Business Wire | Aug 6, 2020 04:30PM EDT

PennyMac Mortgage Investment Trust Reports Second Quarter 2020 Results

Aug. 06, 2020

WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--Aug. 06, 2020--PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income attributable to common shareholders of $458.4 million, or $4.51 per common share on a diluted basis for the second quarter of 2020, on net investment income of $558.3 million. PMT previously announced a cash dividend for the second quarter of 2020 of $0.40 per common share of beneficial interest, which was declared on June 19, 2020 and paid on July 30, 2020 to common shareholders of record as of July 15, 2020.

Second Quarter 2020 Highlights

Financial results:

* Net income attributable to common shareholders of $458.4 million, up from a net loss attributable to common shareholders of $600.9 million in the prior quarter Driven by record Correspondent Production segment results and partial recovery in the fair value of government-sponsored enterprised (GSE) credit risk transfer (CRT) investments from depressed levels at March 31, 2020 as a result of market dislocations related to COVID-19 ? Partially offset by fair value losses on mortgage servicing rights (MSR) as a result of higher than anticipated prepayments during the quarter and expectations for higher prepayments in the future driven by lower rates, and losses on interest rate hedges driven by elevated hedge costs and fair value losses on options used to hedge MSRs as volatility decreased by June 30, 2020

* Book value per common share of $19.39 at June 30, 2020, up from $15.16 at March 31, 2020

Other investment and financing highlights:

* Investment activity driven by elevated correspondent production volumes Conventional correspondent loan production totaled $18.9 billion in unpaid principal balance (UPB), up 17 percent from the prior quarter and up 76 percent from the second quarter of 2019 Added $203 million of new MSR investments CRT deliveries totaled $1.8 billion in UPB resulting in a firm commitment to purchase $48 million of new CRT securities

* Repurchased approximately 566,000 common shares of PMT at a weighted average price of $13.36, or a total cost of $7.6 million

"PMT delivered record earnings in the second quarter, rebounding from the significant first quarter loss, which drove a substantial recovery in book value from the prior quarter," said President and CEO David Spector. "As a result of our manager's commitment to risk management and operational discipline, PMT not only protected the value of its assets in a volatile year-to-date period, but was able to continually acquire, fund and settle loans throughout the crisis as others retreated. This led to record profitability in the Correspondent Production segment. Additionally, PMT's CRT investments recorded substantial fair value gains as they benefited from the significant recovery in the value of risk assets and elevated prepayments throughout the quarter. At the same time, our manager and service provider, PFSI, continues to closely work with borrowers affected by the pandemic to help them successfully refinance or modify their loans to emerge from forbearance plans. Looking ahead, we project book value growth as we expect the earnings potential of PMT's investment strategies to exceed the current dividend level."

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

Quarter ended June 30, 2020 Interest Credit rate Correspondent sensitive sensitive production Corporate Consolidated strategies strategies

(in thousands)Net investmentincome:Net gain oninvestments: $ $ - $ - $ - $ 488,198 CRT investments 488,198

Loans at fair (121 ) - - - (121 )valueLoans held byvariableinterest entity - 633 - - 633 net ofasset-backedsecuredfinancingMortgage-backed (2,564 ) 19,628 - - 17,064 securitiesHedging (13,245 ) (3,494 ) - - (16,739 )derivativesExcessservicing - (101 ) - - (101 )spreadinvestments 472,268 16,666 - - 488,934

Net loan - (102,660 ) - - (102,660 )servicing feesNet gain on (7,573 ) - 169,787 - 162,214 loans acquiredfor saleNet interestincome(expense):Interest income 1,133 23,585 15,957 137 40,812

Interest 8,796 38,093 13,502 657 61,048 expense (7,663 ) (14,508 ) 2,455 (520 ) (20,236 )

Other income 3,014 - 25,318 1,737 30,069

460,046 (100,502 ) 197,560 1,217 558,321

Expenses:Loanfulfillment andservicing fees 240 15,294 52,814 - 68,348 payable toPennyMacFinancialServices, Inc.Management feespayable to - - - 8,288 8,288 PennyMacFinancialServices, Inc.Other 1,014 1,691 5,168 5,749 13,622

$ 1,254 $ 16,985 $ 57,982 $ $ 90,258 14,037

Pretax income $ $ ) $ 139,578 $ ) $ 468,063 (loss) 458,792 (117,487 (12,820



Credit Sensitive Strategies Segment

The Credit Sensitive Strategies segment primarily includes results from CRT, and also includes distressed loans and non-Agency subordinated bonds. Pretax income for the segment was $458.8 million on net investment income of $460.0 million, versus pretax loss of $960.5 million on a net investment loss of $959.3 million in the prior quarter.

Net gain on investments in the segment was $472.3 million, versus a net loss on investments of $919.1 million in the prior quarter.

Net gain on CRT investments for the quarter was $488.2 million, versus a net loss of $979.8 million in the prior quarter, and included $410.7 million in valuation-related gains reflecting a decrease in market discount rates and improvement in market credit outlook since the end of the prior quarter. Net gain on CRT investments also included $63.8 million in realized gains and carry, up from $55.9 million in the prior quarter. Recognized losses were $2.7 million, as the expected increases in realized losses due to impacts related to COVID-19 have yet to materialize.

In alignment with the Agencies' wind down of front-end lender risk share transactions, CRT deliveries totaled $1.8 billion in UPB for the second quarter.

The Credit Sensitive Strategies segment also recorded a net loss on loans acquired for sale of $7.6 million versus $32.3 million in the prior quarter. These amounts represent the recognition of the fair value of the firm commitment to acquire CRT securities for deliveries during the second quarter.

Net interest expense for the segment totaled $7.7 million, down from $8.0 million in the prior quarter. Interest income totaled $1.1 million, down from $6.6 million in the prior quarter and interest expense totaled $8.8 million, down from $14.6 million in the prior quarter, driven primarily by lower short-term interest rates.

Segment expenses were $1.3 million, up slightly from the prior quarter.

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), non-Agency senior MBS and interest rate hedges. Pretax loss for the segment was $117.5 million on net investment loss of $100.5 million, compared to pretax income of $324.8 million on revenues of $340.2 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 fair 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 was $16.7 million, and consisted of $19.6 million of gains on MBS and $0.6 million of gains on loans held by a variable interest entity net of asset-backed secured financing, partially offset by $3.5 million of losses in the fair value of hedging derivatives, and $0.1 million of losses in the fair value of ESS investments.

Net loan servicing fees resulted in a loss of $102.7 million, compared to gains of $244.6 million in the prior quarter. Net loan servicing fees included servicing fees of $101.8 million, up 8 percent from the prior quarter primarily driven by a larger portfolio, and $11.9 million in other fees, reduced by $59.2 million in realization of MSR cash flows. Net loan servicing fees also included $111.6 million in fair value losses of MSRs, $50.7 million in related hedging losses, and $5.1 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 loan servicing fees:

Quarter ended June 30, March 31, June 30, 2020 2020 2019 (in thousands)From non-affiliates:Servicing fees^(1) $ 101,823 $ 94,469 $ 66,919

Other fees 11,887 7,191 6,408

Effect of MSRs:Carried at fair value-change in fairvalueRealization of cashflows (59,199 ) (63,955 ) (46,580 )

Other (111,649 ) (563,246 ) (136,887 )

(170,848 ) (627,201 ) (183,467 )

Loss on sale - -

Gain on sale - -

Gains (losses) on hedging derivatives (50,650 ) 767,186 55,536

(221,498 ) 139,985 (127,931 )

(107,788 ) 241,645 (54,604 )

From PFSI-MSR recapture income 5,128 2,927 1,015

Net loan servicing fees $ (102,660 ) $ 244,572 $ (53,589 )

^(1) Includes contractually specified servicing fees

MSR and ESS valuation losses were primarily driven by expectations for increased prepayment activity in the future related to lower interest rates and higher-than-modeled actual prepayments during the quarter. PMT benefited from higher recapture income from PFSI for elevated prepayments during the quarter. PMT generally benefits from recapture income when the prepayment of a loan underlying PMT's MSR or ESS results from refinancing by PFSI.

Net interest expense for the segment was $14.5 million, compared to net interest expense of $8.4 million in the prior quarter. Interest income totaled $23.6 million, down from $33.2 million in the prior quarter, primarily driven by decreased income from custodial deposits due to lower earnings rates. Interest expense totaled $38.1 million, down from $41.6 million in the prior quarter, primarily driven by reduced financing expenses related to a smaller MBS portfolio.

Segment expenses were $17.0 million, up 10 percent from the prior quarter.

Correspondent Production Segment

PMT acquires newly originated loans from correspondent sellers and typically sells or securitizes the loans, resulting in current-period income and additions to its investments in MSRs and CRT related to a portion of its production. PMT's Correspondent Production segment generated record pretax income of $139.6 million, up from $65.3 million in the prior quarter.

Through its correspondent production activities, PMT acquired $29.9 billion in UPB of loans originated by nonaffiliates, up slightly from the prior quarter and up 40 percent from the second quarter of 2019. Of total correspondent acquisitions, conventional conforming and jumbo acquisitions from nonaffiliates totaled $18.9 billion, and government-insured or guaranteed acquisitions totaled $11.0 billion, compared to $16.2 billion and $13.6 billion, respectively, in the prior quarter. Interest rate lock commitments on conventional loans were a record $24.8 billion, up from $19.1 billion in the prior quarter and $12.6 billion in the second quarter of 2019.

Segment revenues were $197.6 million, a 76 percent increase from the prior quarter and included net gain on loans acquired for sale of $169.8 million, other income of $25.3 million, which primarily consists of volume-based origination fees, and net interest income of $2.5 million. Net gain on loans acquired for sale in the quarter increased by $88.7 million from the prior quarter, driven by higher conventional correspondent margins early in the second quarter, which have returned to normalized levels faster than originally anticipated. Interest income was $16.0 million, down from $31.4 million in the prior quarter and interest expense was $13.5 million, down from $24.3 million in the prior quarter driven by lower short-term interest rates.

Segment expenses were $58.0 million, up from $46.9 million in the prior quarter driven by the increase in production volumes and an increase in the weighted average fulfillment fee during the quarter. The weighted average fulfillment fee rate in the second quarter was 28 basis points, up from 26 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 net investment income was $1.2 million, up from $0.4 million in the prior quarter.

Management fees were $8.3 million, down 8 percent from the prior quarter primarily driven by the decrease in average shareholders' equity versus the prior quarter.

Other segment expenses were $5.7 million, up from $5.4 million in the prior quarter.

Taxes

PMT recorded income tax expense of $3.4 million down from $10.2 million in the prior quarter.

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 6, 2020.

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. (NYSE: 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: our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, civil unrest, man-made or natural disasters, climate change and pandemics such as COVID-19; the impact to our CRT agreements of increased borrower requests for forbearance under the CARES Act; 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; 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 manmade 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; 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.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

June 30, March 31, June 30, 2020 2020 2019 (in thousands except share amounts)ASSETS $ 346,007 $ $ 77,676 Cash 1,099,380

Short-term investments 273,592 137,960 76,731

Mortgage-backed securities at fair value 2,612,986 3,947,420 2,600,357

Loans acquired for sale at fair value 2,179,962 2,856,042 2,477,267

Loans at fair value 230,660 251,423 358,570

Excess servicing spread received from 151,206 157,109 194,156 PennyMac Financial Services, Inc.Derivative and credit risk transfer 114,346 173,310 258,782 strip assetsFirm commitment to purchase credit risk - - 15,581 transfersecurities at fair valueReal estate acquired in settlement of 43,559 50,838 97,808 loansDeposits securing credit risk transfer 1,666,449 1,855,936 2,060,612 arrangementsMortgage servicing rights 1,189,605 1,157,326 1,126,427

Servicing advances 38,254 39,030 35,143

Due from PennyMac Financial Services, 3,458 3,512 1,485 Inc.Other 233,635 189,202 85,194

$ $ $ Total assets 9,083,719 11,918,488 9,465,789

LIABILITIESAssets sold under agreements to $ $ $ repurchase 3,981,761 6,348,192 5,364,551

Mortgage loan participation and sale 93,117 - - agreementsExchangeable senior notes 195,333 444,525 248,958

Notes payable secured by credit risk 1,810,845 1,967,526 1,370,074 transferand mortgage servicing assetsAsset-backed financing of a variable 212,170 232,565 270,077 interest entity at fair valueInterest-only security payable at fair 14,981 14,134 26,356 valueAssets sold to PennyMac Financial 90,101 99,766 118,716 Services, Inc.under agreement to repurchaseDerivative liabilities 140,201 462,639 22,454

Firm commitment to purchase credit risk 191,193 409,649 - transfersecurities at fair valueAccounts payable and accrued liabilities 48,735 40,534 36,373

Due to PennyMac Financial Services, Inc. 44,329 56,223 34,695

Income taxes payable 15,451 12,067 21,873

Liability for losses under 10,225 7,300 7,728 representations and warrantiesTotal liabilities 6,848,442 10,095,120 7,521,855

SHAREHOLDERS' EQUITYPreferred shares of beneficial interest 299,707 299,707 299,707

Common shares of beneficialinterest-authorized, 500,000,000 common 993 998 786 shares of $0.01 par value; issued andoutstanding 99,275,258, 99,841,390, and78,607,436 common shares, respectivelyAdditional paid-in capital 2,119,577 2,126,264 1,647,186

Accumulated deficit (185,000 ) (603,601 ) (3,745 )

Total shareholders' equity 2,235,277 1,823,368 1,943,934

Total liabilities and shareholders' $ $ $ equity 9,083,719 11,918,488 9,465,789



PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Quarterly Periods Ended June 30, March 31, June 30, 2020 2020 2019 (in thousands, except per share amounts)Investment Income (Loss) $ $ ) $ 87,754 Net gain (loss) on investments 488,934 (815,131

Net loan servicing fees:From nonaffiliatesContractually specified 106,951 97,396 67,934

Other fees 11,887 7,191 6,408

Servicing fees 118,838 104,587 74,342

Change in fair value of mortgage servicing (170,848 ) (627,201 ) (183,467 )rightsHedging results (50,650 ) 767,186 55,536

(102,660 ) 244,572 (53,589 )

Net gain on loans acquired for sale: 162,214 48,775 34,244

Loan origination fees 25,208 23,928 17,630

Interest income 40,812 72,123 71,793

Interest expense 61,048 81,068 65,896

Net interest (expense) income (20,236 ) (8,945 ) 5,897

Results of real estate acquired in settlement 2,856 32 2,075 of loansOther 2,005 252 2,390

Net investment income (loss) 558,321 (506,517 ) 96,401

ExpensesEarned by PennyMac Financial Services, Inc.:Loan fulfillment fees 52,815 41,940 29,590

Loan servicing fees 15,533 14,521 11,568

Management fees 8,288 9,055 8,832

Loan origination 4,468 4,249 3,118

Safekeeping 1,905 1,658 1,000

Professional services 1,492 1,496 1,733

Loan collection and liquidation 864 750 1,247

Compensation 1,200 519 1,771

Other 3,693 3,720 4,172

Total expenses 90,258 77,908 63,031

Income (Loss) before provision for (benefit 468,063 (584,425 ) 33,370 from) income taxesProvision for (benefit from) income taxes 3,443 10,248 (10,863 )

Net income (loss) 464,620 (594,673 ) 44,233

Dividends on preferred shares 6,235 6,234 6,234

Net income (loss) attributable to common $ $ ) $ 37,999 shareholders 458,385 (600,907

Earnings per shareBasic $ 4.59 $ (5.99 ) $ 0.52

Diluted $ 4.51 $ (5.99 ) $ 0.50

Weighted average shares outstandingBasic 99,689 100,245 73,425

Diluted 101,592 100,245 81,892

Dividends declared per common share $ 0.40 $ 0.25 $ 0.47

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