PennyMac Mortgage Investment Trust

Good afternoon and welcome to PennyMac Mortgage Investment Trust's second quarter earnings call. Additional materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earning materials. Now, I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perriotti, PennyMac Mortgage Trust Chief Financial Officer.

Thank you, Operator. P&T's second quarter financial results reflect increased levels of income, excluding market-driven value changes, and contributions from all three investment strategies partially offset by fair value changes in the interest rate-sensitive strategies due to elevated volatility. Net income to common shareholders was $15 million for diluted earnings per share of 17 cents. PMT's annualized return on common equity was 4 percent, and book value per share was $15.89 at June 30th, down slightly from the end of the prior quarter. Turning to the origination market, current third-party estimates for total origination average $1.7 trillion in 2024 and $2.1 trillion in 2025. reflecting projections for lower rates from current levels and increased refinance volumes. P&T's financial performance in recent periods highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise in managing mortgage-related investments in a challenging environment. I am pleased to note that in the second quarter, we successfully issued $217 million of exchangeable senior notes and $355 million of term notes secured by Fannie Mae MSRs, both at attractive terms and both with consideration of similar notes with upcoming maturities. Given its increased investable capital in the current market, P&T is expected to retain an increased percentage of total conventional corresponding low production in the third quarter. Dan will provide additional detail later on in the discussion. More than two-thirds of PMT shareholders' equity is currently invested in the season portfolio of MSRs and the unique GSC lender risk share transactions that we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future. as low expected prepayments extend the expected asset lives. Additionally, delinquencies remain low due to the overall strength of the consumer, as well as a substantial accumulation of home equity in recent years due to continued home price appreciation. MSR investments account for more than half of PMT's deployed equity. The majority of the underlying mortgages remain far out of the money and we expect the MSR asset to continue to produce stable cash flows over an extended period of time. MSR values also benefit from the current interest rate environment as the placement fee income PMT receives on custodial deposits is closely tied to short-term interest rates. Similarly, mortgages underlying PMT's large investment in GSE lender risk share have low delinquencies and a low weighted average current loan to value ratio of 48.5%. These characteristics are expected to support the performance of these assets over the long term. And we continue to expect that realized losses will be limited. Slide seven outlines the runway potential expected from P&T's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of 33 cents per share, down slightly from 35 cents per share last quarter, driven primarily by lower expected asset yields in the interest rate-sensitive strategies. Now I'll turn it over to Dan, who will review the drivers of PMT's second quarter financial performance.

Thank you, David. PMT earned $15 million in net income to common shareholders in the second quarter. or 17 cents per diluted common share. PMT's credit-sensitive strategies contributed $16 million in pretax income, including $11 million from PMT's organically-created CRT investments. Credit spreads were relatively unchanged during the quarter, with only minor impacts on the fair value of our investments. As David mentioned, the outlook for our current investments in organically-created CRT remains favorable. with a low underlying current weighted average loan-to-value ratio of below 50% and a 60-day delinquency rate of 1.11%, both as of June 30th. Income from opportunistic investments in CAS and Stacker bonds issued by the GSEs totaled $6 million in the quarter. As mortgage credit spreads tightened over the last several quarters, the go-forward returns on some of the investments that we had previously made fell below our threshold. In this quarter, we sold $8 million in subordinate tranches of investor loan securitizations we participated in during 2021. The interest rate-sensitive strategies contributed $17 million of pre-tax income. The fair value of PMT's MSR investment increased by $46 million due to slightly higher mortgage rates at quarter end. These fair value gains were more than offset by changes in the fair value of MBS interest rate hedges, and related income tax effects during the quarter. MBS fair value decreased by $39 million, and interest rate hedges decreased by $18 million. Income on assets held in PMT's taxable REIT subsidiary drove a tax expense of $3 million. The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, essentially unchanged from March 31st. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding decreased to $83 million from $110 million at March 31st. No principal and interest advances are currently outstanding. Turning to the correspondent production segment, pre-tax income was down slightly from last quarter as lower margins offset the impact of higher volumes. Profitability in the segment in recent periods has benefited from the release of reserves related to representations and warranties provided at the time of securitization, as the high volumes of loans produced from 2020 to 2022 passed the three-year window for violations with minimal repurchase-related losses. We expect the contribution from the release of these reserves to decline to more normalized levels over the next several quarters. Total correspondent loan acquisition volume was $23 billion in the second quarter, of 24% from the prior quarter, driven by an increase in the size of the mortgage origination market. Conventional loans acquired for PMT's account total $2.2 billion of 26% from the prior quarter. As David noted, in the third quarter, we expect PMT to retain a higher percentage of total conventional correspondent production from 30 to 50% versus 18% in the second quarter. The weighted average fulfillment fee rate was 20 basis points, down from 23 basis points in the prior quarter. PMT reported $35 million of net income across its strategies, excluding market-driven value changes and the related tax impacts from $28 million last quarter, primarily due to higher average yields on interest-sensitive assets during the quarter. Turning to capital, we are fully reserved in our liquidity management for repayment in full of the $210 million in exchangeable senior notes due in October 2024. In May, We issued $217 million of new five-year exchangeable senior notes with a coupon of 8.5%. In June, we issued $355 million in five and a half year Fannie Mae MSR term notes at SOFR plus 275 basis points. And after quarter end, we redeemed $305 million of similar term notes due in 2027 with a coupon of SOFR plus 419 basis points. These successful financing activities further solidify PMT's capital position, illustrating our deep access to capital and liquidity across various types of transactions and investors. We'll now open it up for questions. Operator?