement in observed market prices for reperforming loans during the quarter as well as improved payment history of the reperforming loans owned by PMT.

Mortgage Servicing Rights

PMT's MSR portfolio, which is subserviced by PFSI, grew to $39.9 billion in UPB compared to $37.1 billion at June 30, 2015. Servicing fee revenue of $25.5 million was reduced by $11.3 million for amortization. Impairment and fair value changes totaled $13.1 million for the third quarter, which were offset by $19.1 million of gains on hedging derivatives. These impacts resulted in net loan servicing revenue of $20.8 million, up from $13.0 million in the second quarter.

The following schedule details the net loan servicing fees:

Quarter ended
September 30, 2015   June 30, 2015
(in thousands)
Net loan servicing fees
Servicing fees (1) $ 25,500 $ 25,887
MSR recapture fee receivable from PFSI 670 -
Effect of MSRs:
Carried at lower of amortized cost or fair value
Amortization (11,334 ) (9,987 )
Provision for impairment (7,845 ) 7,082
Gain on sale 4 -
Carried at fair value - change in fair value (5,267 ) 6,307
Gains on hedging derivatives   19,063     (16,272 )
  (5,379 )   (12,870 )
Net loan servicing fees $ 20,791   $ 13,017  
 
(1) Includes contractually specified servicing revenue.
 

Correspondent Production Segment

PMT acquires newly originated mortgage loans from third-party correspondent sellers and typically sells or securitizes the loans, resulting in current-period income and an ongoing investment in MSRs. For the quarter ended September 30, 2015, PMT's Correspondent Production segment generated pretax income of $10.2 million, versus $5.2 million in the second quarter. Revenues totaled $30.4 million, up 34 percent from the second quarter, driven by higher net gains on loans acquired for sale and an increase in loan acquisition volumes which resulted in higher loan origination fee revenue and net interest income.

Through its correspondent production activities in the third quarter, PMT acquired $14.4 billion in UPB of loans and issued IRLCs totaling $13.6 billion, compared to $11.9 billion and $14.4 billion, respectively, in the second quarter. Of the correspondent acquisitions, conventional conforming and jumbo volumes totaled $4.1 billion, and government insured or guaranteed volumes totaled $10.3 billion compared to $3.6 billion and $8.3 billion, respectively, in the second quarter.

Net gain on mortgage loans acquired for sale totaled $13.9 million in the third quarter compared to $11.2 million last quarter. Segment revenues in the third quarter also included $9.1 million of loan origination fees and net interest income of $7.4 million. The third quarter results reflect a robust mortgage origination market primarily driven by continued low mortgage rates, in addition to increased market share for PMT's correspondent production business resulting from successful execution of its growth initiatives.

The following schedule details the net gain on mortgage loans acquired for sale:

   
Quarter ended
September 30, 2015 June 30, 2015
(in thousands)
Net gain on mortgage loans acquired for sale
Receipt of MSRs in loan sale transactions $ 52,814 $ 32,176
Provision for representation and warranties (1,833 ) (1,419 )
Cash investment (1) (28,689 ) (32,505 )
Fair value changes of pipeline, inventory and hedges   (8,408 )   12,923  
$ 13,884   $ 11,175  
(1) Includes cash hedge expense
 

Segment expenses increased 15 percent quarter-over-quarter to $20.2 million, primarily due to higher loan fulfillment fee expense resulting from the 14 percent increase in conventional loan acquisition volumes. The weighted average fulfillment fee rate in the third quarter was 43 basis points, unchanged from the prior quarter.

Management Fees and Taxes

Management fees decreased by one percent from the second quarter to $5.7 million. There were no incentive fees for the third quarter as a result of PMT's financial performance over the four-quarter period for which incentive fees are calculated.

PMT recorded a provision for income tax of $6.3 million in the third quarter, versus an income tax benefit of $3.0 million in the second quarter.

Mr. Kurland concluded, "PMT's improved financial performance in the third quarter reflects our focus on maximizing returns from existing investments and deploying capital in unique mortgage-related strategies. We are allocating capital to investments in mortgage servicing rights, GSE credit risk transfers and other mortgage-related securities as opportunities for investing in distressed mortgage loans are diminished. We believe that these strategies will also improve the predictability of PMT's earnings and drive increased shareholder value over time."

Management's slide presentation will be available in the Investor Relations section of the Company's website at www.pennymac-REIT.com beginning at 1:30 p.m. (Pacific Standard Time) on Wednesday, November 4, 2015.

About PennyMac Mortgage Investment Trust

PennyMac Mortgage Investment Trust is a mortgage real estate investment trust (REIT) that invests primarily in residential mortgage loans and mortgage-related assets. PennyMac Mortgage Investment Trust trades on the New York Stock Exchange under the symbol "PMT" and is externally managed by PNMAC Capital Management, LLC, an indirect subsidiary of PennyMac Financial Services, Inc. Additional information about PennyMac Mortgage Investment Trust is available at www.PennyMac-REIT.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management's beliefs, estimates, projections and assumptions with respect to, among other things, the Company's financial results, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like "believe," "expect," "anticipate," "promise," "plan," and other expressions or words of similar meanings, as well as future or conditional verbs such as "will," "would," "should," "could," or "may" are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks; volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically; events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets; changes in general business, economic, market, employment and political conditions, or in consumer confidence and spending habits from those expected; declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market; the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives; the inherent difficulty in winning bids to acquire distressed loans or correspondent loans, and our success in doing so; the concentration of credit risks to which we are exposed; the degree and nature of our competition; the availability, terms and deployment of short-term and long-term capital; the adequacy of our cash reserves and working capital; our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets; the timing and amount of cash flows, if any, from our investments; unanticipated increases or volatility in financing and other costs, including a rise in interest rates; the performance, financial condition and liquidity of borrowers; incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties; changes in the number of investor repurchases or indemnifications and our ability to obtain indemnification or demand repurchase from our correspondent sellers; increased rates of delinquency, default and/or decreased recovery rates on our investments; increased prepayments of the mortgages and other loans underlying our mortgage-backed securities or relating to our mortgage servicing rights, excess servicing spread and other investments; the degree to which our hedging strategies may or may not protect us from interest rate volatility; the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations; changes in regulations or the occurrence of other events that impact the business, operation or prospects of government sponsored enterprises; changes in government support of homeownership; changes in governmental regulations, accounting treatment, tax rates and similar matters; our ability to satisfy complex rules in order to qualify as a REIT for U.S. federal income tax purposes; and our ability to make distributions to our shareholders in the future. You should not place undue reliance on any forward-looking statement and should consider all of the uncertainties and risks described above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

1 Return on average equity is calculated based on annualized quarterly net income as a percentage of monthly average shareholders' equity during the period.
2 Although definitive documentation has been executed, this credit risk transfer transaction is subject to continuing due diligence and customary closing conditions, including required regulatory approvals. There can be no assurance regarding the size of the transaction or that the transaction will be completed at all.
3 Weighted average twelve-month projected housing price index change.

     
PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 

 

September 30, 2015 June 30, 2015 September 30, 2014
(in thousands except share data)
ASSETS
Cash $ 89,303 $ 114,698 $ 46,487
Short-term investments 31,518 32,417 37,452
Mortgage-backed securities at fair value pledged to secure securities
sold under agreements to repurchase and Federal Home Loan Bank advances 315,599 287,626 267,885
Mortgage loans acquired for sale at fair value 1,050,296 2,213,874 688,850
Mortgage loans at fair value 2,637,730 2,730,820 2,561,911
Excess servicing spread purchased from PennyMac Financial Services, Inc. 418,573 359,102 187,368
Derivative assets 16,806 13,950 10,344
Real estate acquired in settlement of loans 353,563 324,278 275,185
Real estate held for investment 4,448 1,544 -
Mortgage servicing rights 423,095 394,737 345,848
Servicing advances 79,528 78,347 59,325
Due from PennyMac Financial Services, Inc. 9,050 9,342 4,311
Other assets   162,722   116,639   119,847
Total assets $ 5,592,231 $ 6,677,374 $ 4,604,813
LIABILITIES
Assets sold under agreements to repurchase $ 2,864,032 $ 3,500,569 $ 2,416,686
Federal Home Loan Bank advances 183,000 138,400 -
Mortgage loan participation and sale agreement 61,078 70,612 -
Credit risk transfer financing at fair value - 649,120 -
Notes payable 192,332 192,352 -
Note payable to PennyMac Financial Services, Inc. 150,000 52,526 -
Asset-backed secured financing of the variable interest entity at fair value 234,287 151,489 166,841
Exchangeable senior notes 244,805 244,559 250,000
Derivative liabilities 2,786 6,818 1,889
Accounts payable and accrued liabilities 67,086 75,967 80,493
Due to PennyMac Financial Services, Inc. 17,220 16,245 21,420
Income taxes payable 42,702 36,706 66,208
Liability for losses under representations and warranties   18,473   16,714   13,235
Total liabilities   4,077,801   5,152,077   3,016,772
SHAREHOLDERS' EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding 73,792,435, 74,811,922 and 74,139,570 common shares 738 748 741
Additional paid-in capital 1,468,739 1,483,389 1,470,189
Retained earnings   44,953   41,160   117,111
Total shareholders' equity   1,514,430   1,525,297   1,588,041
Total liabilities and shareholders' equity $ 5,592,231 $ 6,677,374 $ 4,604,813
 
     
PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Quarter Ended

 

September 30, 2015 June 30, 2015 September 30, 2014
(in thousands, except earnings per share)
Investment Income
Net interest income:
Interest income $ 61,438 $ 45,333 $ 41,236
Interest expense   37,760     29,739     22,020  
  23,678     15,594     19,216  
Net loan servicing fees 20,791 13,017 10,533
Net gain on mortgage loans acquired for sale 13,884 11,175 9,509
Loan origination fees 9,135 7,279 6,447
Net gain on investments 24,958 22,614 70,390
Results of real estate acquired in settlement of loans (4,221 ) (1,806 ) (11,926 )
Other   2,549     1,892     2,361  
Net investment income   90,774     69,765     106,530  
Expenses
Expenses payable to PennyMac Financial Services, Inc.:
Loan fulfillment fees 17,553 15,333 15,497
Loan servicing fees (1) 11,736 12,136 12,325
Management fees 5,742 5,779 9,623
Professional services 1,759 1,662 1,927
Compensation 1,550 1,389 1,843
Other   7,327     8,378     7,384  
Total expenses   45,667     44,677     48,599  
Income before provision (benefit) from income taxes 45,107 25,088 57,931
Provision (benefit) from income taxes   6,295     (2,983 )   2,982  
Net income   38,812     28,071     54,949  
 
Earnings per share
Basic $ 0.51 $ 0.37 $ 0.74
Diluted $ 0.49 $ 0.36 $ 0.69
Weighted-average shares outstanding
Basic 74,681 74,683 74,140
Diluted 83,411 83,480 82,832
 

(1) Servicing expenses include both special servicing for PMT's distressed portfolio and subservicing for its mortgage servicing rights.

 

PennyMac Mortgage Investment Trust
Christopher Oltmann
(818) 224-7028

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