PennyMac Mortgage Investment Trust(PMT) - 2023 Q3 - Quarterly Report

Financial Information Unaudited Financial Statements The unaudited consolidated financial statements show a significant improvement in net income for Q3 2023 and the nine-month period, with total assets at $13.22 billion as of September 30, 2023 Consolidated Balance Sheets Total assets decreased to $13.22 billion as of September 30, 2023, primarily due to reduced loans acquired for sale, while total liabilities also decreased to $11.27 billion Consolidated Balance Sheet Summary (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $13,223,336 | $13,921,564 | | Mortgage servicing rights at fair value | $4,108,661 | $4,012,737 | | Mortgage-backed securities at fair value | $4,665,970 | $4,462,601 | | Loans acquired for sale at fair value | $1,025,730 | $1,821,933 | | Total Liabilities | $11,274,258 | $11,958,749 | | Assets sold under agreements to repurchase | $6,020,716 | $6,616,528 | | Notes payable secured by CRT and MSR assets | $2,825,591 | $2,804,028 | | Total Shareholders' Equity | $1,949,078 | $1,962,815 | - Assets of consolidated Variable Interest Entities (VIEs) totaled $2.62 billion as of September 30, 2023, decreasing from $2.84 billion at year-end 2022[25] Consolidated Statements of Operations Net income attributable to common shareholders significantly increased to $51.0 million for Q3 2023 and $115.4 million for the nine-month period, driven by reduced investment losses Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Investment Income | $163,429 | $151,065 | $344,247 | $254,404 | | Net (Losses) Gains on Investments | ($109,544) | ($253,336) | $13,761 | ($713,081) | | Net Income (Loss) | $61,422 | $11,913 | $146,743 | ($77,950) | | Net Income (Loss) to Common Shareholders | $50,967 | $1,458 | $115,379 | ($109,314) | | Diluted EPS | $0.51 | $0.01 | $1.20 | ($1.19) | Consolidated Statements of Cash Flows Net cash from operating activities was $807.2 million for the nine months ended September 30, 2023, with a net increase in cash of $124.5 million overall Cash Flow Summary (Nine months ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $807,162 | $1,275,504 | | Net Cash from Investing Activities | $60,482 | ($1,342,701) | | Net Cash from Financing Activities | ($743,114) | $67,145 | | Net Increase (Decrease) in Cash | $124,530 | ($52) | Notes to Consolidated Financial Statements Notes detail accounting policies, four operating segments, extensive related-party transactions, and the use of Variable Interest Entities (VIEs) for Credit Risk Transfer (CRT) arrangements - The company operates in four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate[40] - The company has extensive related-party transactions with PennyMac Financial Services, Inc. (PFSI) and its subsidiaries, with loan servicing fees of $20.3 million and management fees of $7.2 million paid in Q3 2023[53][59][63] - The company utilizes Variable Interest Entities (VIEs) for Credit Risk Transfer (CRT) arrangements and subordinate mortgage-backed securities investments, consolidating CRT-related VIEs as primary beneficiary[77][78][81] Fair Value of Financial Instruments (in thousands) | Category | Level 1 | Level 2 | Level 3 | Total (Sep 30, 2023) | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Mortgage-backed securities | $0 | $4,562,437 | $103,533 | $4,665,970 | | Mortgage servicing rights | $0 | $0 | $4,108,661 | $4,108,661 | | Liabilities | | | | | | Derivative and CRT strip liabilities | $1,688 | $11,458 | $76,178 | $140,494 | Management's Discussion and Analysis (MD&A) Management discusses the impact of rising interest rates on business segments, noting increased net income in Q3 2023 driven by credit-sensitive strategies and reduced MBS losses, while maintaining strong liquidity Company Overview and Business Trends PMT, a specialty finance REIT, navigates a challenging market with rising interest rates impacting mortgage origination but benefiting MSRs, while seeing growth opportunities in correspondent business - The company's investment portfolio, including MSRs, subordinate MBS, and CRT arrangements, is primarily generated through correspondent production activities[249] - The U.S. mortgage origination market is projected to shrink to $1.6-$1.8 trillion in 2023 from $2.3 trillion in 2022 due to higher interest rates[263] - Higher interest rates increased floating-rate borrowing costs but also generated more interest income from custodial placement fees, leading to increased sales of conventional loans to affiliate PLS[264] Results of Operations Analysis Pretax income increased to $118.4 million in Q3 2023, driven by improvements in Credit Sensitive Strategies and Correspondent Production, despite a decline in Interest Rate Sensitive Strategies Pretax Income (Loss) by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Credit sensitive strategies | $40,996 | ($3,699) | $169,420 | ($123,375) | | Interest rate sensitive strategies | $81,563 | $103,510 | $61,366 | $217,088 | | Correspondent production | $8,846 | $6,065 | $12,029 | $20,426 | | Corporate | ($12,985) | ($15,497) | ($38,741) | ($45,570) | | Total Pretax Income | $118,420 | $90,379 | $204,074 | $68,569 | - Net loan servicing fees decreased to $281.3 million in Q3 2023, primarily due to smaller MSR valuation gains (net of hedging) of $110.7 million[270] - Net losses on investments and financings significantly improved to $109.5 million in Q3 2023, primarily due to smaller valuation losses on MBS and gains on CRT arrangements[294] - Total expenses decreased 26% to $45.0 million in Q3 2023, driven by a $12.9 million reduction in loan fulfillment fees[304][306] Balance Sheet Analysis Total assets decreased 5% to $13.2 billion as of September 30, 2023, primarily due to reduced loans acquired for sale, partially offset by increases in MBS and MSRs - Total assets decreased by $698.2 million, or 5%, from December 31, 2022, to September 30, 2023, primarily due to a decrease in Loans acquired for sale at fair value[316] Correspondent Loan Purchases (Fair Value, in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Quarter ended Sep 30 | $21,755,784 | $22,785,467 | | Nine months ended Sep 30 | $63,699,477 | $67,387,436 | Investment Portfolio Composition (Fair Value, in thousands) | Asset Class | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Mortgage-Backed Securities | $4,665,970 | $4,462,601 | | CRT Arrangements (Carrying Value) | $1,145,156 | $1,144,078 | | MSRs | $4,108,661 | $4,012,737 | Liquidity and Capital Resources The company's liquidity is supported by diverse sources, with total debt at $10.8 billion and a debt-to-equity ratio of 5.5:1 as of September 30, 2023, while remaining compliant with financial covenants Financing Summary (as of Sep 30, 2023, in thousands) | Financing Type | Amount | Debt-to-Equity Ratio | | :--- | :--- | :--- | | Total Secured Borrowings | $10,177,645 | - | | Unsecured Senior Notes | $599,754 | - | | Total Borrowings | $10,777,399 | 5.5:1 | | Shareholders' Equity | $1,949,078 | - | | Total Financing | $12,726,477 | - | - The company is subject to financial covenants, including a minimum tangible net worth of $1.25 billion and minimum unrestricted cash of $75 million[343] - In September 2023, the company issued $53.5 million of 8.50% unsecured senior notes due 2028[339] - The company and its servicer, PLS, believe they are in compliance with revised capital and liquidity requirements from the FHFA and Ginnie Mae, effective September 30, 2023[347][348] Market Risk Disclosures The company is exposed to real estate, credit, interest rate, and prepayment risks, with sensitivity analyses showing potential fair value decreases for MBS, MSRs, and CRT arrangements under adverse market changes MBS Fair Value Sensitivity to Interest Rate Changes (in thousands) | Interest Rate Shift (bps) | -75 | -50 | +50 | +75 | | :--- | :--- | :--- | :--- | :--- | | Change in Fair Value | $154,495 | $106,221 | ($113,878) | ($172,339) | MSR Fair Value Sensitivity to Key Inputs (in thousands) | Change in Fair Value from Adverse Change in: | +5% | +10% | +20% | | :--- | :--- | :--- | :--- | | Pricing Spread | ($52,357) | ($103,437) | ($201,939) | | Prepayment Speed | ($47,226) | ($93,108) | ($181,071) | CRT Arrangement Fair Value Sensitivity (in thousands) | Scenario | Change in Fair Value | | :--- | :--- | | Pricing Spread +50 bps | ($20,526) | | Property Value -10% | ($15,231) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[360] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2023[361] Other Information Legal Proceedings, Risk Factors, and Share Repurchases The company reports no material legal proceedings or changes to risk factors, and no common share repurchases were made in Q3 2023, with $74.8 million remaining in authorization - As of September 30, 2023, the company was not involved in any material legal actions, claims, or proceedings[364] - There were no material changes from the risk factors set forth in the company's Annual Report on Form 10-K for the year ended December 31, 2022[365] Common Share Repurchase Activity (Q3 2023) | Period | Total Shares Purchased | Average Price Paid | Amount Available for Future Repurchase | | :--- | :--- | :--- | :--- | | July 2023 | 0 | $0.00 | $74,828,000 | | August 2023 | 0 | $0.00 | $74,828,000 | | September 2023 | 0 | $0.00 | $74,828,000 |