Market Overview

PennyMac Mortgage Investment Trust Reports Second Quarter 2018 Results

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PennyMac Mortgage Investment Trust (NYSE:PMT) today reported net income
attributable to common shareholders of $30.2 million, or $0.47 per
common share on a diluted basis, for the second quarter of 2018, on net
investment income of $83.0 million. PMT previously announced a cash
dividend for the second quarter of 2018 of $0.47 per common share of
beneficial interest, which was declared on June 27, 2018, and paid on
July 30, 2018.

Second Quarter 2018 Highlights

Financial results:

  • Net income attributable to common shareholders of $30.2 million, up
    from $22.0 million in the prior quarter
  • Diluted earnings per common share of $0.47, up 34 percent from the
    prior quarter
  • Net investment income of $83.0 million, up 10 percent from the prior
    quarter
  • Book value per common share of $20.27 at June 30, 2018, up from $20.24
    at March 31, 2018
  • Annualized return on average common equity of 10 percent, up from 7
    percent for the prior quarter1

Investment activities and correspondent production results:

  • Continued investment in GSE credit risk transfer (CRT) and mortgage
    servicing rights (MSRs) resulting from PMT's Correspondent Production
    business
    • Correspondent production from nonaffiliates related to
      conventional conforming loans totaled $5.4 billion in unpaid
      principal balance (UPB), up 28 percent from the prior quarter
    • CRT deliveries totaled $3.9 billion in UPB
      • Deliveries into our fourth CRT transaction with Fannie Mae
        totaled $2.3 billion in UPB which is expected to result in
        approximately $82 million of new CRT investments upon
        settlement, which is expected in the third quarter
      • Entered into an agreement to acquire REMIC CRT securities from
        Fannie Mae and delivered $1.5 billion in UPB of loans subject
        to this agreement resulting in a firm commitment to purchase
        $58 million of CRT securities
    • Added $65 million in new MSR investments

Notable activity after quarter end:

  • Entered into an agreement to sell $99 million in UPB of performing
    loans from the distressed portfolio2

"Our earnings this quarter reflect the strong returns from our
investments in CRT and our Interest Rate Sensitive Strategies," said
President and CEO David Spector. "Strong contributions from these
investment strategies were offset somewhat by underperformance in our
legacy distressed mortgage loan portfolio, which represents a
substantially smaller percentage of our equity allocation versus a year
ago and should decrease in the third quarter as we complete the expected
sale of a pool of performing loans from the portfolio. Despite the
competitive mortgage market environment, our Correspondent Production
business performed well, with higher volumes while creating new CRT and
MSR investments. We also began CRT deliveries to Fannie Mae to be
included in a new REMIC structure, which is more tax-efficient and is
expected to allow more of our correspondent production to be placed into
CRT investments."

The following table presents the contributions of PMT's segments,
consisting of Correspondent Production, Credit Sensitive Strategies,
Interest Rate Sensitive Strategies, and Corporate:

 
      Quarter ended June 30, 2018

Correspondent
production

 

Credit sensitive
strategies

 

Interest rate
sensitive
strategies

  Corporate   Total
(in thousands)
Net investment income:
Net gain (loss) on investments
Mortgage loans at fair value $ - $ (4,701 ) $ - $ - $ (4,701 )

Mortgage loans held by variable interest entity net of
asset-backed secured financing

- - 176 - 176
Mortgage-backed securities - 242 (9,103 ) - (8,861 )
CRT Agreements - 38,496 - - 38,496
Hedging derivatives - - (1,121 ) - (1,121 )
Excess servicing spread investments   -     -     1,520     -     1,520  
- 34,037 (8,528 ) - 25,509
Net gain on mortgage loans acquired for sale 4,714 4,428 - - 9,142
Net mortgage loan servicing fees - 16 27,570 - 27,586
Net interest income (expense)
Interest income 17,822 8,751 25,422 349 52,344
Interest expense   (10,533 )   (9,443 )   (20,089 )   -     (40,065 )
7,289 (692 ) 5,333 349 12,279
Other income (loss)   8,895     (420 )   -     -     8,475  
  20,898     37,369     24,375     349     82,991  
Expenses:

Mortgage loan fulfillment and servicing fees payable to PennyMac
Financial Services, Inc.

14,559 1,172 8,259 - 23,990

Management fees payable to PennyMac Financial Services, Inc.

- - - 5,728 5,728
Other   1,823     3,544     (285 )   5,905     10,987  
  16,382     4,716     7,974     11,633     40,705  
Pretax income (loss) $ 4,516   $ 32,653   $ 16,401   $ (11,284 ) $ 42,286  
 

Credit Sensitive Strategies Segment

The Credit Sensitive Strategies segment primarily includes results from
distressed mortgage loans, CRT, and non-Agency subordinated bonds.
Pretax income for the segment was $32.7 million on revenues of
$37.4 million, compared with pretax income of $3.6 million on revenues
of $10.6 million in the prior quarter.

Net gain on investments was $34.0 million, an increase of 174 percent
from the prior quarter.

Net gain on CRT investments was $38.5 million, compared to $22.6 million
in the prior quarter. Returns on CRT investments in the second quarter
benefitted from ongoing capital deployment into new CRT investments and
continued strong credit markets.

PMT's distressed mortgage loan portfolio generated realized and
unrealized losses totaling $4.7 million, compared with realized and
unrealized losses of $10.0 million in the prior quarter. Losses in the
second quarter included a $5.8 million reduction in fair value due to an
increase in investor yield requirements. Fair value losses on performing
loans in the distressed portfolio were $4.4 million while fair value
losses on nonperforming loans were $0.4 million.

The schedule below summarizes the (losses) gains on distressed mortgage
loans:

 
      Quarter ended
June 30, 2018   March 31, 2018   June 30, 2017
(in thousands)
Valuation changes:
Performing loans $ (4,437 ) $ (4,169 ) $ 15,466
Nonperforming loans   (409 )   (5,102 )   (15,750 )
(4,846 ) (9,271 ) (284 )
Gain on payoffs 561 235 1,348
(Loss) gain on sale   (416 )   (915 )   (34 )
$ (4,701 ) $ (9,951 ) $ 1,030  
 

The Credit Sensitive Strategies segment includes net gain on mortgage
loans acquired for sale of $4.4 million, which represents the value of a
commitment to acquire the CRT security under the new REMIC structure.

Net interest expense for the segment totaled $0.7 million, compared to
$0.5 million in the prior quarter. Interest income totaled $8.8 million,
a 14 percent decrease from the prior quarter, driven by a decrease in
capitalized interest due to reduced loan modification activity and fewer
performing loans in the distressed loan portfolio resulting from its
ongoing liquidation. Interest expense totaled $9.4 million, down
11 percent from the prior quarter, driven by lower financing costs
related to the ongoing reduction of the distressed loan portfolio and
real estate acquired upon settlement of loans (REO).

Other investment losses were $0.4 million, compared with $1.4 million in
the prior quarter driven by the ongoing liquidation of the REO
properties. At quarter end, PMT's inventory of REO properties totaled
$109.3 million, down from $141.5 million at March 31, 2018.

Segment expenses were $4.7 million, a 33 percent decrease from the prior
quarter, driven by a reduction in mortgage loan servicing fees paid to
PennyMac Financial Services, Inc. (NYSE:PFSI) which in the prior
quarter included activity fees related to the settlement of a bulk
distressed loan sale.

Interest Rate Sensitive Strategies Segment

The Interest Rate Sensitive Strategies segment includes results from
investments in MSRs, excess servicing spread (ESS), Agency
mortgage-backed securities (MBS), and non-Agency senior MBS and interest
rate hedges. Pretax income for the segment was $16.4 million on revenues
of $24.4 million, compared with pretax income of $37.8 million on
revenues of $45.8 million in the prior quarter. The segment includes
investments that typically have offsetting exposures to changes in
interest rates. For example, in a period with increasing interest rates,
MSRs and ESS typically gain in value whereas Agency MBS typically
decline in value.

The results in the Interest Rate Sensitive Strategies segment consist of
net gains and losses on investments, net interest income and net loan
servicing fees, as well as the associated expenses.

Net loss on investments for the segment totaled $8.5 million, primarily
consisting of $9.1 million of losses on MBS and $1.1 million of losses
on hedging derivatives, partially offset by $1.5 million in gains on ESS.

Net interest income for the segment was $5.3 million, compared to $2.1
million in the prior quarter. Interest income totaled $25.4 million, a
31 percent increase from the prior quarter, primarily driven by growth
in the MBS portfolio. Interest expense totaled $20.1 million, a
16 percent increase from the prior quarter due to financing costs
related to the increase in MBS investments and the issuance of a term
note secured by MSRs in April.

Net mortgage loan servicing fees were $27.6 million, down from
$56.1 million in the prior quarter. Net mortgage loan servicing fees
included $48.7 million in servicing fees and $1.9 million in ancillary
and other fees, reduced by $28.0 million in realization of MSR
cashflows. Net mortgage loan servicing fees also included a
$16.1 million increase in the value of MSRs, $11.4 million of related
hedging losses and $0.4 million of MSR recapture income. PMT's hedging
activities are intended to manage the Company's net exposure across all
interest rate-sensitive strategies, which include MSRs, ESS and MBS.

The following schedule details net mortgage loan servicing fees:

 
      Quarter ended
June 30, 2018   March 31, 2018   June 30, 2017
(in thousands)
From non-affiliates:
Servicing fees1 $ 48,667 $ 48,732 $ 39,705
Ancillary and other fees 1,859 1,703 1,379
Effect of MSRs:
Carried at fair value—change in fair value
Realization of cashflows (27,997 ) (26,639 ) (2,304 )
Other   16,083     52,612     (2,096 )
(11,914 ) 25,973 (4,400 )
Carried at lower of amortized cost or fair value:
Amortization - - (19,523 )
Additions to impairment valuation allowance - - (4,089 )
Gains (losses) on hedging derivatives   (11,438 )   (20,848 )   2,391  
  (23,352 )   5,125     (25,621 )
27,174 55,560 15,463
From PFSI-MSR recpature income   412     595     234  
Net mortgage loan servicing fees $ 27,586   $ 56,155   $ 15,697  
 
1Includes contractually specified servicing fees, net of
Agency guarantee fees.
 

Before January 1, 2018, PMT carried the majority of its MSRs at the
lower of amortized cost or fair value. Beginning January 1, 2018, the
Company elected to account for all MSRs at fair value prospectively.

MSR valuation gains were primarily driven by higher mortgage rates,
resulting in expectations for lower prepayment activity in the future.
ESS valuation gains also benefitted from higher mortgage rates and
include recapture income totaling $0.6 million from PFSI for prepayment
activity during the quarter. When prepayment of a loan underlying PMT's
ESS results from refinancing by PFSI, PMT generally benefits from
recapture income.

Segment expenses were $8.0 million, a 1 percent decrease from the prior
quarter, driven by a decrease in other expenses.

Correspondent Production Segment

PMT acquires newly originated mortgage loans from correspondent sellers
and typically sells or securitizes the loans, resulting in
current-period income and ongoing investments in MSRs and CRT related to
a portion of its production. PMT's Correspondent Production segment
generated pretax income of $4.5 million versus $6.6 million in the prior
quarter.

Through its correspondent production activities, PMT acquired
$15.0 billion in UPB of loans and issued interest rate lock commitments
totaling $16.2 billion in the second quarter, compared with
$13.1 billion and $13.6 billion, respectively, in the prior quarter. Of
the correspondent acquisitions, conventional conforming acquisitions
from nonaffiliates totaled $5.4 billion, and government-insured or
guaranteed acquisitions totaled $9.5 billion, compared with $4.2 billion
and $8.8 billion, respectively, in the prior quarter.

Segment revenues were $20.9 million, a 10 percent increase from the
prior quarter. Segment revenues included a net gain on mortgage loans of
$4.7 million, other income of $8.9 million, which primarily consists of
volume-based origination fees, and net interest income of $7.3 million.
Net gain on mortgage loans acquired for sale in the quarter decreased
38 percent from the prior quarter, driven by a highly competitive
mortgage market that resulted in reduced production margins, partially
offset by the increase in acquisition volumes. Net interest income
increased 67 percent from the prior quarter primarily driven by the
increase in production volumes and incentives which the Company is
currently entitled to receive under one of its master repurchase
agreements to finance mortgage loans that satisfy certain consumer
relief characteristics.

Segment expenses were $16.4 million, up 32 percent from the prior
quarter, primarily driven by a $2.6 million dollar increase in
fulfillment fee expenses driven by the increase in conventional
correspondent production volume. The weighted average fulfillment fee
rate in the second quarter was 27 basis points, down slightly from 28
basis points in the prior quarter.

Corporate Segment

The Corporate segment includes interest income from cash and short-term
investments, management fees, and corporate expenses.

Segment revenues were $349,000, up from $200,000 in the prior quarter.

Management fees were $5.7 million, up 1 percent from the prior quarter,
resulting from an increase in PMT's shareholders' equity. No incentive
fees were paid in the second quarter.

Other segment expenses were $5.9 million compared with $4.7 million in
the prior quarter, driven by an increase in the value of outstanding
incentive-based compensation awards resulting from PMT's higher common
share price.

Taxes

PMT recorded income tax expense of $5.9 million compared with
$9.7 million of expense in the prior quarter, resulting from a reduced
income contribution from strategies that generate taxable income.

***

Executive Chairman Stanford L. Kurland concluded, "Our earnings this
quarter reflect the ongoing work to transition our equity allocation
more toward organic investments in GSE credit risk transfer and mortgage
servicing rights generated by our Correspondent Production business. As
we continue to redeploy capital resulting from the resolution of our
distressed investments into CRT and MSRs, we expect to see higher
returns for PMT. We believe investors are showing confidence in PMT's
return potential as reflected in the performance of our common shares
this year."

Management's slide presentation will be available in the Investor
Relations section of the Company's website at www.pennymac-REIT.com
beginning at 1:10 p.m. (Pacific Daylight Time) on Thursday, August 2,
2018.

1 Annualized return on average common equity is calculated
based on annualized quarterly net income attributable to common
shareholders as a percentage of monthly average common equity during the
period.

2 This transaction is subject to continuing due diligence and
customary closing conditions. There can be no assurance regarding the
size of the transaction or that the transaction will be completed at all.

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." PMT is externally
managed by PNMAC Capital Management, LLC, a controlled subsidiary of
PennyMac Financial Services, Inc. (NYSE:PFSI). 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 mortgage 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; our exposure to market
risk and declines in credit quality and credit spreads; 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
mitigate cybersecurity risks and cyber incidents; our exposure to risks
of loss with real estate investments resulting from adverse weather
conditions and man-made or natural disasters; our ability to satisfy
complex rules in order to qualify as a REIT for U.S. federal income tax
purposes; our ability to make distributions to our shareholders in the
future; and our organizational structure and certain requirements in our
charter documents. 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.

 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (UNAUDITED)

 
      June 30, 2018   March 31, 2018   June 30, 2017
(in thousands except share information)
ASSETS
Cash

$

63,035

$ 102,167 $ 69,893
Short-term investments 39,484 71,044 77,366
Mortgage-backed securities at fair value 1,698,322 1,436,456 1,065,540
Mortgage loans acquired for sale at fair value 1,790,518 1,115,534 1,318,603
Mortgage loans at fair value 749,445 779,489 1,527,812
Excess servicing spread purchased from PennyMac Financial Services,
Inc.
229,470 236,002 261,796
Firm commitment to purchase credit risk transfer security at fair
value
4,426 - -
Derivative assets 133,239 122,518 73,875
Real estate acquired in settlement of loans 109,271 141,506 207,034
Real estate held for investment 46,431 45,790 40,316
Mortgage servicing rights 1,010,507 957,013 734,800
Servicing advances 53,340 63,352 67,172
Deposits securing credit risk transfer agreements 651,204 622,330 503,108
Due from PennyMac Financial Services, Inc. 4,010 313 5,013
Other assets   94,147     96,972     57,916  
Total assets $ 6,676,849   $ 5,790,486   $ 6,010,244  
LIABILITIES
Assets sold under agreements to repurchase $ 3,780,204 $ 3,408,283 $ 3,497,999
Mortgage loan participation and sale agreements 87,751 - 38,345
Notes payable 445,062 - 159,980
Asset-backed financing of a variable interest entity at fair value 287,719 296,982 329,459
Exchangeable senior notes 247,759 247,471 246,629
Assets sold to PennyMac Financial Services, Inc. under agreement to
repurchase
138,582 142,938 150,000
Interest-only security payable at fair value 7,652 7,796 6,577
Derivative liabilities 3,446 3,636 8,856
Accounts payable and accrued liabilities 58,612 63,196 74,253
Due to PennyMac Financial Services, Inc. 19,661 27,356 17,725
Income taxes payable 47,289 42,321 14,892
Liability for losses under representations and warranties   7,625     8,249     10,697  
Total liabilities   5,131,362     4,248,228     4,555,412  
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest 299,707 299,707 46
Common shares of beneficial interest—authorized, 500,000,000 common
shares of $0.01 par

value; issued and outstanding 60,950,754, 60,882,954, and
66,842,495 common shares, respectively

610 609 668
Additional paid-in capital 1,282,971 1,281,115 1,489,116
Accumulated deficit   (37,801 )   (39,173 )   (34,998 )
Total shareholders' equity   1,545,487     1,542,258       1,454,832  
Total liabilities and shareholders' equity $ 6,676,849   $ 5,790,486   $ 6,010,244  
 
 

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)

 
      Quarter ended
June 30, 2018   March 31, 2018   June 30, 2017
(in thousands, except per share amounts)
Net investment income
Net gain on mortgage loans acquired for sale
From nonaffiliates $ 6,251 $ 4,986 $ 14,088
From PennyMac Financial Services, Inc.   2,891     2,641     3,204  
9,142 7,627 17,292
Mortgage loan origination fees 8,850 7,037 10,467
Net gain (loss) on investments:
From nonaffiliates 23,989 (7,733 ) 33,477
From PennyMac Financial Services, Inc.   1,520     7,751     (5,885 )
25,509 18 27,592
Net mortgage loan servicing fees
From nonaffiliates 27,174 55,560 15,463
From PennyMac Financial Services, Inc.   412     595     234  
27,586 56,155 15,697
Interest income:
From nonaffiliates 48,434 37,046 48,020
From PennyMac Financial Services, Inc.   3,910     3,934     4,366  
52,344 40,980 52,386
Interest expense:
To nonaffiliates 38,167 32,840 36,401
To PennyMac Financial Services, Inc.   1,898     1,976     2,025  
40,065 34,816 38,426
Net interest income 12,279 6,164 13,960
Results of real estate acquired in settlement of loans (2,297 ) (3,226 ) (3,465 )
Other   1,922     1,898     2,416  
Net investment income   82,991     75,673     83,959  
Expenses
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees 14,559 11,944 21,107
Mortgage loan servicing fees1 9,431 11,019 10,099
Management fees 5,728 5,696 5,638
Professional services 1,757 1,319 2,747
Real estate held for investment 1,301 1,438 1,353
Compensation 2,220 1,268 1,959
Mortgage loan origination 1,572 272 1,993
Mortgage loan collection and liquidation 1,923 2,229 3,338
Other   2,214     2,650     3,899  
Total expenses 40,705 37,835 52,133
Income before provision for income taxes 42,286 37,838 31,826
Provision for income taxes   5,861     9,652     3,046  
Net income 36,425 28,186 28,780
Dividends on preferred shares   6,234     6,234     2,336  
Net income attributable to common shareholders $ 30,191   $ 21,952   $ 26,444  
Earnings per common share
Basic $ 0.49 $ 0.36 $ 0.39
Diluted $ 0.47 $ 0.35 $ 0.38
Weighted-average common shares outstanding
Basic 60,903 60,761 66,761
Diluted 69,370 69,875 75,228
Dividends declared per common share $ 0.47 $ 0.47 $ 0.47
 

1 Mortgage loan servicing fees expense includes both
special servicing for PMT's distressed portfolio and subservicing
for its mortgage servicing rights.

 

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