PennyMac Mortgage Investment Trust Reports Fourth Quarter and Full-Year 2018 Results

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income
attributable to common shareholders of $35.4 million, or $0.55 per
common share on a diluted basis for the fourth quarter of 2018, on net
investment income of $83.9 million. PMT previously announced a cash
dividend for the fourth quarter of 2018 of $0.47 per common share of
beneficial interest, which was declared on December 21, 2018, and paid
on January 28, 2019.

Fourth Quarter 2018 Highlights

Financial results:

  • Net income attributable to common shareholders of $35.4 million, down
    from $40.3 million in the prior quarter

    • Results reflect solid contributions from Government-sponsored
      enterprise (GSE) credit risk transfer (CRT) investments and
      Interest Rate Sensitive strategies
    • Fair value declines in CRT and mortgage servicing right (MSR)
      investments held in PMT’s taxable subsidiary drove $15.4 million
      benefit for income tax expense
  • Diluted earnings per common share of $0.55, down 11 percent from the
    prior quarter
  • Annualized return on average common equity of 11 percent, down from 13
    percent in the prior quarter1
  • Book value per common share of $20.61 at December 31, 2018, up from
    $20.48 at September 30, 2018

Investment and operating highlights:

  • Continued investment in GSE CRT and MSRs resulting from PMT’s mortgage
    acquisitions

    • Correspondent production from nonaffiliates related to
      conventional conforming and jumbo loans totaled $9.1 billion in
      unpaid principal balance (UPB), up 21 percent from the prior
      quarter
    • Loan acquisitions from PennyMac Financial Services, Inc. (NYSE:
      PFSI) totaled $0.9 billion in UPB, down 2 percent from the prior
      quarter
    • Loans eligible for CRT investments totaled $8.1 billion, resulting
      in a firm commitment to purchase $310 million of CRT securities
    • New MSR investments totaled $128 million
  • Completed $267 million in UPB of previously announced distressed loan
    sales

Full-Year 2018 Highlights

Financial results:

  • Net income attributable to common shareholders of $127.9 million, up
    25 percent from the prior year
  • Diluted earnings per common share of $1.99, up 34 percent from the
    prior year
  • Net investment income of $351.1 million, up 10 percent from the prior
    year
  • Return on average common equity of 10 percent, up from 8 percent in
    the prior year1
  • PMT’s equity allocation to CRT, MSRs and excess servicing spread (ESS)
    grew to 70 percent of total equity at December 31, 2018, from 66
    percent at the end of 2017
  • Completed distressed loan sales representing $710 million in UPB;
    equity allocated to distressed loan investments declined to 8 percent
    of total equity at December 31, 2018, from 22 percent at the end of
    2017
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.

“Our results reflect solid performance in a volatile market environment
during the fourth quarter,” said President and CEO David Spector. “PMT’s
unique credit risk transfer investments, while somewhat impacted by
credit spread widening, continued to deliver solid results and the
returns on our Interest Rate Sensitive strategies reflect our
disciplined focus on hedging through this period. Our correspondent
production activities delivered strong volume growth as a result of our
unique execution capabilities, driving continued growth in our CRT and
MSR investment strategies.”

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 December 31, 2018

Correspondent

production

 

Credit

sensitive

strategies

 

Interest rate

sensitive

strategies

  Corporate   Consolidated
(in thousands)
Net gain (loss) on investments:
Mortgage loans at fair value $ $ 2,505 $ $ $ 2,505

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

445 445
Mortgage-backed securities (120 ) 39,146 39,026
CRT investments 9,814 9,814
Hedging derivatives (5,181 ) (5,181 )
Excess servicing spread investments           107         107  
12,199 34,517 46,716
Net gain on mortgage loans acquired for sale 3,635 13,971 17,606
Net mortgage loan servicing fees (7,548 ) (7,548 )
Net interest income (expense)
Interest income 23,611 10,152 32,944 417 67,124
Interest expense   (11,315 )   (12,624 )   (29,742 )       (53,681 )
12,296 (2,472 ) 3,202 417 13,443
Other income (loss)   15,038     (1,353 )           13,685  
30,969 22,345 30,171 417 83,902
Expenses:

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

28,591 2,032 9,492 40,115
Management fees payable to PennyMac Financial Services, Inc. 6,559 6,559
Other   3,006     2,382     531     5,107     11,026  
  31,597     4,414     10,023     11,666     57,700  
Pretax income (loss) $ (628 ) $ 17,931   $ 20,148   $ (11,249 ) $ 26,202  

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 $17.9 million on revenues of $22.3 million,
compared to pretax income of $33.1 million on revenues of $40.0 million
in the prior quarter.

During the quarter, PMT continued to deliver to Fannie Mae loans
eligible for CRT investments under a new REMIC structure. The Company
also settled its fourth CRT transaction with Fannie Mae in the quarter.

The Credit Sensitive Strategies segment recorded net gain on mortgage
loans acquired for sale of $14.0 million, up from $12.3 million in the
prior quarter, which represents the recognition of the fair value of
firm commitments to acquire CRT securities under the REMIC structure.
The quarter-over-quarter increase in net gain on mortgage loans acquired
for sale was driven by the higher volume of loans delivered into CRT
investments resulting from increased loan production activity.

Net gain on investments was $12.2 million, down 54 percent from the
prior quarter.

Net gain on CRT investments was $9.8 million, compared to $29.5 million
in the prior quarter. Net gain on CRT investments included $19.6 million
in valuation-related losses, driven by declines in fair value from
credit spread widening and increased market volatility. Net gain on CRT
investments also included $30.1 million in realized gains and carry on
CRT investments, up from $27.0 million in the prior quarter, as well as
losses recognized during the quarter of $0.7 million, up from $0.4
million in the prior quarter, reflecting portfolio seasoning and in line
with expectations.

PMT’s distressed mortgage loan portfolio generated realized and
unrealized gains totaling $2.5 million, compared to a loss of $3.1
million in the prior quarter. Fair value gains on performing loans in
the distressed portfolio were $7.7 million, while fair value losses on
nonperforming loans were $4.0 million.

Net interest expense for the segment totaled $2.5 million, compared to
$0.1 million in the prior quarter. Interest income totaled
$10.2 million, a 17 percent increase from the prior quarter, driven by
an increase in deposits securing CRT agreements resulting from the
settlement of our fourth CRT transaction during the quarter. Interest
expense totaled $12.7 million, up from $8.8 million in the prior
quarter, resulting from the growth in CRT investments subject to
financing arrangements.

Other investment losses were $1.4 million, compared to a gain of
$1.5 million in the prior quarter, driven by costs related to ongoing
reduction of the real estate acquired in the settlement of loans (REO)
portfolio. At quarter end, PMT’s inventory of REO properties totaled
$85.7 million, down from $95.6 million at September 30, 2018.

Segment expenses were $4.4 million, down 36 percent from the prior
quarter driven by servicing advance recoveries and lower professional
services expense.

Interest Rate Sensitive Strategies Segment

The Interest Rate Sensitive Strategies segment includes results from
investments in MSRs, ESS, Agency mortgage-backed securities (MBS),
non-Agency senior MBS and interest rate hedges. Pretax income for the
segment was $20.1 million on revenues of $30.2 million, compared to
pretax income of $24.1 million on revenues of $33.2 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 increasing interest rates, MSRs and ESS typically increase
in fair value whereas Agency MBS typically decrease 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 $34.5 million, primarily
consisting of $39.1 million of gains on MBS, partially offset by a $5.2
million loss in the value of hedging derivatives.

Net interest income for the segment was $3.2 million compared to $5.5
million in the prior quarter. Interest income totaled $32.9 million, up
from $30.6 million in the prior quarter primarily driven by growth in
the MBS portfolio. Interest expense totaled $29.7 million, up from
$25.1 million in the prior quarter, driven by increased financing costs
from higher short-term interest rates and a larger MSR asset.

Net mortgage loan servicing fees resulted in a loss of $7.5 million,
compared to a gain of $44.4 million in the prior quarter. Net mortgage
loan servicing fees included $57.4 million in servicing fees and $1.4
million in ancillary and other fees, reduced by $34.9 million in
realization of MSR cash flows. Net mortgage loan servicing fees also
included a $40.9 million decrease in the fair value of MSRs,
$8.8 million of related hedging gains and $0.6 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
December 31, 2018   September 30, 2018   December 31, 2017
(in thousands)
From non-affiliates:
Servicing fees(1) $ 57,400 $ 49,864 $ 45,553
Ancillary and other fees 1,388 3,111 1,877
Effect of MSRs:
Carried at fair value—change in fair value
Realization of cashflows (34,863 ) (30,053 ) (2,806 )
Other   (40,927 )   33,004     (959 )
(75,790 ) 2,951 (3,765 )
(Loss) gain on sale 660
Carried at lower of amortized cost or fair value:
Amortization (22,609 )
Additions to impairment valuation allowance (1,589 )
Gains (losses) on hedging derivatives   8,830     (12,093 )   (782 )
  (66,960 )   (9,142 )   (28,085 )
(8,172 ) 43,833 19,345
From PFSI—MSR recapture income   624     561     570  
Net mortgage loan servicing fees $ (7,548 ) $ 44,394   $ 19,915  
(1) Includes contractually specified servicing 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, and
prospectively, the Company accounts for all MSRs at fair value.

MSR valuation losses were primarily driven by a decrease in mortgage
rates at quarter end, resulting in expectations for higher prepayment
activity in the future. ESS investments also declined in value from a
decrease in mortgage rates; however, the valuation losses were more than
offset by higher 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.

Segment expenses were $10.0 million, a 10 percent increase from the
prior quarter, primarily driven by higher servicing expenses on a
growing MSR portfolio.

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 a pretax loss of $0.6 million, compared to a profit of
$6.0 million in the prior quarter.

Through its correspondent production activities, PMT acquired
$18.1 billion in UPB of loans and issued interest rate lock commitments
totaling $19.1 billion in the fourth quarter, compared to $16.6 billion
and $17.9 billion, respectively, in the third quarter. Of the
correspondent acquisitions, conventional conforming and jumbo
acquisitions from nonaffiliates totaled $9.1 billion and
government-insured or guaranteed acquisitions totaled $8.9 billion,
compared to $7.5 billion and $9.0 billion, respectively, in the prior
quarter.

Segment revenues were $31.0 million, an 11 percent decrease from the
prior quarter and included a net gain on mortgage loans of $3.6 million,
other income of $15.0 million, which primarily consists of volume-based
origination fees, and net interest income of $12.3 million. Net gain on
mortgage loans acquired for sale in the quarter decreased by
$8.9 million from the prior quarter, driven by heightened competition
for conventional loans during the quarter. Net interest income increased
$2.5 million from the prior quarter, primarily driven by production
volume growth and the corresponding recognition of incentives the
Company is currently entitled to receive under one of its master
repurchase agreements to finance mortgage loans that satisfy certain
consumer relief characteristics. These incentives totaled $8.7 million,
up from $5.0 million in the third quarter. The Company expects that it
will cease to accrue incentives under this repurchase agreement
beginning in the second quarter of 2019. While there can be no
assurance, the Company expects that the loss of any such incentives
could be partially offset by an improvement in pricing margins.

Segment expenses were $31.6 million, up 10 percent from the prior
quarter from increased production activity, partially offset by a
reduction in the weighted average fulfillment fee during the quarter.
The weighted average fulfillment fee rate in the fourth quarter was
32 basis points, down from 35 basis points in the prior quarter,
reflecting discretionary reductions made by PFSI to facilitate
successful loan acquisitions by PMT.

Corporate Segment

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

Segment revenues were $417,000, down from $611,000 in the prior quarter.

Management fees were $6.6 million, up 1 percent from the prior quarter
primarily driven by a 10 percent increase in incentive fees paid to PFSI
in the fourth quarter based on PMT’s profitability.

Other segment expenses were $5.1 million, down from $5.6 million in the
prior quarter.

Taxes

PMT recorded an income tax benefit of $15.4 million compared to a
$5.1 million expense in the prior quarter, resulting from net losses
driven by fair value declines in PMT’s taxable subsidiary.

Executive Chairman Stanford L. Kurland concluded, “PMT’s partnership
with PFSI and exclusive access to unique investments in GSE CRT and MSRs
from its own conventional correspondent production have delivered strong
results, placing PMT among the top performing residential mortgage REIT
stocks in 2018. We remain focused on prudently growing PMT’s core
investments in CRT and MSRs while continuing to seek attractive new
opportunities in the dynamic U.S. mortgage market. The recent launch of
HELOC and prime non-QM loan products by our manager and service
provider, PennyMac Financial, is expected to leverage PMT’s ability to
securitize and retain credit risk investments from securitizations while
further diversifying its investment portfolio.”

Management’s slide presentation will be available in the Investor
Relations section of the Company’s website at www.pennymac-REIT.com
beginning at 1:30 p.m. (Pacific Standard Time) on Thursday, February 7,
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. (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)
 
  December 31, 2018   September 30, 2018   December 31, 2017
(in thousands except share amounts)
ASSETS
Cash $ 59,845 $ 88,929 $ 77,647
Short-term investments 74,850 26,736 18,398
Mortgage-backed securities at fair value 2,610,422 2,126,507 989,461
Mortgage loans acquired for sale at fair value 1,643,957 1,949,432 1,269,515
Mortgage loans at fair value 408,305 633,168 1,089,473
Excess servicing spread purchased from PennyMac Financial Services,
Inc.
216,110 223,275 236,534
Firm commitment to purchase credit risk transfer security at fair
value
37,994 18,749
Derivative assets 167,165 143,577 113,881
Real estate acquired in settlement of loans 85,681 95,605 162,865
Real estate held for investment 43,110 45,971 44,224
Mortgage servicing rights 1,162,369 1,109,741 844,781
Servicing advances 67,666 48,056 77,158
Deposits securing credit risk transfer agreements 1,146,501 662,624 588,867
Due from PennyMac Financial Services, Inc. 4,077 2,351 4,154
Other assets   85,309     92,857     87,975  
Total assets $ 7,813,361   $ 7,267,578   $ 5,604,933  
LIABILITIES
Assets sold under agreements to repurchase $ 4,777,027 $ 4,394,500 $ 3,180,886
Mortgage loan participation and sale agreements 178,639 31,578 44,488
Notes payable 445,573 445,318
Asset-backed financing of a variable interest entity at fair value 276,499 278,113 307,419
Exchangeable senior notes 248,350 248,053 247,186
Assets sold to PennyMac Financial Services, Inc. under agreement to
repurchase
131,025 133,128 144,128
Interest-only security payable at fair value 36,011 8,821 7,070
Derivative liabilities 5,914 11,880 1,306
Accounts payable and accrued liabilities 70,687 70,362 64,751
Due to PennyMac Financial Services, Inc. 33,464 27,467 27,119
Income taxes payable 36,526 52,382 27,317
Liability for losses under representations and warranties   7,514     7,413     8,678  
Total liabilities   6,247,229     5,709,015     4,060,348  
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest 299,707 299,707 299,707

Common shares of beneficial interest—authorized, 500,000,000
common shares of $0.01 par value; issued and outstanding
60,951,444, 60,951,444, and 61,334,087 common shares, respectively

610 610 613
Additional paid-in capital 1,285,533 1,284,537 1,290,931
Accumulated deficit   (19,718 )   (26,291 )   (46,666 )
Total shareholders’ equity   1,566,132     1,558,563     1,544,585  
Total liabilities and shareholders’ equity $ 7,813,361   $ 7,267,578   $ 5,604,933  

Contacts

Media
Stephen Hagey
(805) 530-5817

Investors
Christopher Oltmann
(818) 224-7028

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