Q1 2022 PennyMac Mortgage Investment Trust Earnings Presentation (Pre-Recorded)
For large non banks additional proposed standards include an additional liquidity buffer capital and liquidity plans and third party ratings requirements.
If the standards were implemented today PMT is well positioned to meet each of these requirements given its relatively low levels of leverage strong liquidity and long standing commitment to capital and enterprise risk management.
Now I'd like to turn the call over to Vandy, who will talk about the drivers of Pmt's outlook and first quarter investment performance.
Thank you David the rapid shift in market interest rates and credit spreads created opportunities for PMT to make investments. In addition to those normally created from its correspondent production activities, although our ability to organically produce investments distinguishes PMT from most other public mortgage Reits. We also have the <unk>.
Strong balance sheet and risk management capabilities necessary to deploy capital and investments from third parties when attractive opportunities arise.
And our credit sensitive strategies, we invested $86 million in floating rates CRT bonds recently issued by Freddie Mac and Fannie Mae in three separate transactions during the quarter.
After quarter end, we invested an additional $31 million in floating rates CRT bonds recently issued by Freddie Mac and Fannie Mae in two separate transactions.
And in our interest rate sensitive strategies during the quarter, we invested $27 million and fixed rate bonds from a senior tranche of our recently completed jumbo securitization.
On slide seven of our first quarter earnings presentation, we illustrate the run rate potential from Pmt's investment strategies, which represents the average annualized return in quarterly earnings potential that PMT expects over the next four quarters.
In total we expect our quarterly run rate return for Pmt's strategies to average 39 per share or eight 7% annualized return on equity.
This run rate potential reflects performance expectations in the highly competitive transitioning mortgage market and our credit sensitive strategies. The potential returns from Pmt's organically created CRT investments increased from last quarter, reflecting credit spreads that widen. In addition, we expect to continue investing in.
The subordinate tranches of bonds that result from private label Securitizations of agency eligible investor loans.
At a slower pace than the last several quarters due to the decline in market origination volumes.
In the interest rate sensitive strategies, we expect more consistent returns as prepayment speeds have declined meaningfully in.
In correspondent production the expected returns reflect the continuation of the declining size of the origination market and the intense competitive dynamic in the conventional correspondent channel, which is expected to continue.
This analysis excludes potential contributions from additional opportunistic investments and opportunities under exploration such as new investments in Pmt's organically created GSC CRT or the introduction of new products other than investor loans.
Our forecast for Pmt's taxable income and our liquidity continues to support the common dividend at its current level of 47 per share through the remainder of 2022.
Now, let's discuss the drivers of first quarter results and our correspondent production segment.
Total correspondent loan acquisition volume was $22 5 billion.
In the first quarter.
43% or $9 $8 billion were conventional loans, and 57% or $12 $7 billion were government loans.
Conventional lock volume in the quarter was $10 2 billion down.
Down significantly as increased competition for conventional loans, including from the Gse's was heightened during the quarter margin compression in the conventional correspondent space created a return profile lower than our threshold and so volume declined as we maintained our discipline that we have started to see some return to more.
Normalized margins in April .
Pmt's correspondent production segment pretax income as a percentage of interest rate lock commitments was four basis points up from three basis points from the prior quarter and the weighted average fulfillment fee rate in the first quarter was 17 basis points up from 12 basis points from the prior quarter Act.
Acquisition volumes in April were $6 5 billion.
And locks were $7 5 billion.
Pmt's interest rate sensitive strategies consist of our investments in MSR sourced from our correspondent production and investments in agency MBS non agency senior MBS and interest rate derivatives with offsetting interest rate exposure.
The fair value of Pmt's MSR investments at the end of the first quarter was $3 4 billion up from $2 9 billion at.
At the end of the prior quarter.
The increase reflects both newly originated MSR, resulting from conventional production volumes and fair value gains the <unk> of loans underlying Pmt's MSR investments also continue to grow as new production more than offset runoff from prepayments.
Now I would like to discuss Pmt's credit sensitive strategies, which primarily consist of seasoned investments in organically creative CRT from Pmt's production investments in non agency subordinate bonds from private label Securitizations of Pmt's production and opportunistic investments in GSE CRT.
The total <unk> of loans underlying pmt's organically created CRT investments as of March 31 was $28 2 billion down 8% quarter over quarter.
The fair value of our organically created CRT investments at the end of the quarter was $1 4 billion down from $1 7 billion at December 31 due.
Due to fair value declines and the decline in balance that resulted from prepayments.
The outlook for our current investments and organically created CRT remains favorable with a current weighted average loan to value ratio of approximately 63% at March 31 benefiting.
Benefiting from the home price appreciation experienced in recent years, the 60 plus day delinquency rate underlying these investments continue to improve and declined to 185% from three 6% at December 31.
We continue to hold discussions with the <unk> regarding the potential resumption of our lender base CRT transactions. We are encouraged by the progress, we're making but do not currently have any further definitive developments to share on this topic is.
As David mentioned earlier, we continue to invest in securitization collateralized by investor loans and during the quarter, we added $23 million in fair value of new Investor loan securitization investments, we ended the quarter with $103 million in fair value of such investments now.
Now I would like to turn the call over to Dan who will review our quarterly financial results.
Thank you Vandy PMT.
PMT reports results through four segments credit sensitive strategies, which contributed $56 million in pretax loss interest rate sensitive strategies, which contributed $84 2 million in pretax income correspondent production, which contributed $4 6 million and pre tax income in the corporate segment, which had a pretax loss of $14 eight.
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The losses on Pmt's organically created CRT investments this quarter totaled $47 8 million.
This amount included $74 $9 million in market, driven fair value losses, reflecting the impact of wider credit spreads.
On Pmt's organically created CRT investments also included $23 $3 million in realized gains and carry $16 million and net recoveries of previously realized losses, primarily related to L Street Securities 2017 to SPM one.
$200000 in interest income on cash deposits $10 million of financing expenses and $2 $5 million of expenses to assist certain borrowers in mitigating loan delinquencies. They incurred as a result of dislocations arising from the COVID-19 pandemic.
Pmt's interest rate sensitive strategies contributed income of $84 2 million in the quarter MSR fair value increased $393 million during the quarter driven by higher mortgage rates, resulting in expectations for lower prepayment activity in the future.
These fair value gains held in Pmt's taxable REIT subsidiary resulted in a provision for tax expense of $37 million.
The fair value on agency MBS and interest rate hedges declined by $351 million, primarily driven by higher interest rates.
Pmt's correspondent production segment contributed $4 6 million of pre tax income for the quarter.
Pmt's corporate segment includes interest income from cash and short term investments management fees and corporate expenses. The segment's contribution for the quarter was a pretax loss of $14 8 million.
As David mentioned book value decreased at $17 87 from $19 <unk> at the end of the prior quarter. The decline in book value per share is outsized relative to Pmt's performance. This quarter as a recent accounting change beginning in 2022 required us to reclassify the portion of PMT senior notes that are exchangeable for PMT.
Common shares originally allocated to additional paid in capital to the carrying value of the exchangeable senior notes pro forma for this change book value at December 31 was $18 60.
And with that I'll turn the discussion back over to David for some closing remarks.
Thank you Dan.
While fair value impacts drove a net loss for PMT. This quarter changes in the current market environment I provided additional opportunities for new investments with attractive long term risk adjusted returns.
Though the current market environment remains challenging I'm confident in this management team's ability to deliver strong performance to PMT shareholders over the longer term.
We encourage investors with any questions to reach out to our investor relations team by email or phone. Thank you.
This concludes pennymac mortgage investment Trust's first quarter earnings discussion.
For any questions. Please visit our website at www Dot <unk> dot com or call our Investor Relations Department at 8182 to 47028. Thank you.
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