PennyMac Mortgage Investment Trust Reports Fourth Quarter and Full-Year 2016 Results

PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income of $31.2 million, or $0.44 per diluted share, for the fourth quarter of 2016, on net investment income of $68.9 million. PMT previously announced a cash dividend for the fourth quarter of 2016 of $0.47 per common share of beneficial interest, which was declared on December 20, 2016, and paid on January 27, 2017.

Fourth Quarter 2016 Highlights

Financial results:

• Diluted earnings per common share of $0.44, down 10 percent from the prior quarter
• Net income of $31.2 million, down 12 percent from the prior quarter
• Net investment income of $68.9 million, down 33 percent from the prior quarter
• Book value per share of $20.26, up from $20.21 at September 30, 2016
• Return on average equity of 9 percent, down from 10 percent for the prior quarter1

Investment activities and correspondent production results:

• Continued investment in GSE credit risk transfer (CRT) and mortgage servicing rights (MSRs) resulting from PMT’s correspondent production business
  • CRT deliveries totaled $2.6 billion in UPB, which will result in approximately $92 million of new CRT investments once the aggregation period is complete, $24 million of which had been invested at quarter end
  • Added $101 million in new MSR investments
• Cash proceeds from the liquidation and paydown of distressed mortgage loans and real estate owned (REO) properties were $92 million, reflecting steady progress of resolution activities
• Correspondent production related to conventional conforming loans totaled $7.5 billion in unpaid principal balance (UPB), up 3 percent from the prior quarter; conventional conforming interest rate lock commitments (IRLCs) totaled $6.9 billion in UPB, down 20 percent from the third quarter

Notable activity after quarter end:

• Entered into an agreement to sell $89 million in UPB of performing loans from the distressed portfolio2

Full-Year 2016 Highlights

• Net income of $75.8 million, down 16 percent from the prior year
• Net investment income of $272.1 million, up 9 percent from the prior year
• Diluted earnings per common share of $1.08, down 7 percent from the prior year
• Return on average equity of 5 percent, down from 6 percent for the prior year1
• Repurchased approximately 7.4 million of PMT common shares during 2016 at a cost of $98.4 million
• Total mortgage assets reached $5.6 billion, up 9 percent from the prior year, with new investments in MSRs and credit risk transfer from PMT’s own correspondent production

“PMT’s fourth quarter earnings reflect contributions from its credit and interest-rate sensitive strategies as well as its correspondent production activities. Credit risk transfer investments and correspondent production delivered strong performance; however, the distressed loan portfolio underperformed expectations,” said Executive Chairman Stanford L. Kurland. “Returns on our net interest-rate sensitive strategies were primarily driven by gains on MSRs and ESS resulting from the significant rise in mortgage rates during the quarter. Correspondent production lock volumes and margins decreased from last quarter’s recent highs, pressured by the increase in mortgage rates and seasonality. This quarter’s results also included an income tax benefit primarily driven by the performance of interest rate hedges held in our taxable REIT subsidiary, which produced a loss offset by gains on other interest-rate sensitive assets.”

PMT reported pretax income of $13.9 million for the quarter ended December 31, 2016, compared to pretax income of $45.0 million in the third quarter.

The following table presents the contribution of PMT’s Investment Activities and Correspondent Production segments:

Investment Activities Segment

The Investment Activities segment generated pretax income of $2.1 million on revenues of $26.3 million in the fourth quarter, compared to pretax income of $13.6 million on revenues of $41.3 million in the third quarter. Net gain on investments in the fourth quarter included $18.9 million of gains and recapture income related to excess servicing spread (ESS); $10.4 million of gains on CRT investments; and $7.5 million of gains related to hedging derivatives. These gains were partially offset by net losses on mortgage backed securities (MBS) of $23.1 million; losses on distressed mortgage loans of $1.0 million; and $0.4 million of losses on mortgage loans held by a variable interest entity, net of the related asset-backed secured funding.

Net loan servicing fees were $7.8 million, down from $15.8 million in the third quarter. Net loan servicing fees included $37.1 million in servicing fees, reduced by $17.9 million of amortization and realization of MSR cash flows. Net loan servicing fees also included $48.6 million of impairment reversals and fair value gains related to MSRs, offset by $60.7 million of related hedging losses. Net loan servicing fees also included $0.7 million of MSR recapture income. PMT’s hedging activities are intended to manage its net exposure across all interest rate-sensitive strategies, which include MSRs, ESS and MBS.

MSR fair value gains, impairment reversals and ESS valuation gains in the fourth quarter resulted from expectations for lower future prepayment activity due to the sharp rise in mortgage rates during the quarter. ESS gains also included recapture income totaling $1.8 million payable to PMT for prepayment activity during the quarter. When prepayment of a loan underlying PMT’s ESS results from a refinancing by PennyMac Financial Services, Inc. (NYSE: PFSI), PMT generally benefits from recapture income.

Net interest income from PMT’s investments was $11.6 million in the fourth quarter, a 6 percent decrease from the prior quarter. Interest income totaled $41.1 million dollars, a 5 percent decrease from the third quarter. Interest income included $22.0 million of capitalized interest from loan modifications, which declined modestly from the third quarter due to a reduction in modification activity. Capitalized interest increases interest income and reduces loan valuation gains. Interest expense totaled $29.6 million in the fourth quarter, a 4 percent decrease from the prior quarter.

Other investment losses were $5.4 million, compared with a $1.1 million loss in the third quarter, driven by REO valuation losses and higher REO expenses due to a seasonal increase in real estate tax payments. At quarter end, PMT’s inventory of REO properties totaled $274.0 million, down from $288.4 million at September 30, 2016.

Segment expenses were $24.1 million, down from $27.6 million in the third quarter, driven by adjustments to estimates of liquidation expenses, partially offset by $1.3 million in servicing activity fees related to a sale of performing loans from the distressed portfolio.

Distressed Mortgage Investments

PMT’s distressed mortgage loan portfolio generated realized and unrealized losses totaling $1.0 million, compared with realized and unrealized losses of $3.4 million in the third quarter. In the fourth quarter, fair value losses on the performing loans in the distressed portfolio were $0.6 million while fair value losses on nonperforming loans were $1.5 million.

The schedule below details the realized and unrealized (losses) gains on distressed mortgage loans:

Income contribution from the distressed portfolio declined modestly from the third quarter and underperformed PMT’s expectations. The underperformance was driven by increased recidivism of previously performing loans and reduced expectations for future loan performance and recoveries. These factors were partially offset by actual home prices which performed better than prior forecasts.

Mortgage Servicing Rights

PMT’s MSR portfolio, which is subserviced by PFSI, grew to $56.3 billion in UPB compared with $50.9 billion at September 30, 2016. Servicing fees and MSR recapture revenue of $37.8 million was reduced by $17.9 million of amortization. Impairment reversals and fair value gains totaled $48.6 million, which were offset by $60.7 million of losses on hedging derivatives.

The following schedule details net loan servicing fees:

Correspondent Production Segment

PMT acquires newly originated mortgage loans from third-party correspondent sellers and typically sells or securitizes the loans, resulting in current-period income and ongoing investments in MSRs and GSE credit risk transfers related to a portion of its production. For the fourth quarter, PMT’s Correspondent Production segment generated pretax income of $11.7 million, versus $31.4 million in the third quarter.

Through its correspondent production activities, PMT acquired $20.0 billion in UPB of loans and issued IRLCs totaling $19.2 billion, compared with $18.9 billion and $21.6 billion, respectively, in the third quarter. Of the correspondent acquisitions, conventional conforming and jumbo acquisitions totaled $7.5 billion, and government-insured or guaranteed acquisitions totaled $12.5 billion, compared with $7.3 billion and $11.7 billion, respectively, in the third quarter.

Segment revenues were $42.7 million, a 31 percent decrease from the third quarter, driven by a decline in net gain on mortgage loans. Net gain on mortgage loans acquired for sale in the quarter declined 47 percent from the third quarter, driven by a 20 percent quarter-over-quarter decline in conventional lock volume and lower margins. Third quarter results also included a $5.1 million benefit in provision for representations and warranties due to a change in estimate.

The following schedule details the net gain on mortgage loans acquired for sale:

Segment expenses were $30.9 million, up slightly from $30.7 million in the third quarter, primarily due to the increase in acquisition volumes. The weighted average fulfillment fee rate in the fourth quarter was 36 basis points, down from 38 basis points in the prior quarter.3

Management Fees and Taxes

Management fees were $5.1 million, up slightly from $5.0 million in the third quarter. There were no incentive fees due for the fourth quarter.

PMT recorded an income tax benefit of $17.3 million in the fourth quarter, versus a provision for income taxes of $9.6 million in the third quarter. The income tax benefit was primarily driven by the performance of interest rate hedges held in the taxable REIT subsidiary, which produced a loss offset by gains on other interest-rate sensitive assets.

Mr. Kurland concluded, “While earnings from PMT’s investments in the fourth quarter were lower, largely driven by underperformance of the distressed loan portfolio, the cash flows from PMT’s existing investments remained strong. As we enter what appears to be a period of higher interest rates, we expect that the mortgage market will normalize from the elevated margins and volumes seen in 2016. However, robust macroeconomic trends bode well for home purchase demand and PMT’s purchase-money oriented correspondent production. In addition, higher rates and a vibrant economy are expected to positively impact the performance of the company’s CRT, MSRs, ESS and distressed loan investments.”

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 2, 2017.

About PennyMac Mortgage Investment Trust

PennyMac Mortgage Investment Trust is a mortgage real estate investment trust (REIT) that invests primarily in residential mortgage loans and mortgage-related assets. PennyMac Mortgage Investment Trust trades on the New York Stock Exchange under the symbol “PMT” and is externally managed by PNMAC Capital Management, LLC, an indirect subsidiary of PennyMac Financial Services, Inc. Additional information about PennyMac Mortgage Investment Trust is available at www.PennyMac-REIT.com.

1 Return on average equity is calculated based on annualized quarterly net income as a percentage of monthly average shareholders’ equity during the period.
2 This transaction is subject to continuing due diligence and customary closing conditions. There can be no assurance regarding the size of the transaction or that the transaction will be completed at all.
3 Fulfillment fees are based on the unpaid principal balance of acquired mortgage loans and monthly funding volumes. Effective September 12, 2016, the contractual fulfillment fee is 0.35% for conventional loans sold to the Agencies, and 0.85% for all other loans. Previously, the fulfillment fee was 0.50% of the unpaid principal balance of conventional and jumbo loans, subject to reductions at specified volumes and discretionary reductions by PFSI.

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 distressed loans or correspondent 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; 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 satisfy complex rules in order to qualify as a REIT for U.S. federal income tax purposes; and our ability to make distributions to our shareholders in the future. 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.

(1) Mortgage loan servicing fees expense includes both special servicing for PMT’s distressed portfolio and subservicing for its mortgage servicing rights

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