PennyMac Mortgage Investment Trust

Good afternoon and welcome to PennyMac Mortgage Investment Trust fourth quarter and full year 2024 earnings call. Additional earnings materials, including the presentation slides that will be referred to in this 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, Panamax Mortgage Investment Trust Chairman and Chief Executive Officer, and Don Perotti, Panamax Mortgage Investment Trust Chief Financial Officer. You may begin.

Thank you, Operator. PMT produced very strong results in the fourth quarter, generating a 10% return on equity driven by strong levels of income, excluding market-driven value changes, and excellent performance across all three investment strategies. Net income to common shareholders was $36 million for diluted earnings per share of 41 cents, and PMT declared a fourth quarter common dividend of 40 cents per share. Book value per share year-end was $15.87 up from the end of the prior quarter. Importantly, the fourth quarter marked a return to the organic creation of credit investments for PMT, which I will expand on later. Turning to slide four, for the full year, PMT produced a return on common equity of 8%, with $119 million of net income attributable to common shareholders and income contributions from all three investment strategies. 2024 was a year characterized by significant interest rate volatility, as evidenced by the yield on the 10-year Treasury, which ranged from 3.6% to 4.7%. Even with this volatility, our dividend remained consistent and book value per share was stable throughout the year, as the active hedging of mortgage servicing rights offset the majority of fair value changes in the interest rate-sensitive strategies. Also during 2024, we worked on multiple facets of the business to reposition PMT's balance sheet for success in a higher interest rate environment. This included the opportunistic sale of certain investments as credit spreads tightened, a major rebalance of our agency MBS portfolio, and the issuance of $1.3 billion in term debt to address and extend upcoming maturities, generally at tighter financing spreads. We also renewed PMT's mortgage banking agreement with our manager and industry leader, PFSI, solidifying this unique synergistic partnership between the two companies for another half a decade. All of these activities positioned PMT with a very strong foundation as we enter 2025. Turning to the origination market, current third-party estimates for total originations in 2025 average $2 trillion, reflecting growth in overall volumes. Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time. 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 its changing environment. Turning to slide six, a key competitive advantage throughout PMT's history has been the ability to organically create MSR and credit investments from its own production volumes. We believe that our position as the producer of the underlying loans is a competitive advantage, providing us with an ability to review and diligence the loans selected for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we're uniquely positioned with the ability to work directly with borrowers in times of stress to minimize losses. As evidenced by the strong historical performance of our unique investments, and lender credit risk transfer. In recent periods, volume or pricing limits for the GSEs on certain types of loans, such as non-owner-occupied and second homes, coupled with strong investor demand, has driven increased private label securitizations of such loans. This development has created a renewed opportunity for P&T to organically create credit investments from its own production. We leveraged the strength of our correspondent production franchise and securitization expertise to complete two securitizations of agency-eligible investor loans, where we retained $52 million of new investments in credit subordinate bonds. After quarter end, we completed a third securitization of investor loans and thus retained an additional $21 million of new investments in credit subordinate bonds. Return on equity for these investments is expected to be in the low to mid teens. With a growing pipeline of loans available for private label securitization and a receptive market for these securities, we expect similar levels of activity well into 2025, with the potential for increased investment opportunities through securitizations of other loan products, such as jumbo loans, as the origination market grows. Turning to slide seven, approximately two-thirds of PMT shareholders' equities currently invested in a season portfolio of MSRs and the unique GSE 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 depreciation. MSR investments account for approximately 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. MSR values also continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances 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 valuation 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 our expectations for PMT to be a consistent issuer and investor in private label securitizations, Alongside a seasoned portfolio of MSRs and CRT with strong underlying fundamentals, I am confident the company will continue to deliver attractive risk-adjusted returns in 2025 and beyond. Now, I'll turn it over to Dan, who will review the drivers of PMT's fourth quarter financial performance and PMT's run rate return potential.

Thank you, David. PMT earned $36 million in net income to common shareholders in the fourth quarter, or 41 cents per diluted common share. The credit-sensitive strategies contributed $20 million in pre-tax income. The contribution from organically created CRT investments was $20 million, while the contribution from opportunistic investments in CAS and stacker bonds was offset by losses on non-agency subordinate MBS due to increasing interest rates and losses on other credit-sensitive strategies. 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 1.5%, both as of December 31st. The interest rate-sensitive strategies contributed pre-tax income of $25 million. Fair value increases on MSR investments were $184 million as the increase in mortgage rates drove a decrease in future prepayment projections. These fair value increases were offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and the related income tax effects. MBS fair value decreased by $140 million due to the increase in mortgage rates. Interest rate hedges decreased by $51 million. Income from correspondent production and gains on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $9 million tax expense. The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, up slightly from $3.8 billion at September 30th, as fair value gains and newly originated MSR investments were slightly offset by runoff from prepayments. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding increased to $105 million from $71 million at September 30th due to seasonal property tax payments. No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $28 billion in the fourth quarter, up 9% from the prior quarter driven by the larger overall market. Correspondent loans acquired for PMT's account totaled $3.5 billion, down 41% from the prior quarter due to PMT retaining a smaller percentage of the conventional conforming correspondent loan production. PMT retained 19% of total conventional correspondent production in the fourth quarter, down from 42% in the third quarter. We expect this percentage to remain between 15 to 25% in the first quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market. Income from PMT's correspondent production segment was up from last quarter, driven by increased demand for private label securitization and whole loan execution for investor loans during the quarter. The contribution of pre-tax income related to the strong execution of our private label securitizations in the quarter was approximately $9 million. Profitability in the segment in recent periods has also 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. The weighted average fulfillment fee rate was 18 basis points, down from 19 basis points in the prior quarter. Under the renewed Mortgage Banking Services Agreement with TFSI, effective July 1, 2025, correspondent loans will initially be acquired by TFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent production from PFSI. In total, PMT reported $51 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $35 million in the prior quarter, driven primarily by decreased realization of MSR cash flows and correspondent production income. Looking ahead, slide 8 outlines the run rate return 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, unchanged from the prior quarter. We see slightly increased return potential for the credit-sensitive strategies as short-term interest rates are expected to remain higher for longer. We also see improvement in the interest-sensitive strategy segment as the yield curve is steepened. The improvements in these segments was somewhat offset by slightly decreased return potential in the correspondent production, in correspondent production given the current expected margin environment. If the yield curve steepens further, we expect TMT's overall run rate would increase closer to the 40 cent range driven by higher overall yields in the interest rate sensitive strategies. Turning to our capital position, we retired $43 million of CRT term notes that were due to mature in October, where the remaining assets were financed via repurchase agreement due to the size of the position. Also, we repaid in full $210 million of exchangeable senior notes that matured in November. Through 2025, we will continue to look for opportunities to raise additional debt capital to address the maturity of our exchangeable note in 2026, as well as to provide additional funding for potential expansion of our securitization efforts. We'll now open it up for questions. Operator?