Good afternoon, and welcome to the Fourth Quarter 2015 Earnings Discussion for PennyMac Mortgage Investment Trust. The slides that accompany the discussion are available from the PennyMac Mortgage Investment Trust website at www.pennymac-reit.com. .

Before we begin, please take a few moments to read the disclaimer on Slide 2 of the presentation. Thank you..

Now I’d like to turn the discussion over to Stan Kurland, PMT’s Chairman and Chief Executive Officer. .

Thank you, Chris. For the fourth quarter, PMT earned a total of $15.7 million in net income or $0.21 per diluted share, representing an annualized return on equity of 4%. PMT paid a dividend of $0.47 per share for the quarter, and book value per share declined to $20.28 at quarter end..

PMT reports results through 2 segments, Investment Activities and Correspondent Production..

The Investment Activities segment reported a pretax loss of $6.1 million. Segment results were adversely impacted by the decline in distressed loan valuation gains this quarter..

During the quarter, investment returns underperformed expectations due to a combination of factors, the largest of which was reduced earnings from our distressed loan portfolio, driven by credit spread widening and lower home price appreciation versus prior forecasts..

In the fourth quarter, PMT made new investments in credit risk transfer and mortgage servicing rights from its own correspondent production activity..

Investments in the second credit risk transfer transaction with Fannie Mae totaled $107 million to date on $3 billion of PMT's production..

New investments in MSRs from our correspondent production activities totaled $42 million. In total, the value of PMT's MSR and ESS investments grew to $872 million, relating to $94 billion of UPB at the end of the quarter..

Despite the pretax loss from investment activities, which were driven by noncash fair value losses, cash flows from PMT's existing investment portfolio remained strong. Cash proceeds from the liquidation of distressed mortgage loans and REO totaled $113.5 million during the quarter.

The Correspondent Production segment earned $13.1 million in pretax income. .

This strong performance was driven by higher gains on mortgage loans and reduced fulfillment expenses..

On Slide 4, I'd like to highlight a couple of recent developments after quarter end. In January, PMT, through a subsidiary, was approved as a multifamily Seller/Servicer for Freddie Mac's small balance loan program. We believe that this represents a significant development for the commercial mortgage business.

This program provides financing for the purchase and refinancing of multifamily properties of between $1 million and $5 million. PMT plans to retain first loss B-pieces from securitization of these loans as attractive credit risk investments..

We believe that the multifamily business is an attractive opportunity, and we also intend to pursue participation in other multifamily programs, such as HUD's multifamily housing program..

Also the Federal Housing Finance Agency finalized a rule that will result in the termination of PMT's membership in the Federal Home Loan Bank of Des Moines. While we are disappointed by this decision, we expect that the loss of FHLB membership will have a limited impact as PMT transitions its existing FHLB borrowings to bank financing..

Now let's turn to Slide 5 and discuss our current perspectives on the mortgage market..

During the fourth quarter, anticipation over the eventual Fed funds rate increase and continued improvements in the U.S. economy drove interest rates higher. The 30-year fixed rate increased 16 basis points during the quarter, but the increase has more than reversed after quarter end, and mortgage rates are now back to the levels of last April..

Volatility has returned to the capital markets on concerns over growth rates in the global economy and falling oil prices, driving investors back to the safety of U.S. Treasury bonds..

In December, the Federal Housing Finance Agency, or FHFA, released its 2016 scorecard to set performance targets for Fannie Mae and Freddie Mac..

The scorecard reflects their ongoing central role in the mortgage market and highlights several initiatives for the GSEs, including credit risk transfer..

FHFA is now calling for Fannie Mae and Freddie Mac to transfer credit risk on at least 90% of the unpaid principal balance of newly acquired single family mortgages that meet certain criteria..

We believe that this is a positive development for the mortgage market by further stabilizing the GSEs and attracting private capital to take on credit risk of an increasing portion of the GSE loans..

Key housing metrics have continued to show steady improvement. We have seen the pace of home sales steadily improve in 2015, with both existing and new home sales posting their best year since the financial crisis..

With interest rates at low levels and strong job growth in key home-buying-age demographics, housing fundamentals appear poised for continued improvement in 2016..

Finally, the industry was faced with new regulation with the TILA-RESPA integrated disclosure rule that went into effect in October, changing the disclosure requirements for new loan originations..

Originators across the industry experienced varying degrees of difficulty with the rule, which has produced some initial delays and extended closing timelines thus far..

Now let's turn to Slide 6 and review PMT's performance during the fourth quarter, broken down by each of its strategies..

For the fourth quarter, PMT's investments generated an annualized return on equity of 4%, net of all expenses and overhead. Distressed loan investments contributed an annualized return of negative 1.4% compared to 14.5% in the prior quarter..

Performance of the distressed loan portfolio declined as a result of several factors, including lower actual home prices versus prior forecasts, higher advances on nonperforming loans and increased yield requirements. .

Returns on the credit risk transfer investment were impacted by valuation losses as a result of credit spread widening, which were largely offset from revenues related to the investment..

Other credit-sensitive strategies include non-agency subordinate bonds and commercial real estate loans. Combined, credit sensitive strategies delivered a $4.2 million pretax loss in the fourth quarter..

Interest-rate-sensitive strategies, which include the performance of our MSRs, ESS and agency and non-agency MBS positions and related hedges, together generated an 8.5% pretax return on equity..

While we show the income contribution of each of these interest-rate sensitive strategies separately, they are managed in the aggregate, as the interest rate sensitivity of the MSRs and ESS are inversely correlated to the MBS positions..

These offsetting strategies help to moderate the impact of interest rate movements on PMT's performance..

MSRs and ESS experienced valuation gains resulting from higher interest rates, which were partially offset by hedge losses..

Returns on correspondent production improved from the third quarter as a result of higher gains on mortgage loans and lower fulfillment expenses during the quarter..

Now let's turn to Slide 7 and review PMT's investment strategies. As a reminder, PMT's objective is to deliver superior returns over the long term by investing in mortgage-related strategies that take advantage of the specialized operational capabilities of our manager and service provider..

Our investment strategies include distressed residential whole loans, which were PMT's initial focus and remain the majority of PMT's equity allocation today..

We continue to consider new investments in distressed mortgage loans on an opportunistic basis. However, PMT's recent capital deployment has focused on interest rate and other credit -- sensitive strategies..

Other credit-sensitive strategies include GSE credit risk transfers on PMT's own correspondent production of conventional conforming loans; subordinate bonds, which includes subordinate tranches of our own non-agency jumbo securitization, and small balance commercial real estate loans..

Our interest rate sensitive strategies are comprised of investments in MSRs, excess servicing spread, agency and senior non-agency MBS, and the retained senior MBS from the securitization of prime jumbo loans..

We manage these strategies together on a global basis, as they have different sensitivities to interest rate changes..

Additionally, PMT generates returns from its correspondent loan aggregation activities, which also result in long-term investments in MSRs and credit risk transfer..

Finally, at the current market price of PMT's common shares, we see the repurchase of stock as a highly attractive use of capital, and we intend to use proceeds from the liquidation of lower yielding investments for additional share repurchases..

Now let's turn to Slide 8 and review PMT's targeted returns for each of these strategies..

On Slide 8, we lay out the long-term returns on PMT's investment strategies, which are largely unchanged from targets we reviewed last quarter..

The ROE associated with each asset in the far right column of the table is the return we target for the investments that PMT holds today and for new investments we would make using our base case assumptions for variables, such as prepayment speeds and credit performance..

The ROEs shown are the targeted contribution for each strategy on a pretax basis and are net of direct expenses associated with the strategy. We have reduced our targets for commercial loans compared to the amounts shown in prior quarters, reflecting changes in market opportunity we believe are achievable..

While our quarterly results can vary, this slide represents the returns that we currently expect to achieve over time for each of PMT's investment strategies..

Now I'd like to turn it over to David Spector, PMT's President and Chief Operating Officer. .

Thank you, Stan. Let's turn to Slide 10 and discuss the resolution activity on PMT's distressed whole loan investments..

Here we show the various resolution activities, which include liquidation activities, modifications, and loan transitions from foreclosure to REO. Liquidation activities include payoffs, foreclosure sale to third parties, short sales and sales of REO properties to third parties.

The UPB of total liquidation activities increased 15% from the third quarter, primarily as a result of a 47% quarter-over-quarter increase in REO sales as properties and inventory completed the eviction process, partially offset by a decrease in short sales and foreclosure sales as more loans were modified..

Modification activity increased 26% quarter-over-quarter, driven by a sustained increase in the pipeline of modifications since the second quarter, driving growth in completed modifications..

Our strong modification efforts have helped to increase the UPB of completed modifications to $99 million in UPB in the fourth quarter versus $79 million in UPB in the third quarter. The pipeline of modifications in process at the end of the quarter was $342 million..

Foreclosure to REO activity decreased 27% quarter-over-quarter. This activity relates to completed foreclosures, where PMT retains ownership of the property with the ultimate resolution coming through sale or rental. PMT's portfolio of REO rentals totaled $8.8 million at December 31, up from $4.4 million at September 30..

Now let's turn to Slide 11 and discuss the operational results for correspondent production..

Correspondent production totaled $10 billion in UPB for the fourth quarter, a 30% decline from the third quarter but a 38% increase from the fourth quarter of 2014..

Conventional conforming and jumbo loan acquisitions were $3.5 billion in UPB, a decrease of 15% from the prior quarter..

The decrease in production volumes was primarily driven by a seasonally smaller origination market, higher rates, and the impact of delays from TRID implementation..

Correspondent lock volume was $10.6 billion in UPB, a 22% decrease from the third quarter. Conventional conforming and jumbo locks were $3.6 billion in UPB, an 11% decrease from the third quarter. In January, total correspondent loan acquisitions were $3.3 billion in UPB, while interest rate lock commitments were $2.9 billion in UPB..

During the quarter, we continue to execute on strategic initiatives to grow our correspondent seller relationships and to optimize our business relationships with existing sellers. At the end of the fourth quarter, we reached 432 correspondent seller relationships, up from 400 at the end of the third quarter after starting off the year with 344..

We also continue to focus on growing our business from relationships with small- to medium-sized originators, who benefit the most from PennyMac Financial's operational expertise and risk management abilities.

These sellers accounted for $2.5 billion of locked volume in the fourth quarter, unchanged from the previous quarter, despite a smaller origination market in the fourth quarter. Finally, purchase money loans accounted for 86% of our correspondent production, reflecting the strong focus on home purchase financing by our correspondent sellers.

This high concentration of purchase money volume positions us well for a strengthening housing market..

Let's now turn to Slide 12 and discuss the continued development of our investments in GSE credit risk transfer relating to our correspondent production..

Last quarter, we announced a second credit risk transfer deal CRT 2015-2, which is expected to total $4 billion in UPB of production and create an M1 bond investment totaling approximately $140 million when completed..

To-date, on CRT 2015-2, we have invested $107 million and just over $3 billion in UPB of conventional conforming production. Combined with the transaction that closed during the third quarter, our total CRT investments reached $147 million at December 31..

We believe that PMT's credit risk transfer investments are aligned with Fannie Mae's goals, which seek to attract private capital investment in GSE credit risk..

We continue to see significant potential for deploying additional capital into this strategy going forward..

Now let's turn to Slide 13 and discuss our investments in MSR and ESS..

PMT's investment in MSRs and ESS reached $872 million, up from $842 million at September 30, with the related loans underlying the investments totaling $94 billion in UPB at December 31..

Investments in MSRs, which also result from PMT's correspondent production activities, totaled $460 million, up from $423 million at September 30..

As of December 31, our investments in ESS totaled $412 million, down from $419 million at September 30, driven by prepayment of the underlying loans..

Now I'd like to turn the discussion over to Anne McCallion, PMT's Chief Financial Officer, to review the third quarter's financial results.

Anne?.

Thank you, David. On Slide 15, we show the pretax earnings contribution from each of PMT's segments over the last 5 quarters..

In the fourth quarter of 2015, PMT's pretax earnings totaled $6.9 million, comprised of $6.1 million of pretax loss from investment activities and $13.1 million of pretax income from correspondent production..

Now let's turn to Slide 16 and look at the results of the Investment Activities segment. The Investment Activities segment income is derived from the performance of PMT's investment portfolio..

In the fourth quarter, investment segment revenues totaled $22.6 million, down 63% from the third quarter..

The quarter-over-quarter decrease in revenues was driven primarily by a decrease in net gain on investments and lower net loan servicing fees..

Net gain on investments totaled $2.6 million in the fourth quarter, compared to $25 million in the prior quarter..

Net gain on investments in the fourth quarter included valuation gains on distressed loans of $2 million, a $29.9 million decline from the third quarter, which I will discuss in greater detail on Slide 18..

We invest in multiple interest-rate-sensitive strategies, some of which have offsetting exposures, which help PMT manage interest-rate risk. These strategies include agency and non-agency MBS, MSRs, and excess servicing spread..

Higher interest rates in the fourth quarter drove a fair value loss totaling $7.7 million in the agency and non-agency MBS portfolio..

Higher rates, which result in lower expected prepayments also contributed to valuation gains on ESS, totaling $8.7 million. Additionally, ESS gains for the fourth quarter include recapture income of $1.9 million..

Net loan servicing fees resulting from PMT's investment in MSRs were $7.9 million in the fourth quarter, down from $20.8 million in the third quarter. MSR valuation gains and impairment reversal due to lower-than-expected prepayments were offset by losses on hedges associated with the MSRs and ESS.

The net valuation impact of MSR valuation gains, impairment recovery and losses on hedges was a loss of $7.7 million..

Net interest income increased 6% quarter-over-quarter, which I will discuss in greater detail on the next slide..

Other investment losses were $5.1 million, compared to a $1.7 million loss in the third quarter, driven by increased advances related to PMT's inventory of REO properties, which are accounted for at the lower of cost of fair value..

Segment expenses were $28.7 million in the fourth quarter, up from $25.4 million in the third quarter, due to increased expenses related to the ongoing preservation of interest in nonperforming loans..

On Slide 17, we show the components of interest income for the Investment Activities segment. PMT's net interest income grew 6% quarter-over-quarter and is an increasingly important contributor to the company's earnings..

In particular, interest income earned by the distressed loans is a significant component of PMT's investment returns. Capitalized interest on loan modifications increased 54% in the fourth quarter to $22.8 million, increasing interest income but generally reducing gains on the performing loan portfolio..

Interest income on our excess servicing spread investments was $7.8 million, down 3% from the prior quarter due to runoff of the underlying loans..

Now let's turn to Slide 18 and discuss the cash flows related to PMT's distressed loan portfolio. PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans totaling $2 million in the fourth quarter compared to $31.9 million in the second quarter..

Valuation losses on distressed loans totaled $700,000 in the fourth quarter compared to a $29.1 million gain in the third quarter. Valuation losses on performing loans were $2.2 million, and valuation gains on nonperforming loans were $1.6 million..

Valuation gains on nonperforming loans were adversely impacted this quarter by lower actual home prices versus prior forecasts and increased yield requirements, partially offset by an increase in expectations for future home price appreciation..

The distressed loan portfolio was also negatively impacted by lower realization values on certain loans due to higher servicing advances resulting from the slower-than-expected transition of loans from foreclosure status to REO and extended resolution timelines..

The increase in modification activity during the quarter resulted in valuation losses on the performing loans, because capitalized interest resulting from loan modifications increases interest income and tends to decrease gains on the performing loans..

Payoff gains on distressed loans totaled $2.6 million compared to $2.9 million in the prior quarter..

Liquidation activity on distressed loans continued to generate significant cash flows. The increase in this activity in the fourth quarter resulted in an increase in gross cash proceeds to $113.5 million, up from $103.7 million in the third quarter..

With respect to the distressed loans and REO liquidated during the quarter, $3.3 million in valuation gains had been recognized over the holding period of the assets, and another $9.1 million of gains were realized at liquidation..

Now let's turn to Slide 19 and discuss the value of PMT's mortgage servicing rights and excess servicing spread assets..

PMT's mortgage servicing rights portfolio, which is sub-serviced by PennyMac Financial, grew to $42.3 billion in UPB, up from $39.9 billion at the end of the third quarter..

PMT also owns investments in ESS, totaling $412.4 million, with a UPB related to the underlying loans totaling $52 billion..

MSRs and ESS are a growing portion of PMT's long-term investments, and their fair value generally increases in a rising interest rate environment and decreases when rates fall.

In the fourth quarter, the fair value of the ESS investment increased, primarily as a result of lower projected prepayment activity due to an increase in mortgage rates during the quarter. ESS valuation gains also included recapture income from PennyMac Financial totaling $1.9 million..

The chart on Slide 19 shows some of the key metrics of PMT's MSR and ESS portfolio and highlights the difference between the carrying value of PMT's MSRs and their estimated fair value. At the end of the quarter, the fair value of PMT's MSR asset was $31 million greater than its carrying value..

For the excess servicing spread column, the UPB, weighted average coupon and expected prepayment speed represent the characteristics of the underlying MSR portfolio owned by PennyMac Financial, while the weighted average servicing spread, fair value and valuation multiple relate to the ESS asset owned by PMT..

Let's now turn to Slide 20 and discuss the correspondent segment's fourth quarter performance..

Correspondent Production segment revenues totaled $28 million in the fourth quarter compared to $30.4 million in the prior quarter..

Net gains on mortgage loans acquired for sale totaled $15.8 million, a 14% increase, primarily resulting from the optimization of GSE deliveries and specified loan sales, partially offset by lower interest income resulting from a reduction in the amount of loan inventory quarter-over-quarter and a decline in correspondent acquisition volumes.

Net interest income for the segment was $5.2 million compared to $7.4 million in the third quarter. Other income, which is primarily comprised of loan origination fees was $7 million, a 24% decrease from the prior quarter..

Expenses in the Correspondent Production segment decreased 26% quarter-over-quarter due to the decline in acquisition volumes and a lower weighted average loan fulfillment fee. The weighted average fulfillment fee rate in the fourth quarter was 37 basis points, down from 43 basis points in the prior quarter..

And with that, I'll turn the discussion back over to Stan for some closing remarks. .

Thank you, Anne. We are confident in the outlook for PMT to deliver superior returns over time through its investments in distinctive mortgage-related strategies. While earnings in the fourth quarter were lower, largely driven by fair value changes, the cash flows from PMTs existing investments continue to remain strong.

We're redeploying capital from liquidation of distressed whole loans into new investments in front-end credit risk transfer and mortgage servicing rights that result from our correspondent production activities.

In addition, at the current market price of PMT's common shares, we see the repurchase of stock as a highly attractive use of capital, and we intend to use proceeds from the liquidation of lower yielding investments for additional share repurchases..

In closing, we encourage investors with any questions to reach out to our Investor Relations team by e-mail or phone. Thank you. .

This concludes the PennyMac Mortgage Investment Trust Fourth Quarter Earnings Discussion. For any questions, please visit our website at www.pennymac-reit.com or call our Investor Relations Department at (818) 224-7028. Thank you..