PennyMac Mortgage Investment Trust Reports Third Quarter 2013 Results

PennyMac Mortgage Investment Trust (NYSE: PMT) today reported net income of $39.7 million, or $0.57 per diluted share, for the third quarter of 2013, on net investment income of $86.1 million. In addition, PMT’s Board of Trustees has declared a cash dividend of $0.57 per common share of beneficial interest. This dividend will be paid on November 29, 2013 to common shareholders of record as of November 15, 2013.

Quarterly Highlights

Financial results:

• Diluted earnings per common share of $0.57, down 34 percent from the prior quarter
• Net income of $39.7 million, down 27 percent from the prior quarter
• Net investment income of $86.1 million, down 26 percent from the prior quarter
• Book value per share of $21.22, up from $21.06 at June 30
• Issuance of $250 million in new common equity
• Return on average equity of 11 percent, down from 18 percent for the prior quarter¹

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¹ Return on equity calculated based on average shareholders’ equity.

Mortgage investment and correspondent activity results:

• Acquired two distressed mortgage loan pools totaling $930 million in UPB during the quarter
• Completed $550.5 million UPB jumbo securitization, retaining $367 million in senior, subordinate and Interest Only securities
• Completed initial investment in excess servicing spread from “mini bulk” MSRs acquired by PennyMac Financial Services, Inc. (NYSE: PFSI)
• Mortgage servicing rights (MSR) portfolio reached $23.7 billion in UPB
• Correspondent acquisitions of $7.7 billion in unpaid principal balance (UPB), down 11 percent from the prior quarter²
  • Conventional conforming and jumbo acquisitions of $3.7 billion in UPB, down 15 percent from the prior quarter
• Correspondent interest rate lock commitments (IRLCs) of $6.7 billion, down 33 percent from the prior quarter
  • Conventional conforming and jumbo IRLCs of $2.9 billion, down 44 percent from the prior quarter

Investment activity after the third quarter:.

• Entered into an agreement to acquire $563 million in UPB of nonperforming whole loans, which are expected to settle in November³
• Acquired $62 million in excess servicing spread from a $10.3 billion UPB portfolio of Fannie Mae MSRs acquired by PFSI from a third party
• Expected to enter into an agreement with PFSI relating to the acquisition of approximately $85 million in excess servicing spread from a $10.8 billion UPB portfolio of legacy Ginnie Mae MSRs that PFSI has entered into a letter of intent to acquire from a third party⁴

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² Government loan acquisitions for the third quarter were $4.0 billion in UPB and were or will be sold to an affiliate, for which PMT earned or will earn a sourcing fee of 3 basis points and interest income for its holding period. Correspondent acquisition volumes do not include $393 million in UPB of prime non-agency jumbo loans acquired on a bulk basis in August.

³ This pending transaction is subject to continuing due diligence and customary closing conditions. There can be no assurance that the committed amounts will ultimately be acquired or that the transaction will be completed.

⁴ The pending transactions are subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions. There can be no assurance that the committed amounts will ultimately be acquired or that either transaction will be completed at all.

“Higher mortgage rates in the third quarter drove a significant contraction in the mortgage origination market, which led to lower lock volume and reduced margins in PMT's correspondent lending business. However, our distressed whole loan portfolio continued to perform well, and we made significant new investments, deploying capital from the third quarter equity raise,” said Chairman and Chief Executive Officer Stanford L. Kurland. “Higher rates and an improving housing market have also helped create attractive investment opportunities. We had the largest quarterly total for distressed whole loans acquired since PMT's inception, and we completed our initial investments in excess servicing spread. We expect these new investments to make meaningful contributions to earnings going forward.”

PMT earned $36.1 million in pretax income for the quarter ended September 30, 2013, a 47 percent decrease from its record-setting second quarter. The following table presents the contribution of PMT’s Investment Activities and Correspondent Lending segments to pretax income:

Correspondent Lending Segment

For the quarter ended September 30, 2013, the Correspondent Lending Segment generated revenues of $18.9 million, a decline of 63 percent from the second quarter. Net gain on mortgage loans acquired for sale was $11.0 million in the third quarter, down from $44.4 million in the prior quarter. Also contributing to the segment’s revenues were $3.4 million of net interest income and $4.5 million of other revenue, primarily loan origination fees.

The following schedule details the net gain on mortgage loans acquired for sale in the third quarter of 2013:

Rising mortgage rates caused a significant decline in U.S. mortgage originations driving increased competition, reduced volumes, and lower margins during the quarter. PMT acquired $7.7 billion in UPB of loans in correspondent lending in the third quarter, and IRLCs totaled $6.7 billion, compared to $8.6 billion and $10.0 billion, respectively, in the second quarter. Of the correspondent lending acquisitions, conventional loans were $3.6 billion, government insured or guaranteed loans were $4.0 billion, and jumbo loans were $74 million.

The Correspondent Lending segment generated a pretax loss of $0.3 million, versus $28.1 million of pretax income in the second quarter. The loss was largely driven by declining margin and lock volume, along with fulfillment fees that are based on loan funding volumes which were higher than lock volumes in the third quarter.

In September, PMT completed a non-agency securitization of $550.5 million in UPB of jumbo loans, selling $170 million of senior bonds backed by the loans. PMT retained the remaining securities from the transaction as investments. The transaction is accounted for as a secured financing; as such, PMT continues to carry the underlying loans as assets on its consolidated balance sheet and reflects the securities sold as liabilities.

Investment Activities Segment

The Investment Activities Segment generated $36.4 million in pretax income on revenues of $67.2 million in the third quarter, compared to $39.8 million and $73.0 million, respectively, in the second quarter. Valuation gains were $41.9 million in the third quarter, an increase of $3.1 million from the second quarter. Interest income increased by $6.1 million to $25.3 million, partly offset by an increase in interest expense of $4.5 million attributable to the increased utilization of credit facilities associated with PMT’s recent distressed whole loan acquisitions. Expenses were $30.8 million in the third quarter, an increase of 24 percent from the prior quarter, primarily due to increased servicing fee expenses from the growing portfolio of MSRs and distressed whole loans, as well as an increase in allocated corporate expenses.

Distressed Mortgage Investments

PMT’s distressed mortgage loan portfolio generated realized and unrealized gains totaling $48.0 million in the third quarter, compared to $46.8 million in the second quarter. Of the gains in the third quarter, $6.1 million was realized through payoffs in which collections on the loan balances were at levels higher than their recorded fair values.

Valuation gains totaled $41.9 million in the third quarter, compared to $38.8 million in the second quarter. The third quarter gain was driven by home price appreciation greater than forecast, the progression of loans closer to their resolution, and portfolio growth offset somewhat by less optimistic projections for future home prices. Performing loans in the portfolio saw a $15,000 valuation loss in the third quarter, compared to $4.7 million in valuation gains in the second quarter. This reduction was largely driven by a $6.6 million increase in capitalized interest income resulting from loan modifications versus the second quarter. Capitalized interest on modifications increases interest income and tends to reduce the loan valuation.

The following schedule details the realized and unrealized gains on mortgage loans for the third quarter of 2013:

During the quarter, PMT acquired and settled $930 million in UPB of nonperforming whole loans, which represented the largest total for distressed whole loan acquisitions in any quarter since PMT’s inception. After the end of the quarter, PMT entered into a purchase agreement for $563 million in UPB of distressed whole loans, which is expected to settle in the fourth quarter.⁵

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⁵ This pending transaction is subject to continuing due diligence and customary closing conditions. There can be no assurance that the committed amount will ultimately be acquired or that the transaction will be completed.

Servicing

PMT’s MSR portfolio, which is subserviced by PennyMac Loan Services, LLC, grew to $23.7 billion in UPB, compared to $19.9 billion in the second quarter. Servicing fee revenue of $14.5 million was partially offset by amortization and impairment of $7.9 million, generating net loan servicing fees of $6.7 million, down from $7.9 million in the second quarter. The decrease in net loan servicing fees was largely due to higher amortization from increased prepayment speed expectations, which were higher as a result of declining mortgage rates at the end of the quarter.

The following schedule details the net loan servicing fees in the third quarter of 2013:

Expenses

Expenses for the third quarter of 2013 totaled $50.0 million, compared to $47.6 million in the second quarter. The increase in expenses was largely driven by an increase in servicing expenses, as well as increases in professional services and compensation. Servicing expenses increased as a result of growth in PMT’s investments in MSRs created from its correspondent lending activities and distressed whole loan acquisitions. Professional fees were higher largely due to the jumbo securitization transaction during the quarter, and compensation expenses from an increase in stock-based compensation. The increases were largely offset by a $3.7 million decrease in loan fulfillment fees as a result of lower correspondent and jumbo loan acquisition volume during the quarter. Management fees were $8.5 million, essentially flat compared to the second quarter.

The Company had a benefit for income taxes of $3.6 million in the third quarter, compared to a provision for income taxes of $13.4 million in the second quarter, due to a pretax loss in its taxable REIT subsidiary. This resulted in an effective income tax rate of negative 10%, down from an effective income tax rate of 20% in the prior period.

Mr. Kurland concluded, “The outlook for PMT remains strong. Our investments in excess servicing spread, in partnership with PFSI, represent an attractive new strategy for PMT. The pipeline of distressed whole loan investments remains robust, and we expect to continue seeing significant opportunities for new investments through 2014. In correspondent lending we expect to resume increasing acquisition volumes as the origination market stabilizes. In summary, I believe PMT is well positioned to grow and replenish its investments, producing valuable returns for our shareholders.”

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 Wednesday, November 6, 2013. We encourage investors to submit questions via email to InvestorRelations@pnmac.com; if any questions are submitted we will post answers via a document on our website.

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, a wholly owned subsidiary of Private National Mortgage Acceptance Company, LLC. 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; volatility in our industry, the debt or equity markets, the general economy or the residential finance and real estate markets; changes in general business, economic, market, employment and political conditions or in consumer confidence; declines in residential real estate or significant changes in U.S. housing prices or activity in the U.S. housing market; availability of, and level of competition for, attractive risk-adjusted investment opportunities in residential mortgage loans and mortgage-related assets that satisfy our investment objectives; concentration of credit risks to which we are exposed; the degree and nature of our competition; our dependence on our manager and servicer, potential conflicts of interest with such entities, and the performance of such entities; availability, terms and deployment of short-term and long-term capital; unanticipated increases or volatility in financing and other costs; 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; the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest; 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 and other investments; the degree to which our hedging strategies may protect us from interest rate volatility; our failure to maintain appropriate internal controls over financial reporting; our ability to comply with various federal, state and local laws and regulations that govern our business; changes in legislation or regulations or the occurrence of other events that impact the business, operations or prospects of government agencies, mortgage lenders and/or publicly-traded companies; the creation of the Consumer Financial Protection Bureau, or CFPB, and enforcement of its rules; changes in government support of homeownership; changes in government or government-sponsored home affordability programs; changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of real estate investment trusts, or REITs; limitations imposed on our business and our ability to satisfy complex rules for us 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 our subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal income tax purposes and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules; and the effect of public opinion on our reputation. 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) Servicing expenses include both special servicing for PMT’s distressed portfolio and subservicing for its mortgage servicing rights.