PennyMac Mortgage Investment Trust

Good afternoon and welcome to PennyMac Mortgage Investment Trust third quarter earnings call. Additional earning materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust 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 earnings materials. Now, I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust Chief Financial Officer. Please go ahead.

Thank you, Operator. PMT's third quarter financial results reflect solid levels of income excluding market-driven value changes bolstered by fair value changes including associated tax benefits. Net income to common shareholders was $31 million for diluted earnings per share of 36 cents. PMT's annualized return on common equity was 9%, and book value per share September 30th was $15.85, down slightly from the end of the prior quarter. Turning to the origination market, current third party estimates for total originations averaged $2.3 trillion in 2025, reflecting expectations for mortgage rates to decline from current level. driving growth in both refinance and purchase bodies. PMT's stable performance in recent periods of heightened volatility highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise managing mortgage-related investments in a changing environment. We continue to focus on PMT's balance sheet. And this quarter, I'm pleased to note that we effectively completed the refinancing of $457 million of CRT and MSR term notes with $514 million of new term notes with lower effective costs and extended durations. Approximately two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GFC lender risk share transactions 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 have extended the expected lives of these assets. Additionally, delinquencies remain low due to the overall strength of the consumer, as well as the 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 of these MSRs 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. While MSR fair values were down slightly from June 30th due to fair value declines and runoff from prepayments, MSR values continue to 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 lender-originated risk share have low delinquencies and a low weighted average current loan-to-value ratio of below 50%. 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. Given the capital rates in the second quarter, in the third quarter, PMT retained an increased percentage of total conventional correspondent loan production, resulting in approximately $90 million invested in new MSRs, more than double the amount from the prior quarter. In the fourth quarter, We expect PMT will retain a smaller percentage of conventional production as we optimize PMT's capital allocation while also evaluating emerging investment opportunities in the private label securitization market. We believe the mortgage landscape is evolving and increasingly presenting new opportunities for PMT to be a material participant in that market. Volume or pricing limits for the GSEs on certain types of loans, such as non-owner occupied and second homes have driven increased private label securitizations of such loans in recent periods. Additionally, meaningful volumes of jumbo loans are being originated in channels outside of the banks. PMT has long benefited from its synergistic relationship with PFSI and its leading fulfillment and servicing operation to process large volumes of loans at the highest quality standards and positively influence investment performance. Combined, we estimate PMT accounted for approximately 7% of the total production market in the last year, with a leadership position in the correspondent channel and a growing presence in direct lending. Through this multi-channel production platform, we have been acquiring and originating growing volumes of loans we think have the potential for PMT to securitize to drive organic investments in newly created private label securities. Given our longstanding relationships with global banks, asset managers, and institutional asset-backed investors, we believe PMT is well-positioned to successfully execute on these activities, especially as the origination market returns to more normalized levels. While we have been selling jumbo loans on a whole-loan basis, we've been aggregating agency-eligible non-owner-occupied loans with the expectation that PMT will close the securitization of such loans in the fourth quarter, followed by another similar transaction in the first quarter next year. Now I'll turn it over to Dan, who will review the drivers of PMT's third quarter financial performance and PMT's run rate potential.

Thank you, David. PMT earned $31 million in net income to common shareholders in the third quarter, or 36 cents per diluted common share. PMT's credit-sensitive strategies contributed $26 million in pretax income. Of this, $17 million were from organically-created CRT investments, $6 million were from non-agency subordinate MBS, and $3 million were from other opportunistic investments in GSE CRT. 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 below 50% and a 60-day delinquency rate of 1.23%, both as of September 30th. The interest rate-sensitive strategies contributed pre-tax income of $500,000. The fair value of PMT's MSR investment decreased by $84 million, but the decrease in mortgage rates drove an increase in future prepayment projections. These fair value declines were offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and related income tax effects. MBS fair values increased by $128 million due to the decline in mortgage rates. Interest rate hedges decreased by $67 million. Fair value declines on MSRs and interest rate hedges held in PMT's taxable REIT subsidiary drove the $15 million tax benefit this quarter. Inclusive of the tax benefit, the interest rate sensitive segment contributed approximately $19 million to net income. The fair value of PMC's MSR asset at the end of the quarter was $3.8 billion, down slightly from $3.9 billion at June 30th, as fair value declines and runoff from prepayments more than offset new investments from loan production. Delinquency rates for borrowers underlying PMC's MSR portfolio remain low, while servicing advances outstanding decreased to $71 million from $83 million at June 30th. No principal and interest advances are currently outstanding. Income from PMT's correspondent production segment was up from last quarter driven by higher volumes. Total correspondent loan acquisition volume was $26 billion in the third quarter, up 15% from the prior quarter driven by the larger overall market. Conventional loans acquired for PMT's account totaled $5.9 billion, up 167% from the prior quarter due to PMT retaining a larger percentage of the total conventional correspondent production. We expect this percentage to decrease to approximately 15 to 25% in the fourth quarter in order to optimize PMT's capital allocation. Profitability in this segment in recent periods has benefited from the release of liabilities 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 liabilities to decline to more normalized levels over the next several quarters. The weighted average fulfillment fee rate was 19 basis points, down from 20 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 unchanged from the prior quarter. Looking forward, Slide 7 outlines the run rate potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of 37 cents per share, up from 33 cents per share last quarter, primarily driven by the decline in short-term interest rates, which reduces expected financing costs. If the yield curve steepens further, we expect PMT's overall run rate would continue to increase closer to the 40-cent range driven by overall, higher overall yields in interest rate sensitive strategies. Turning to capital, liquidity is in place for repayment in full of the $210 million in exchangeable senior notes due in November. As David mentioned earlier, we strengthened our capital position, refinancing MSR and CRT term notes at more attractive rates and longer durations. At the end of the prior quarter, we issued $355 million of three and a half year MSR term notes with a cost of SOFR plus 275 basis points. In July, proceeds from that issuance were used to refinance $305 million of MSR term notes, which were at a cost of SOFR plus 419 basis points that were mature in 2027. And in August, we issued $159 million in four-year CRT term notes with a cost of SOFR plus 310 basis points effectively refinancing $152 million of notes which were at a cost of SOFR plus 375 basis points that were due to mature in 2025. We'll now open it up for questions. Operator? Thank you.