PennyMac Mortgage Investment Trust Reports Second Quarter 2019 Results

PennyMac Mortgage Investment Trust PMT today reported net income attributable to common shareholders of $38.0 million, or $0.50 per common share on a diluted basis for the second quarter of 2019, on net investment income of $96.4 million. PMT previously announced a cash dividend for the second quarter of 2019 of $0.47 per common share of beneficial interest, which was declared on June 26, 2019 and paid on July 30, 2019 to common shareholders of record as of July 15, 2019.

Second Quarter 2019 Highlights

Financial results:

• Net income attributable to common shareholders of $38.0 million, down from $47.3 million in the prior quarter
  • Results reflect solid performance from government-sponsored enterprise (GSE) credit risk transfer (CRT) investments and strong correspondent production
  • Agency mortgage-backed securities (MBS) and interest rate hedges substantially offset the market-driven valuation impact on mortgage servicing rights (MSR) and excess servicing spread (ESS) investments
• Annualized return on average common equity of 10 percent¹
• Book value per common share of $20.79 at June 30, 2019, up from $20.72 at March 31, 2019

Other investment and financing highlights:

• Increased investment in CRT securities and MSRs resulting from PMT's record level of loan acquisition volumes
  • Conventional loan production totaled $12.2 billion in unpaid principal balance (UPB), up 35 percent from the prior quarter²
  • CRT deliveries totaled $9.3 billion in UPB, resulting in a firm commitment to purchase $324 million of CRT securities
  • New MSR investments totaled $153 million
• Settled PMT's fifth CRT transaction totaling $933 million in face amount; currently delivering loans to Fannie Mae under a commitment for our sixth CRT transaction
• Issued $638 million of 4-year term notes to finance PMT's fourth settled CRT transaction, further adding duration and improving its capital efficiency
• Raised approximately $214 million in net proceeds from the issuance of common shares during the quarter
• Completed the sale of nonperforming loans totaling $42 million in UPB from the distressed portfolio

Notable activity after quarter end:

• Entered into an agreement after the quarter end to sell approximately $115 million in UPB of nonperforming and reperforming loans from the distressed portfolio³
  • Remaining distressed loans after the sale are expected to total $18 million in UPB

"PMT's investments delivered solid returns in the second quarter, driven by strong fundamental performance of our credit sensitive strategies and improved correspondent production earnings," said President and CEO David Spector. "Record production volumes this quarter accelerated the pace of capital deployment into CRT and MSRs. Lower interest rates drove fair value losses on MSR and ESS investments, which were substantially offset by gains from MBS and interest rate hedges. We are optimistic regarding our ability to continue to deploy capital into PMT's organically created investments with accretive returns as we consider our outlook for future growth."

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

Credit Sensitive Strategies Segment

The Credit Sensitive Strategies segment primarily includes results from CRT, distressed mortgage loans and non-Agency subordinated bonds. Pretax income for the segment was $33.0 million on revenues of $35.8 million, compared to pretax income of $58.4 million on revenues of $61.1 million in the prior quarter.

The Credit Sensitive Strategies segment recorded a net gain on loans acquired for sale of $11.4 million, up modestly from $11.1 million in the prior quarter. These amounts represent the recognition of the fair value of firm commitments to acquire CRT securities for deliveries during the second quarter; an additional $9.4 million was attributed to the Correspondent Production segment, up from $8.6 million in the prior quarter.

Net gain on investments in the segment was $25.4 million, down from $53.8 million in the prior quarter.

Net gain on CRT investments for the quarter was $30.8 million, compared to $53.1 million in the prior quarter, and included $3.6 million in valuation-related losses driven by credit spread widening on seasoned CRT investments. The prior quarter included $20.4 million in valuation-related gains related to credit spread tightening. Net gain on CRT investments also included $35.3 million in realized gains and carry, up from $33.6 million in the prior quarter. Recognized losses of $0.9 million were flat from the prior quarter, reflecting portfolio seasoning and in line with expectations.

PMT's distressed mortgage loan portfolio generated realized and unrealized losses totaling $5.5 million, compared to gains of $0.5 million in the prior quarter. Fair value losses on performing loans in the distressed portfolio were $1.8 million, while fair value losses on nonperforming loans were $4.3 million, driven by forecasts for slower home price appreciation and higher expected resolution costs. The distressed mortgage loan portfolio also generated realized gains related to payoffs and loan sales of $0.7 million.

Net interest expense for the segment totaled $4.3 million, compared to $3.8 million in the prior quarter. Interest income totaled $9.6 million, up from $8.3 million in the prior quarter, driven by a larger CRT investment. Interest expense totaled $14.0 million, up from $12.0 million in the prior quarter, driven by increased financing costs related to the larger CRT investment.

Other investment income in the segment was $3.3 million, compared to a loss of $30,000 in the prior quarter, driven by the continued liquidation of the real estate acquired in the settlement of loans (REO) portfolio and seasonal factors. At quarter end, PMT's inventory of REO properties totaled $97.8 million, up from $72.2 million at March 31, 2019. The increase was driven by a reclassification of certain properties previously held for investment to the REO portfolio.

Segment expenses were $2.8 million, essentially unchanged from the prior quarter.

Interest Rate Sensitive Strategies Segment

The Interest Rate Sensitive Strategies segment includes results from investments in MSRs, ESS, Agency MBS, non-Agency senior MBS and interest rate hedges. Pretax loss for the segment was $1.9 million on revenues of $9.6 million, compared to pretax income of $0.8 million on revenues of $11.2 million in the prior quarter. The segment includes investments that typically have offsetting fair value exposures to changes in interest rates. For example, in a period with decreasing interest rates, MSRs and ESS typically decrease in fair value whereas Agency MBS typically increase 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 associated expenses.

Net gain on investments for the segment totaled $62.4 million, and primarily consisted of $37.2 million of gains in the value of hedging derivatives and $27.5 million of gains on MBS, partially offset by a $3.2 million loss in the value of ESS investments.

Net loan servicing fees resulted in a loss of $53.6 million, compared to a loss of $31.1 million in the prior quarter. Net loan servicing fees included $66.9 million in servicing fees and $6.4 million in other fees, reduced by $46.6 million in realization of MSR cash flows. Net loan servicing fees also included a $136.9 million decrease in the fair value of MSRs, $55.5 million of related hedging gains and $1.0 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:

MSR valuation losses were primarily driven by a decrease in mortgage rates during the quarter, resulting in expectations for elevated prepayment activity in the future. ESS investments also declined in value from a decrease in mortgage rates and the ongoing paydown of the underlying loans, partially offset by increased recapture income from PFSI for prepayment activity during the quarter. PMT generally benefits from recapture income when the prepayment of a loan underlying PMT's ESS results from refinancing by PFSI.

Net interest income for the segment was $0.9 million, down from $1.0 million in the prior quarter. Interest income totaled $35.9 million, up from $34.1 million in the prior quarter, primarily driven by higher interest income on custodial deposits. Interest expense totaled $35.0 million, up from $33.1 million in the prior quarter, driven by higher interest shortfall expense from elevated prepayment activity.

Segment expenses were $11.5 million, an increase of 11 percent from the prior quarter, primarily driven by higher servicing fee expenses on a growing MSR portfolio.

Correspondent Production Segment

PMT acquires newly originated 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 $16.2 million, up from $3.6 million in the prior quarter.

Through its correspondent production activities, PMT acquired $21.7 billion in UPB of loans from nonaffiliates compared to $15.1 billion in the prior quarter. Of total correspondent acquisitions, conventional conforming and jumbo acquisitions from nonaffiliates totaled $10.7 billion, and government-insured or guaranteed and non-delegated acquisitions totaled $11.0 billion, compared to $8.1 billion and $6.9 billion, respectively, in the prior quarter. PMT also acquired $1.1 billion of conventional loans from PennyMac Financial, compared to $0.7 billion in the prior quarter. PMT issued interest rate lock commitments on conventional loans totaling $12.6 billion, compared to $9.0 billion in the prior quarter.

Segment revenues were $49.4 million, a 46 percent increase from the prior quarter and included net gain on loans acquired for sale of $22.8 million, other income of $17.7 million, which primarily consists of volume-based origination fees, and net interest income of $8.9 million. Net gain on loans acquired for sale in the quarter increased by $12.6 million from the prior quarter, driven by improved production margins and higher CRT-related gains, as discussed earlier. Net interest income decreased $1.7 million from the prior quarter, primarily driven by a decrease in the recognition of incentives the Company is entitled to receive under one of its master repurchase agreements, under which it finances mortgage loans that satisfy certain consumer relief characteristics. These incentives totaled $2.3 million in the second quarter, down from $7.5 million in the first quarter. As the Company expected, the lender substantially curtailed the incentives provided under the master repurchase agreement through an orderly wind down of the incentive program during the quarter ended June 30, 2019.

Segment expenses were $33.2 million, up from $30.2 million in the prior quarter driven by the increase in production activity, partially offset by a decrease in the weighted average fulfillment fee during the quarter. The weighted average fulfillment fee rate in the second quarter was 28 basis points, down from 34 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 $1.6 million, up from $0.4 million in the prior quarter.

Management fees were $8.8 million, up 22 percent from the prior quarter driven by increased incentive fees paid to PFSI based on PMT's profitability and an increase in base management fees as a result of PMT's increased shareholders' equity.

Other segment expenses were $6.7 million, up from $6.1 million in the prior quarter.

Taxes

PMT recorded a $10.9 million benefit for income tax expense compared to $3.7 million in the prior quarter, driven by increased fair value losses on investments held in PMT's taxable subsidiary.

"This week marks the 10^th anniversary of PennyMac Mortgage Investment Trust, and we are proud of our track record in pursuing unique mortgage-related investment strategies and delivering attractive risk-adjusted returns while preserving shareholder value," commented Executive Chairman Stanford L. Kurland. "Our recent successful capital raises have been driven by PMT's performance and compelling investment outlook. We expect the new investments in CRT and MSRs to be accretive to PMT's overall return profile with further benefit from increased scale economies, and we remain optimistic about our ability to drive strong returns and shareholder value over the current investment horizon."

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 Time) on Thursday, August 1, 2019.

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. PMT is externally managed by PNMAC Capital Management, LLC, a wholly-owned subsidiary of PennyMac Financial Services, Inc. PFSI. Additional information about PennyMac Mortgage Investment Trust is available at www.PennyMac-REIT.com.

Forward-Looking Statements

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 the Company's investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject it to additional risks; the occurrence of natural disasters or other events or circumstances that could impact the Company's operations; volatility in the Company's industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise; events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad impact on financial and housing markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts; changes in general business, economic, market, employment and domestic and international 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 the Company's investment objectives; the inherent difficulty in winning bids to acquire mortgage loans, and the Company's success in doing so; the concentration of credit risks to which the Company is exposed; the degree and nature of the Company's competition; the Company's dependence on its manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities; changes in personnel and lack of availability of qualified personnel at its manager, servicer or their affiliates; the availability, terms and deployment of short-term and long-term capital; the adequacy of the Company's cash reserves and working capital; the Company's ability to maintain the desired relationship between its financing and the interest rates and maturities of its assets; the timing and amount of cash flows, if any, from the Company's investments; unanticipated increases or volatility in financing and other costs, including a rise in interest rates; the performance, financial condition and liquidity of borrowers; the ability of the Company's servicer, which also provides the Company with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards; incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of the Company's customers and counterparties; the Company's indemnification and repurchase obligations in connection with mortgage loans it purchases and later sells or securitizes; the quality and enforceability of the collateral documentation evidencing the Company's ownership and rights in the assets in which it invests; increased rates of delinquency, default and/or decreased recovery rates on the Company's investments; the performance of mortgage loans underlying mortgage-backed securities in which the Company retains credit risk; the Company's ability to foreclose on its investments in a timely manner or at all; increased prepayments of the mortgages and other loans underlying the Company's mortgage-backed securities or relating to the Company's mortgage servicing rights, excess servicing spread and other investments; the degree to which the Company's hedging strategies may or may not protect it from interest rate volatility; the effect of the accuracy of or changes in the estimates the Company makes about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon the Company's financial condition and results of operations; the Company's ability to maintain appropriate internal control over financial reporting; the Company's exposure to risks of loss and disruptions in operations resulting from adverse weather conditions and man-made or natural disasters; technologies for loans and the Company's ability to mitigate security risks and cyber intrusions; the Company's ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct its business; the Company's ability to detect misconduct and fraud; the Company's ability to comply with various federal, state and local laws and regulations that govern its business; developments in the secondary markets for the Company's mortgage loan products; legislative and regulatory changes that impact the mortgage loan industry or housing market; changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association, the Federal Housing Administration or the Veterans Administration, the U.S. Department of Agriculture, or government-sponsored entities such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or such changes that increase the cost of doing business with such entities; the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies; the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof; changes in government support of homeownership; changes in government or government-sponsored home affordability programs; limitations imposed on the Company's business and its ability to satisfy complex rules for it to qualify as a REIT for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of the Company's subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes, as applicable, and the Company's ability and the ability of its subsidiaries to operate effectively within the limitations imposed by these rules; changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company); the Company's ability to make distributions to its shareholders in the future; the Company's failure to deal appropriately with issues that may give rise to reputational risk; and the Company's organizational structure and certain requirements in its 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.

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