PMT PennyMac Mortgage Investment Trust

PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income attributable to common shareholders of $26.4 million, or $0.38 per common share on a diluted basis, for the second quarter of 2017, on net investment income of $84.0 million. PMT previously announced a cash dividend for the second quarter of 2017 of $0.47 per common share of beneficial interest, which was declared on June 27, 2017 and paid on July 27, 2017.

Second Quarter 2017 Highlights

Financial results:

• Diluted earnings per common share of $0.38, down 5 percent from the prior quarter
• Net income attributable to common shareholders of $26.4 million, down 6 percent from the prior quarter
• Net investment income of $84.0 million, up 30 percent from the prior quarter
• Book value per common share of $20.04, down from $20.14 at March 31, 2017
• Return on average common equity of 8 percent, essentially unchanged from 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
  • Correspondent production related to conventional conforming loans totaled $5.9 billion in UPB, up 28 percent from the prior quarter
  • CRT deliveries totaled $3.8 billion in unpaid principal balance (UPB), which will result in approximately $132 million of new CRT investments once the aggregation period is complete
  • Added $66 million in new MSR investments
• Focus on liquidation and sales of the remaining distressed mortgage loan portfolio; successfully reduced PMT's equity allocation for distressed mortgage loans to 31% of total equity, down from 50 percent a year ago2
  • Cash proceeds from the liquidation and pay down of distressed mortgage loans and real estate acquired upon settlement of loans (REO) were $71 million
  • Entered into an agreement to sell $149 million in UPB of performing loans from the distressed portfolio3
  • Assessing opportunities to access the market for bulk sales of performing and nonperforming loans from the distressed loan portfolio

Notable activity after quarter end

• Issued 7.8 million preferred shares for gross proceeds of $195 million4

1 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.2 Management’s internal allocation of equity. Amounts as of quarter end.3 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.4 8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable preferred shares. Includes 800,000 shares from the exercise of the underwriters’ over-allotment option.

“PMT continues to make solid progress in growing its credit risk transfer and mortgage servicing rights investments and in liquidating its distressed loan investments,” said President and CEO David Spector. “Our second quarter results were driven by strong contributions from our credit risk transfer investments and from correspondent production, where we experienced significant growth in volumes. The market volatility in interest rates, which declined overall during the quarter, contributed to challenges in managing our interest rate sensitive investments which include MSRs and ESS. Our strategy is to continue transitioning PMT’s assets to correspondent-related investments such as CRT and MSRs and to assess opportunities to sell performing and non-performing loans from our distressed portfolio.”

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, 2017

Credit sensitive strategies

 

Interest rate sensitive strategies

 

Correspondent production

  Corporate   Consolidated (in thousands) Net gain on mortgage loans acquired for sale $ 149 $ - $ 17,143 $ - $ 17,292 Net gain (loss) on investments Distressed mortgage loans at fair value 1,030 - - - 1,030 Mortgage loans held by variable interest entity net of

asset-backed secured financing

- 456 - - 456 Mortgage-backed securities 257 3,770 - - 4,027 CRT Agreements 32,853 - - - 32,853 Hedging derivatives - (4,889 ) - - (4,889 ) Excess servicing spread investments   -     (5,885 )   -     -     (5,885 ) 34,140 (6,548 ) - - 27,592 Net mortgage loan servicing fees 29 15,668 - - 15,697 Net interest income Interest income 20,739 18,672 12,820 155 52,386 Interest expense   (13,809 )   (15,655 )   (8,962 )   -     (38,426 ) 6,930 3,017 3,858 155 13,960 Other (loss) income   (1,079 )   -     10,497     -     9,418     40,169     12,137     31,498     155     83,959   Expenses: Mortgage loan fulfillment and servicing fees

payable to PennyMac Financial Services, Inc.

3,522 6,576 21,108 - 31,206 Management fees payable to PennyMac Financial Services, Inc. - - - 5,638 5,638 Other   6,197     145     2,302     6,645     15,289     9,719     6,721     23,410     12,283     52,133   Pretax income (loss)   30,450     5,416     8,088     (12,128 )   31,826  

Credit Sensitive Strategies Segment

The Credit Sensitive Strategies segment includes results from distressed mortgage loans, CRT, non-Agency subordinated bonds and commercial real estate investments. Pretax income for the segment was $30.4 million on revenues of $40.2 million, compared with pretax income of $19.4 million on revenues of $25.8 million in the prior quarter.

Net gain on investments was $34.1 million, an increase of 55 percent from $22.0 million in the prior quarter.

PMT’s distressed mortgage loan portfolio generated realized and unrealized gains totaling $1.0 million, compared with realized and unrealized gains of $3.2 million in the prior quarter. Fair value gains on the performing loans in the distressed portfolio were $15.5 million while fair value losses on nonperforming loans were $15.8 million.

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

Quarter ended June 30, 2017   March 31, 2017   June 30, 2016 (in thousands) Valuation changes: Performing loans $ 15,466 $ 5,970 $ (8,356 ) Nonperforming loans   (15,750 )   (3,169 )   (5,919 ) (284 ) 2,801 (14,275 ) Gain on payoffs 1,348 415 1,208 Gain (loss) on sale   (34 )   -     (396 ) $ 1,030   $ 3,216   $ (13,463 )

The performing loan portfolio benefitted from a strong market for portfolios with similar attributes. The nonperforming loan portfolio was adversely impacted by home price indications that were below prior forecasts and increased uncertainty regarding the realization of cash flows on the remaining population of loans.

Net gain on CRT investments was $32.9 million compared with a gain of $18.6 million in the prior quarter. These gains resulted from higher income on a larger investment position and market-driven value changes related to tight credit spreads. At quarter end, PMT’s deposits in CRT totaled $503 million, compared with $464 million at March 31, 2017.

Net interest income for the segment totaled $6.9 million, up 15 percent from the prior quarter. Interest income totaled $20.7 million, a 2 percent increase from the prior quarter, which included $10.8 million of capitalized interest from loan modifications, up from $9.9 million in the prior quarter. Capitalized interest increases interest income and reduces loan valuation gains. Interest expense totaled $13.8 million, down 3 percent from the prior quarter driven by a smaller distressed mortgage loan portfolio.

Other investment losses were $1.1 million, compared with a $2.3 million loss in the prior quarter. At quarter end, PMT’s inventory of REO properties totaled $207.0 million, down from $224.8 million at March 31, 2017.

Segment expenses were $9.7 million, a 52 percent increase from $6.4 million in the prior quarter. Other expenses in the first quarter included gains realized on previously sold REO.

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. The segment includes investments that have offsetting exposures to changes in interest rates. Interest Rate Sensitive Strategies generated pretax income of $5.4 million on revenues of $12.1 million, compared with pretax income of $0.7 million on revenues of $7.6 million in the prior quarter.

The results in the Interest Rate Sensitive Strategies segment consist of net gain/loss on investments, net interest income and net loan servicing fees, as well as the associated expenses.

The net loss on investments was $6.5 million, consisting of $3.8 million of gains on MBS and $0.5 million of gains on mortgage loans held by a variable interest entity, net of the related asset-backed secured funding; $4.9 million of losses on hedging derivatives; and $5.9 million of net losses on ESS.

Net interest income for the segment was $3.0 million, compared to $1.1 million in the prior quarter. Interest income totaled $18.7 million, a 16 percent increase from the prior quarter, driven by higher placement fees on MSR-related escrow deposits. Interest expense totaled $15.7 million, a 4 percent increase from the prior quarter due to higher short-term borrowing costs.

Net mortgage loan servicing fees were $15.7 million, up from $11.7 million in the prior quarter. Net loan servicing fees included $41.1 million in servicing fees, reduced by $19.5 million of amortization and realization of MSR cash flows. Net loan servicing fees also included a $4.1 million impairment provision for MSRs carried at the lower of amortized cost or fair value, a $4.4 million valuation loss on MSRs carried at fair value and $2.4 million of related hedging gains, and $0.2 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.

The following schedule details net loan servicing fees:

  Quarter ended June 30, 2017   March 30, 2017   June 30, 2016 (in thousands) From nonaffiliates Servicing fees (1) $ 41,084 $ 38,505 $ 31,578 Effect of MSRs: Carried at lower of amortized cost or fair value Amortization and realization of cashflows (19,523 ) (17,858 ) (15,531 ) Reversal of (provision for) impairment (4,089 ) 1,504 (23,170 ) Carried at fair value - change in fair value (4,400 ) (1,993 ) (4,941 ) Gains (Losses) on hedging derivatives   2,391     (8,698 )   27,433   (25,621 ) (27,045 ) (16,198 ) From PennyMac Financial Services, Inc. MSR recapture fee receivable from PFSI   234     292     311   Net mortgage loan servicing fees $ 15,697   $ 11,752   $ 15,691  

PMT’s MSR portfolio, which is subserviced by a subsidiary of PennyMac Financial Services, Inc. (NYSE: PFSI), grew to $63.3 billion in UPB compared with $59.6 billion at March 31, 2017.

MSR and ESS valuation losses primarily resulted from higher projected prepayment activity due to a decline in mortgage rates during the quarter. ESS valuation losses are net of recapture income totaling $1.4 million from PFSI for prepayment activity during the quarter. When prepayment of a loan underlying PMT’s ESS results from a refinancing by PFSI, PMT generally benefits from recapture income.

Segment expenses were $6.7 million, a 1 percent decrease from $6.8 million in the prior quarter.

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 CRT related to a portion of its production. PMT’s Correspondent Production segment generated pretax income of $8.1 million versus $12.5 million in the prior quarter.

Through its correspondent production activities, PMT acquired $16.3 billion in UPB of loans and issued IRLCs totaling $18.2 billion in the second quarter, compared with $13.9 billion and $14.5 billion, respectively, in the prior quarter. Of the correspondent acquisitions, conventional conforming acquisitions totaled $5.9 billion, and government-insured or guaranteed acquisitions totaled $10.4 billion, compared with $4.6 billion and $9.3 billion, respectively, in the prior quarter.

Segment revenues were $31.5 million, a 2 percent increase from the prior quarter. Net gain on mortgage loans acquired for sale in the quarter declined 10 percent from the prior quarter, driven by a 35 percent quarter-over-quarter increase in conventional lock volumes, partially offset by tighter margins reflecting highly competitive market conditions. Additionally, net gain on mortgage loans acquired for sale in the prior quarter included a $4.6 million benefit from a reduction in the estimate of the liability for representations and warranties as compared to a reduction of $1.3 million in the second quarter.

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

Quarter ended June 30, 2017   March 31, 2017   June 30, 2016 (in thousands) Net gain on mortgage loans acquired for sale:   Receipt of MSRs in loan sale transactions $ 65,834 $ 58,688 $ 60,109 Provision for losses relating to representations and warranties

provided in mortgage loan sales:

Pursuant to mortgage loans sales (607 ) (673 ) (650 ) Reduction in liability due to change in estimate 1,305 4,576 — Cash investment (1) (43,204 ) (37,248 ) (47,579 ) Fair value changes of pipeline, inventory and hedges   (6,036 )   (6,318 )     12,346   $ 17,292   $ 19,025     $ 24,226  

(1) Includes cash hedge expense

Segment expenses were $23.4 million, up 28 percent from $18.3 million in the prior quarter, driven by an increase in volume-based fulfillment fee expense. The weighted average fulfillment fee rate in the second quarter was 36 basis points, unchanged from the prior quarter.

Corporate Segment

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

Segment revenues were $155,000, a decrease from $326,000 in the prior quarter.

Management fees, which include incentive fees, were $5.6 million, up 13 percent compared with $5.0 million in the prior quarter. Incentive fees were $304,000 in the second quarter, compared to none in the prior quarter.

Other segment expenses were $6.6 million compared with $5.4 million in the prior quarter, driven by a 19 percent increase in professional services expense, primarily related to financing and distressed asset transaction activities.

Taxes

PMT recorded an income tax expense of $3.0 million compared with a $6.1 million benefit in the prior quarter.

“PMT continues to focus on CRT and MSR investments that result from our correspondent production business,” concluded Executive Chairman Stanford L. Kurland. “Fannie Mae and Freddie Mac recently announced structural improvements to their credit risk transfer programs which we expect will benefit PMT’s future CRT investments. We are pleased with our capital progress, highlighted by our successful raise of new preferred equity after quarter-end. The ability to finance mortgage servicing rights has also improved markedly with attractive transactions recently in the market. These are exciting developments that we believe will enhance the attractiveness of PMT’s core strategies and earnings potential going forward."

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 Daylight Time) on Thursday, August 3, 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.

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.

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

    June 30, 2017 March 31, 2017 June 30, 2016 (in thousands except share information) ASSETS Cash $ 69,893 $ 120,049 $ 95,705 Short-term investments 77,366 19,883 16,877 Mortgage-backed securities at fair value 1,065,540 1,089,610 531,612 Mortgage loans acquired for sale at fair value 1,318,603 1,278,441 1,461,029 Mortgage loans at fair value 1,527,812 1,583,356 2,035,997 Excess servicing spread purchased from PennyMac Financial Services, Inc. 261,796 277,484 294,551 Derivative assets 73,875 41,213 35,007 Real estate acquired in settlement of loans 207,034 224,831 299,458 Real estate held for investment 40,316 35,537 20,662 Mortgage servicing rights 734,800 696,970 471,458 Servicing advances 67,172 70,332 74,090 Deposits securing credit risk transfer agreements 503,108 463,836 338,812 Due from PennyMac Financial Services, Inc. 5,013 10,916 12,375 Other assets   57,916     90,488     79,929   Total assets $ 6,010,244   $ 6,002,946   $ 5,767,562   LIABILITIES Assets sold under agreements to repurchase $ 3,497,999 $ 3,500,190 $ 3,275,691 Mortgage loan participation and sale agreements 38,345 72,975 96,335 Notes payable 159,980 100,088 163,976 Asset-backed financing of a variable interest entity at fair value 329,459 340,365 325,939 Exchangeable senior notes 246,629 246,357 245,564 Assets sold to PennyMac Financial Services, Inc. under agreement to repurchase 150,000 150,000 150,000 Interest-only security payable at fair value 6,577 4,601 1,663 Derivative liabilities 8,856 5,352 3,894 Accounts payable and accrued liabilities 74,253 80,219 75,587 Due to PennyMac Financial Services, Inc. 17,725 20,756 22,054 Income taxes payable 14,892 12,006 26,774 Liability for losses under representations and warranties   10,697     11,447     19,258   Total liabilities   4,555,412     4,544,356     4,406,735   SHAREHOLDERS' EQUITY 8.125% Series A fixed-to floating rate redeemable cumulative preferred shares of

beneficial interest, $0.01 par value per share, 4,600,000 shares issued and outstanding,

$115,000,000 aggregate liquidation preference

46 46 - Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par

value; issued and outstanding 66,842,495, 66,711,052, and 67,723,293 common shares, respectively

668 667 677 Additional paid-in capital 1,489,116 1,487,517 1,389,962 Accumulated deficit   (34,998 )   (29,640 )   (29,812 ) Total shareholders' equity   1,454,832     1,458,590     1,360,827   Total liabilities and shareholders' equity $ 6,010,244   $ 6,002,946   $ 5,767,562    

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

    Quarter ended June 30, 2017   March 31, 2017 June 30, 2016 (in thousands, except per share amounts) Net investment income Net gain on mortgage loans acquired for sale From nonaffiliates 14,088 16,624 22,095 From PennyMac Financial Services, Inc.   3,204     2,401     2,131   17,292 19,025 24,226 Mortgage loan origination fees 10,467 8,290 8,519 Net gain (loss) on investments: From nonaffiliates 33,477 18,091 337 From PennyMac Financial Services, Inc.   (5,885 )   (1,370 )   (15,824 ) 27,592 16,721 (15,487 ) Net mortgage loan servicing fees From nonaffiliates 15,463 11,460 15,380 From PennyMac Financial Services, Inc.   234     292     311   15,697 11,752 15,691 Interest income: From nonaffiliates 48,020 43,453 46,053 From PennyMac Financial Services, Inc.   4,366     4,647     5,713   52,386 48,100 51,766 Interest expense: To nonaffiliates 36,401 35,374 34,371 To PennyMac Financial Services, Inc.   2,025     1,805     2,222   38,426 37,179 36,593 Net interest income 13,960 10,921 15,173 Results of real estate acquired in settlement of loans (3,465 ) (4,246 ) (2,565 ) Other   2,416     2,011     2,061   Net investment income   83,959     64,474     47,618   Expenses Earned by PennyMac Financial Services, Inc.: Mortgage loan fulfillment fees 21,107 16,570 19,111 Mortgage loan servicing fees(1) 10,099 10,486 16,427 Management fees 5,638 5,008 5,199 Professional services 2,747 1,453 2,011 Compensation 1,959 1,892 2,224 Mortgage loan origination 1,993 1,512 1,557 Mortgage loan collection and liquidation 3,338 354 4,290 Other   5,252     4,591     4,958   Total expenses 52,133 41,866 55,777 Income before benefit from income taxes 31,826 22,608 (8,159 ) Provision for (benefit) from income taxes   3,046     (6,129 )   (2,892 ) Net income 28,780 28,737 (5,267 ) Dividends on preferred shares   2,336     571     —   Net income attributable to common shareholders $ 26,444   $ 28,166   $ (5,267 ) Earnings per common share Basic $ 0.39 $ 0.42 $ (0.08 ) Diluted $ 0.38 $ 0.40 $ (0.08 ) Weighted-average common shares outstanding Basic 66,761 66,719 68,446 Diluted 75,228 75,186 68,446 Dividends declared per common share $ 0.47 $ 0.47 $ 0.47

(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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PennyMac Mortgage Investment TrustMediaStephen Hagey, (805) 530-5817orInvestorsChristopher Oltmann, (818) 224-7028