Business Wire | Nov 5, 2020 04:30PM EST

PennyMac Mortgage Investment Trust Reports Third Quarter 2020 Results

Nov. 05, 2020

WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--Nov. 05, 2020--PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income attributable to common shareholders of $93.3 million, or $0.94 per common share on a diluted basis for the third quarter of 2020, on net investment income of $221.0 million. PMT previously announced a cash dividend for the third quarter of 2020 of $0.40 per common share of beneficial interest, which was declared on September 23, 2020 and paid on October 30, 2020 to common shareholders of record as of October 15, 2020.

Third Quarter 2020 Highlights

Financial results:

* Net income attributable to common shareholders of $93.3 million, down from $458.4 million in the prior quarter Driven by strong Correspondent Production segment results and income from government-sponsored enterprise (GSE) credit risk transfer (CRT) investments

* Book value per common share increased to $19.95 at September 30, 2020 from $19.39 at June 30, 2020

Other investment and financing highlights:

* Record correspondent production volumes drove strong investment activity Conventional correspondent loan production totaled $27.4 billion in unpaid principal balance (UPB), up 45 percent from the prior quarter Added $265 million in new MSRs CRT deliveries totaled $1.8 billion in UPB resulting in a firm commitment to purchase $42million of new CRT securities

* Repurchased approximately 492,000 common shares of PMT at a total cost of $8.3 million

Notable activity after quarter end:

* CRT-6 settlement is expected in the fourth quarter for which PMT has arranged appropriate financing1

"PMT delivered strong earnings during the third quarter driven by record correspondent production volumes and income from its credit risk transfer investments," said President and CEO David Spector. "Earnings per share again exceeded the quarterly dividend and as a result, book value per share increased to $19.95. Volumes in PMT's market-leading correspondent production business increased substantially, driving strong segment earnings and new MSR investments totaling $265 million. PMT's investments in credit risk transfer continued to benefit from the improvement in the market value for risk assets and elevated prepayment speeds. We remain focused on leveraging PMT's market position, along with PennyMac Financial's expertise and technology platform, to continue to deploy capital in attractive investments and deliver strong risk-adjusted returns to shareholders."

[1] These transactions are subject to continuing due diligence and customaryclosing conditions. There can be no assurance regarding the size of thesetransactions or that these transactions will be completed at all.

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 September 30, 2020 Interest Credit rate Correspondent sensitive sensitive production Corporate Consolidated stratgies strategies

(in thousands)Net investmentincome (loss):Net gain (loss)on investments:CRT investments $ 60,952 $ - $ - $ - $ 60,952

Loans at fair 193 - - - 193 valueLoans held byvariableinterest entity - 201 - - 201 net ofasset-backedsecuredfinancingMortgage-backed - (37,873 ) - - (37,873 )securitiesHedging (1,134 ) (132 ) - - (1,266 )derivativesExcess servicing - (2,610 ) - - (2,610 )spreadinvestments 60,011 (40,414 ) - - 19,597

Net loan - 60,427 - - 60,427 servicing feesNet gain on (3,934 ) - 102,356 - 98,422 loans acquiredfor saleNet interest(expense)income:Interest income 656 33,516 26,073 378 60,623

Interest expense 6,236 36,178 16,547 56 59,017

(5,580 ) (2,662 ) 9,526 322 1,606

Other income 2,321 - 38,640 - 40,961

52,818 17,351 150,522 322 221,013

Expenses:Loan fulfillmentand servicingfees 187 18,564 54,840 - 73,591 payable toPennyMacFinancialServices, Inc.Management feespayable to - - - 8,508 8,508 PennyMacFinancialServices, Inc.Other 2,603 270 8,786 5,058 16,717

$ 2,790 $ 18,834 $ 63,626 $ 13,566 $ 98,816

Pretax income $ 50,028 $ (1,483 ) $ 86,896 $ (13,244 ) $ 122,197 (loss) 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 $50.0 million on net investment income of $52.8 million, versus pretax income of $458.8 million on net investment income of $460.0 million in the prior quarter.

Net gain on investments in the segment was $60.0 million, versus a net gain on investments of $472.3 million in the prior quarter.

Net gain on CRT investments for the quarter was $61.0 million, versus a net gain of $488.2 million in the prior quarter, and included $14.5 million in valuation-related gains reflecting a modest overall tightening of credit spreads and the impact of elevated prepayment speeds. Net gain on CRT investments also included $48.1 million in realized gains and carry, down from $63.8 million in the prior quarter. Recognized losses were $2.9 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 third quarter.

The Credit Sensitive Strategies segment also recorded a net loss on loans acquired for sale of $3.9 million, down from $7.6 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 third quarter.

Net interest expense for the segment totaled $5.6 million, down from $7.7 million in the prior quarter. Interest income totaled $0.7 million, down from $1.1 million in the prior quarter, and interest expense totaled $6.2 million, down from $8.8 million in the prior quarter, driven primarily by a smaller CRT asset and lower short-term interest rates.

Segment expenses were $2.8 million, up from $1.3 million in the prior quarter, primarily related to distressed loans and real estate acquired in settlement of loans.

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 $1.5 million on net investment income of $17.4 million, compared to a pretax loss of $117.5 million on net investment loss of $100.5 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 loss on investments for the segment was $40.4 million, and consisted of $37.9 million of losses on MBS driven by elevated prepayments on premium MBS, $2.6 million of losses in the fair value of ESS investments, and $0.1 million of losses on hedging derivatives. Net loss on investments also included $0.2 million of gains on loans held by variable interest entity net of asset-backed secured financing.

Net loan servicing fees were $60.4 million, compared to a loss of $102.7 million in the prior quarter. Net loan servicing fees included servicing fees of $98.0 million, down 4 percent from the prior quarter primarily driven by higher delinquencies, and $18.7 million in other fees, reduced by $53.4 million in realization of MSR cash flows. Net loan servicing fees also included $13.1 million in fair value losses of MSRs, $1.0 million in related hedging gains, and $9.3 million of MSR recapture income from PFSI. 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 September 30, June 30, September 30 2020 2020 2019 (in thousands)From non-affiliates:Contractually specified^(1) $ 98,027 $ 101,823 $ 76,377

Other fees 18,660 11,887 6,994

Effect of MSRs:Carried at fair value-change infair valueRealization of cashflows (53,418 ) (59,199 ) (55,673 )

Other (13,055 ) (111,649 ) (157,928 )

(66,473 ) (170,848 ) (213,601 )

Gains (losses) on hedging 962 (50,650 ) 133,921 derivatives (65,511 ) (221,498 ) (79,680 )

51,176 (107,788 ) 3,691

From PFSI-MSR recapture income 9,251 5,128 1,468

Net loan servicing fees $ 60,427 $ (102,660 ) $ 5,159

^(1) Includes contractually specified servicing fees, net of guarantee fees. MSR and ESS valuation losses were primarily driven by expectations for increased prepayment activity in the future related to slightly lower mortgage interest rates. 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 $2.7 million, compared to net interest expense of $14.5 million in the prior quarter. Interest income totaled $33.5 million, up from $23.6 million in the prior quarter, driven by reduced amortization of purchase premiums on Agency MBS. Interest expense totaled $36.2 million, down from $38.1 million in the prior quarter, primarily driven by reduced financing expenses related to a smaller MBS portfolio.

Segment expenses were $18.8 million, up from $17.0 million in 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 pretax income of $86.9 million, down from a record $139.6 million in the prior quarter.

Through its correspondent production activities, PMT acquired $44.3 billion in UPB of loans originated by nonaffiliates, up 48 percent from the prior quarter. Of total correspondent acquisitions, conventional conforming and jumbo acquisitions from nonaffiliates totaled $27.4 billion, and government-insured or guaranteed acquisitions totaled $17.0 billion, compared to $18.9 billion and $11.0 billion, respectively, in the prior quarter. Interest rate lock commitments on conventional loans were a record $34.4 billion, up from $24.8 billion in the prior quarter.

Segment revenues were $150.5 million, down from the prior quarter and included net gain on loans acquired for sale of $102.4 million, other income of $38.6 million, which primarily consists of volume-based origination fees, and net interest income of $9.5 million. Net gain on loans acquired for sale in the quarter decreased by $67.4 million from the prior quarter, as margins returned to more normalized levels after peaking early in the second quarter. Interest income was $26.1 million, up from $16.0 million in the prior quarter, and interest expense was $16.5 million, up from $13.5 million in the prior quarter, driven by higher volumes.

Segment expenses were $63.6 million, up from $58.0 million in the prior quarter, driven by the increase in production volumes and slightly offset by a lower weighted average fulfillment fee. The weighted average fulfillment fee rate in the third quarter was 20 basis points, down 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 net investment income was $0.3 million, down from $1.2 million in the prior quarter.

Management fees were $8.5 million, up 3 percent from the prior quarter primarily driven by the increase in average shareholders' equity versus the prior quarter.

Other segment expenses were $5.1 million, down from $5.7 million in the prior quarter.

Taxes

PMT recorded income tax expense of $22.7 million related to income in its taxable REIT subsidiary, up from $3.4 million in the prior quarter in which tax expense was reduced by release of a valuation allowance.

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, November 5, 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, 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)

September 30, June 30, 2020 September 2020 30, 2019 (in thousands except share amounts)ASSETSCash $ 278,486 $ 346,007 $ 113,651

Short-term investments 81,624 273,592 74,895

Mortgage-backed securities at fair 2,404,766 2,612,986 2,325,010valueLoans acquired for sale at fair 4,024,494 2,179,962 3,947,368valueLoans at fair value 193,832 230,660 290,527

Excess servicing spread received 142,990 151,206 183,141from PennyMac Financial Services,Inc.Derivative and credit risk transfer 107,436 114,346 274,444strip assetsFirm commitment to purchase credit - - 54,734risk transfer securities at fairvalueReal estate acquired in settlement 35,697 43,559 79,201of loansDeposits securing credit risk 1,417,792 1,666,449 2,044,250transfer arrangementsMortgage servicing rights 1,388,403 1,189,605 1,162,714

Servicing advances 46,897 38,254 32,057

Due from PennyMac Financial 18,872 3,458 4,993Services, Inc.Other 313,778 233,635 157,624

Total assets $ 10,455,067 $ 9,083,719 $ 10,744,609

LIABILITIESAssets sold under agreements to $ 5,439,835 $ 3,981,761 $ 6,355,476repurchaseMortgage loan participation and 79,721 93,117 -sale agreementsExchangeable senior notes 196,058 195,333 249,269

Notes payable secured by credit 1,602,389 1,810,845 1,361,142risk transfer and mortgageservicing assetsAsset-backed financing of a 175,879 212,170 261,209variable interest entity at fairvalueInterest-only security payable at 12,940 14,981 24,729fair valueAssets sold to PennyMac Financial 86,958 90,101 107,678Services, Inc. under agreement torepurchaseDerivative and credit risk transfer 166,080 140,201 9,160strip liabilities at fair valueFirm commitment to purchase credit 148,794 191,193 -risk transfer securities at fairvalueAccounts payable and accrued 94,864 48,735 108,913liabilitiesDue to PennyMac Financial Services, 122,478 44,329 39,744Inc.Income taxes payable 33,164 15,451 -

Liability for losses under 14,641 10,225 7,678representations and warrantiesTotal liabilities 8,173,801 6,848,442 8,524,998

SHAREHOLDERS' EQUITYPreferred shares of beneficial 299,707 299,707 299,707interestCommon shares of beneficialinterest-authorized, 500,000,000common shares of $0.01 par value; 988 993 903issued and outstanding 98,789,406,99,275,258, and 90,345,127 commonshares, respectivelyAdditional paid-in capital 2,111,854 2,119,577 1,901,852

(Accumulated deficit) retained (131,283 ) (185,000 ) 17,149earningsTotal shareholders' equity 2,281,266 2,235,277 2,219,611

Total liabilities and shareholders' $ 10,455,067 $ 9,083,719 $ 10,744,609equityPENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Quarterly Periods EndedSeptember 30, 2020June 30, 2020September 30, 2019(in thousands, except per share amounts)Investment IncomeNet gain on investments$

19,597

$

488,934

$

45,789

Net loan servicing fees:From nonaffiliatesServicing fees125,938

118,838

84,839

Change in fair value of mortgage servicing rights(66,473

)

(170,848

)

(213,601

)

Hedging results962

(50,650

)

133,921

60,427

(102,660

)

5,159

Net gain on loans acquired for sale98,422

162,214

49,260

Loan origination fees38,547

25,208

25,470

Interest income60,623

40,812

87,801

Interest expense59,017

61,048

84,229

Net interest income (expense)1,606

(20,236

)

3,572

Results of real estate acquired in settlement of loans2,259

2,856

702

Other155

2,005

808

Net investment income221,013

558,321

130,760

ExpensesEarned by PennyMac Financial Services, Inc.:Loan fulfillment fees54,839

52,815

45,149

Loan servicing fees18,752

15,533

12,964

Management fees8,508

8,288

10,098

Loan origination7,234

4,468

4,328

Safekeeping1,075

1,905

1,633

Professional services1,554

1,492

1,430

Loan collection and liquidation1,082

864

1,551

Compensation1,039

1,200

1,644

Other4,733

3,693

3,830

Total expenses98,816

90,258

82,627

Income before provision for (benefit from) income taxes122,197

468,063

48,133

Provision for (benefit from) income taxes22,650

3,443

(21,867

)

Net income99,547

464,620

70,000

Dividends on preferred shares6,234

6,235

6,234

Net income attributable to common shareholders$

93,313

$

458,385

$

63,766

Earnings per shareBasic$

0.94

$

4.59

$

0.75

Diluted$

0.94

$

4.51

$

0.71

Weighted average shares outstandingBasic99,227

99,689

84,367

Diluted99,424

101,592

92,834

Dividends declared per common share$

0.40

$

0.40

$

0.47

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