PennyMac Mortgage Investment Trust

Good afternoon and welcome to the second quarter earnings discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available from PennyMac Mortgage Investment Trust's website at www.pennymac-reit.com. Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to the risks identified on slide two that could cause our actual results to differ materially. Thank you. Now I'd like to introduce David Spector, PMT's President and Chief Executive Officer, who will discuss the company's second quarter results.

Thank you, Isaac. For the second quarter 2020, PMT reported net income attributable to common shareholders of $458.4 million, or $4.51 per common share. Our record earnings this quarter reflect record correspondent production segment results and the partial recovery in the fair value of our CRT investments from depressed levels at March 31, 2020 as a result of market dislocations related to COVID-19. These earnings were partially offset by fair value losses on MSRs driven by higher than anticipated prepayments during the quarter and expectations for higher prepayments in the future driven by lower rates. Interest rate hedges also recorded fair value losses driven by elevated hedge costs and fair value losses on options used to hedge MSRs as volatility decreased by June 30th. PMT reports results through four segments. Credit-sensitive strategies, which contributed $458.8 million in pre-tax income, interest rate-sensitive strategies, which contributed $117.5 million in pre-tax loss, Correspondent Production which contributed $139.6 million in pre-tax income, and Corporate with a pre-tax loss of $12.8 million. As previously announced, PMT paid a dividend of 40 cents per share for the quarter. Book value per common share was $19.39 at June 30th, up from $15.16 at March 31, 2020. PMT's capital deployment this quarter continued to be driven by its conventional loan production volumes, which totaled $18.9 billion in unpaid principal balance, up 17% from the prior quarter and up 76% from the second quarter of 2019. New MSR investments for the quarter totaled $203 million, and we delivered to Fannie Mae CRT eligible loans of $1.8 billion in UPB resulting in a firm commitment to purchase $48 million of new CRT securities. In May and June, we repurchased approximately 566,000 shares of PMT at a weighted average price of $13.36 at a cost of $7.6 million. Now let's turn to slide four and discuss economic developments affecting our business. Challenges in the U.S. economy reflect the impact of COVID-19 as a recent resurgence of the virus weighs on states' plans to reopen. Reopening plans, including a return to physical work locations, are now on pause in over 80% of the country, and the economic recovery is expected to be more gradual than previously forecasted. According to the Bureau of Labor Statistics, the unemployment rate reached a recent high of 14.7% at April 30th. Thank you for watching. Despite relatively tight levels of supply, economists have begun to forecast home price decreases in metropolitan areas with heavily affected economies. Fiscal stimulus benefits from the federal government have begun to roll off with an extension or further stimulus remaining uncertain, as Congress has yet to resolve differences on several issues, including the jobless benefit, liability protections for business, aid to state and local governments, and direct payments to Americans. Liquidity in the financial markets has largely rebounded since March and April. However, markets continue to reflect uncertainty related to the long-term impacts of COVID-19. The improved liquidity during May and June resulted in a significant recovery in the fair value of credit-related assets, and in particular, government-sponsored enterprise credit risk transfer investments that gained in value. Now, let's turn to slide five. to discuss PMT's opportunity in the mortgage origination market. Economic forecasts for total originations in 2020 have increased to nearly $3 trillion, the highest level since 2003, and forecasts for total originations in 2021 have recently increased to $2.3 trillion, similar to the strong market we saw in 2019. These forecasts are supported by all-time low mortgage rates, which continue to drive robust refinance and purchase mortgage demand. Forecasts for purchase mortgage originations have also increased recently as a result of higher demand, including in suburban areas. Additionally, sales of previously owned homes posted their largest ever monthly increase in June and sales of new homes have been above consensus expectations. Gain on sale margins remain elevated, more specifically in the direct lending channels driven by capacity constraints. Correspondent gain on sale margins have decreased from record levels seen early in the quarter as other market participants have returned. And as a result of its capital structure, risk management disciplines, and significant technology and infrastructure investments made by PFSI in recent years, PMT was able to successfully capitalize on the market opportunity and continue to acquire, fund, and settle loans throughout the crisis. Now let's turn to slide 6 to discuss PMT's investment activity by strategy during the quarter. On slide 6, we detail investment activity for each of PMT's investment strategies during the second quarter. PMT's investment opportunities are driven by its conventional correspondent production business. CRT assets increased due to fair value gains of $453 million and decreased from substantial runoff due to prepayment activity, including a significant reduction in the unfunded commitment related to CRT 6. New investments in CRT were $48 million as we wind down the program with Fannie Mae. PMT's distressed loan and real estate owned portfolio declined further to $52 million in fair value at the end of the second quarter from $60 million at March 31st. This portfolio is primarily comprised of REO. New MSR and ESS investments primarily sourced from the securitization of $18.9 billion in UPB of conventional loan production were $204 million and net of runoff increased $139 million. As a result of the decline in interest rates during the quarter, the fair value of MSR and ESS investments declined by $112 million Partially offsetting the net new investments. Agency MBS are held by PMT as part of the comprehensive strategy designed to mitigate the interest rate sensitivity of the MSR and ESS assets. The reduction of agency MBS in the quarter reflects a rebalancing of the hedge in favor of MBS forwards and does not reflect a significant change in invested equity. Overall, the net change in PMT's invested equity was a decrease of approximately $60 million in the second quarter. Now, let's turn to slide 7 and discuss the run rate return potential from PMT's investment strategies. PMT's run rate return potential represents the average annualized return and quarterly earnings potential PMT expects to earn on average each quarter from its strategies over the next four quarters. Our expectation for PMT's investment strategies is an average diluted EPS per quarter of 65 cents, which would result in an annualized return on common equity of approximately 13%. PMT's equity allocation related to credit-sensitive strategies is expected to average 37%, with a run rate annualized potential return on equity of 16.1%. Our credit-sensitive strategies primarily consist of our investments in CRT, with a return potential that has decreased from previous estimates due to the increase in fair value in the second quarter, which decreased our go-forward expected rates of return. The CRT markets continue to reflect uncertainty related to COVID-19 and its associated losses. Equity allocated to interest rate-sensitive strategies is expected to average 33% with an annualized return on equity of 11.1%. We consider the results in this segment in aggregate as MBS and hedge positions are primarily used to moderate the impact of interest rate volatility on MSR and ESS returns. Our expectations reflect higher return potential on MSRs driven by a reduction in the expected impact on servicing from COVID-19. Equity allocated to the correspondent production segment is expected to average 14%, with an annualized return on equity of approximately 38%. This is lower than prior projections, as conventional margins have returned to normalized levels faster than originally anticipated. That concludes my presentation, and I'd now like to turn the discussion over to Vandi Fartaj, PMT's Chief Investment Officer, who will review our mortgage investment activities.

Thank you, David. Let's begin with slide 9 for a look at our correspondent production highlights. Correspondent acquisitions by PMT in the second quarter totaled $29.9 billion in UPB, up slightly from the prior quarter and up 40% year over year. 63% of our acquisitions were conventional loans and 37% were government loans. Conventional correspondent acquisitions totaled $18.9 billion in UPB, up 17% from the prior quarter and up 76% from the second quarter of 2019. Government loan acquisitions in the quarter for which PMT earns a sourcing fee from PennyMac Financial totaled $11 billion in UPB, down 19% from the prior quarter and up 4% from the second quarter of 2019. Conventional lock volume was a record $24.8 billion in UPB, up 30% from the prior quarter and up 96% from the second quarter of 2019. I'm excited to announce that as of July 31st, approximately 80% of PMT's correspondent sellers are now on P3, the new correspondent lending portal introduced by PennyMac Financial, our manager and service provider during the second quarter. This portal leverages PennyMax proprietary technology and Ellie Mae's next generation encompassed digital lending platform for a best-in-class experience. Importantly, P3 seamlessly integrates with PennyMax proprietary loan bidding system that instantly prices loans for unique characteristics and required returns. We believe that this new system will improve the overall customer experience while also increasing the speed at which we can deploy updates or system enhancements in a rapidly changing mortgage market environment. Higher margin best efforts commitments increased to 38% of lock volume in the second quarter from 23% in the prior quarter enabled by our strong capital position and our manager's expertise to efficiently hedge production pipelines across different market environments. Looking at July, volumes remain elevated. Total correspondent loan acquisitions for the month were $12.7 billion in UPB, while interest rate law commitments were a record $16 billion in UPB. Now let's turn to slide 10 and discuss PMT's investments in GSC credit risk transfer. In alignment with the wind-down of investments in CRT, PMT delivered $1.8 billion in UPB of CRT-eligible loans to Fannie Mae in the second quarter. On a pro forma basis at June 30, PMT's outstanding CRT investments totaled $3.1 billion, essentially unchanged from the prior quarter, as fair value gains were offset by higher prepayments and a reduction in the expected face amount A firm commitment to purchase CRT securities. The 60 plus day delinquency rate was 7.3% up sharply from 0.3% in the prior quarter as a result of hardships related to COVID-19. The expected increase in losses has yet to materialize and realize losses in the second quarter. Total $2.7 million, bringing cumulative lifetime losses to $13 million. The UPB of the loans underlying PMT's CRT agreements was $80.5 billion. Now let's turn to slide 11 to examine how gains on PMT's CRT investments differ from Kaz and Stacker's securities. PMT's CRT investments recorded $453 million in fair value gains in the second quarter, representing a significant recovery of the fair value loss in the first quarter. The gains were lower relative to the more liquid tranches of comparable CAS and Stacker securities. Although PMT's GSE CRT investments are similar to CAS and Stacker, the investments have structural differences that yield different results. The structure of PMT's fifth CRT transaction is shown on the left, while a comparable CAS transaction is shown on the right. PMT owns the entirety of the loss position up to 4%, including the true first loss position, or subordinate tranche labeled B2. This is the first tranche to absorb losses and is the most price sensitive in an adverse economic environment. Further, the credit enhancement on PMT's subordinate tranche may differ from the credit enhancement on the subordinate tranche of a similar Fannie Mae CAS transaction as shown in the example. Additionally, as noted in the diagram, the first loss tranche is retained by Fannie Mae and Freddie Mac in respective CAS and Stacker transactions, which makes comparison to the fair market value of PMT's securities difficult. Now let's turn to slide 12 to discuss how prepayments allow PMT to recoup CRT fair value losses. PMT avoids any actual losses and expects to recognize fair value gains on its CRT investments when the underlying loans pay off. Since principal is received at par or for CRT 6, the commitment amount is reduced. The reporting conventions used in CRT evaluations create a two-month lag in the reporting of prepayments on CRT investments. Therefore, the high level of prepayments in May and June will be reflected in the valuation at September 30th, 2020. Now let's turn to slide 13 to discuss trends in MSR and ESS investments. Despite elevated prepayment activity during the quarter, PMT's MSR assets increased to $1.2 billion, driven by investment growth from strong conventional production volumes. New MSR investments totaled $203 million. The UPB of PMT's MSR portfolio totaled $145.3 billion at June 30, up from $141.8 billion at March 31. PMT's ESS investments resulting from bulk, mini-bulk, and flow MSR acquisitions by PennyMac Financial from 2013 to 2015 decreased to $151.2 million at June 30th, driven by repayments of the underlying loans. The UPV associated with ESS investments totaled $18.2 billion at June 30th, down from $19.2 billion at March 31st. Now let's turn to slide 14 to discuss the performance from the interest rate sensitive strategies segment in the second quarter. PMT seeks to manage interest rate exposure on a global basis, recognizing interest rate sensitivities across its investment strategies. PMT has a history of successfully hedging to offset the majority of the interest rate risk inherent in mortgage servicing rights. In the second quarter, MSR fair value decreased due to expectations for increased prepayment activity in the future related to lower interest rates as well as higher than modeled actual prepayments. Interest rate hedges reported a net loss. While we maintained our hedge discipline throughout the market turmoil, elevated volatility early in the second quarter drove the cost of options to near record highs. Subsequently, volatility decreased by June 30th, resulting in fair value losses on options. Year-to-date through June 30th, MSR and ESS fair value losses totaled $690.1 million, more than offset by gains in fair value of agency MBS and interest rate hedges totaling $825.3 million. This reflects PMT's disciplined focus on capital preservation and risk management to protect the value of the MSR and ESS assets across varying interest rate environments. Now I'd like to turn the discussion over to Andy Chang, PMT's Chief Financial Officer, to review the second quarter's financial results.