Good afternoon, and welcome to the third quarter 2018 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, 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 Executive Chairman. .

Thank you, Chris. Let's begin with Slide 3. For the third quarter, PMT reported net income attributable to common shareholders of $40.3 million or $0.62 per diluted share, representing an annualized return on average common equity of 13%, up from 10% in the prior quarter. PMT paid a dividend of $0.47 per share for the quarter.

Book value per common share increased to $20.48 at quarter end, from $20.27 at June 30, 2018..

Our operating results reflect strong contributions from our GSE credit risk transfer and mortgage servicing rights investments, along with an increased contribution from Correspondent Production. .

Credit Sensitive Strategies, which contributed $33.1 million in pretax income; Interest Rate Sensitive Strategies, which contributed $24.1 million in pretax income; Correspondent Production, which contributed $6 million in pretax income; and Corporate, with a pretax loss of $11.5 million. .

During the third quarter, PMT delivered strong growth in its core investment in credit risk transfer and mortgage servicing rights, resulting from its Correspondent Production activities..

Conventional Correspondent Production totaled $7.5 billion in unpaid principal balance, up 39% from the prior quarter, and conventional loan acquisitions from PennyMac Financial totaled $0.9 billion, up 41% from the prior quarter.

Loans eligible for CRT deliveries totaled $6.8 billion in unpaid principal balance, resulting in a firm commitment to purchase $237 million of CRT securities. New MSR investments added during the quarter totaled $96 million. .

Lastly, we completed the previously announced sale of $96 million in UPB of performing loans from our distressed portfolio.

Following quarter end, we entered into 4 agreements to sell a total of approximately $300 million of UPB of performing and nonperforming loans from our distressed portfolio, continuing to reduce our investment in this asset class, which David will discuss in more detail later. .

Now let's turn to Slide 4, and discuss our perspectives on the current mortgage market. During the third quarter, the average 30-year fixed rate continued to increase, reaching 4.72% at the end of September, and since then, has risen another 14 basis points to 4.86%.

Higher interest rates have reduced refinance incentives for many borrowers, leading to a significant slowdown in refinance activity. However, demand for purchase money mortgages continues to grow, with mortgage originations expected to remain flat to 2018 levels at approximately $1.6 trillion next year, with a modest increase in 2020..

Driving the purchase mortgage market outlook is a strong economy, with low unemployment, combined with wage growth among key home buying demographics, such as millennials. .

While the underlying economic trends supporting housing and mortgage originations remained favorable, recent new and existing home sales have disappointed versus expectations, primarily because of the continued low housing inventories and consumers who are still adjusting to higher mortgage rates.

However, forecasts from the Mortgage Bankers Association suggest that demand will pick up, and home sales will see annual increases from this year's levels through 2020. Also, the high rate of home price appreciation experienced over the last few years is expected to moderate, helping improve affordability for many potential homebuyers. .

Mortgage delinquencies increased quarter-over-quarter, with total U.S. loan delinquency rate reaching 3.97% at quarter end, up from 3.74% at June 30, but down from 4.4% a year ago. The quarter-over-quarter increase was primarily driven by seasonal factors as well as hurricane-related impacts in the Southeastern U.S. .

Now let's turn to Slide 5, and discuss PMT's continuing transition to investments in CRT and MSRs.

The chart on Slide 5 shows our success in transforming PMT's balance sheet by reducing the equity allocated to distressed mortgage loans, while redeploying capital into MSRs and GSE credit risk transfer investments generated from PMT's loan acquisition activities.

Investments in CRT, MSR, and ESS, have grown to 73% of PMT's equity allocation at quarter end, up from 38% 2 years ago. .

Over the same period, PMT's equity allocated to distressed loans has decreased from 42% to 13%. Following the completion of the pending bulk distressed loan sales announced today, we expect the equity allocated to the asset class to drop below $100 million, diminishing the impact of the distressed loan portfolio on earnings going forward..

Now let's turn to Slide 6, and review the run rate quarterly income potential for PMT's strategies. Our expectation for PMT's investment strategies is a run rate diluted EPS of $0.55 per quarter, which would result in an annualized return on common equity of approximately 11%.

PMT's run rate potential reflects our expectations for returns over the next several quarters. Our income potential is driven by continued growth of CRT investments, along with favorable pricing relative to credit risk.

Further, it also reflects growth in Agency MBS positions within our net Interest Rate Sensitive Strategies, primarily to hedge interest rate sensitivities of PMT's growing MSR investments. .

The run rate potential for Correspondent Production reflects our expectations that the current highly competitive mortgage market continues. We also project a substantially smaller distressed portfolio with expected losses driven by continued default-related costs and financing expenses..

Finally, we have lowered our expected provision for income tax expenses, primarily as a result of our more favorable tax treatment of our new CRT investments under the REMIC structure. .

Now let's turn to Slide 7, and discuss PMT's relationship with its external manager, PennyMac Financial. PennyMac Financial is a uniquely qualified manager and service provider for PMT, with residential mortgage expertise as a leading non-bank mortgage originator and servicer.

Through its broad operational capabilities and management expertise, PennyMac Financial sources high-quality, organic investments for PMT.

These capabilities are supported by a technology-driven and scalable platform that delivers best-in-class services and investment management expertise to PMT and facilitates its unique investments in CRT and MSRs, while also seeking additional opportunities for growth. .

The performance-based incentive fee structure between PennyMac Financial and PMT ensures that there is strong alignment of interest between the 2 entities to achieve strong investment returns..

On November 1, PennyMac Financial completed a previously announced corporate reorganization that simplifies its corporate structure and financial reporting.

The reorganization also increases PennyMac Financial's market capitalization from approximately $500 million to $1.5 billion, which is expected to expand the potential investor universe for PennyMac Financial, and make it eligible for inclusion in certain stock market indices. .

Now let's turn to Slide 8, and look at PMT's current investments and future growth strategies.

As a leader in the conventional conforming market, opportunities for PMT to deploy capital into its core investments of CRT and MSRs are significant and have increased recently as the new CRT REMIC structure allows more of our production to be eligible for the investment. .

Over the next 4 quarters, we are forecasting the deployment of $418 million in equity in CRT and MSRs, consisting of $122 million deployed into MSRs and $297 million into CRT..

PMT's ability to source both interest rate sensitive and credit sensitive investments organically, combined with a strong and diverse financing structure, represents key differentiating factors that support future growth and positions PMT to capitalize on new investment opportunities.

Beyond our core investments, we remain diligent in evaluating new investment strategies that can drive growth for PMT as the mortgage market adjusts to a higher interest rate environment. .

We intend to pursue new investments that will leverage our mortgage market expertise and risk management capabilities, including investments in prime jumbo, non-QM loans, and HELOC securitizations. .

Prime jumbo production has expanded in recent years as rising home prices have driven many mortgage balances above the conforming loan limit. Approximately $300 billion of jumbo mortgage loans are expected to be produced in 2018, of which approximately 7% are expected to be securitized and the rest retained on banks' balance sheets. .

We last issued a jumbo securitization in 2013. However, we have once again started to acquire jumbo loans from our correspondent sellers. We are also considering investing in securitizations of prime, non-QM production sourced through our correspondent and PennyMac Financial's production channels. .

The non-QM market has evolved rapidly over the past several years, with a greater number of lenders participating in the market and production volumes growing.

We plan to focus exclusively on the prime non-QM market as these investments carry attractive risk-adjusted return profiles and have the potential to drive increased production volume in the current rising rate environment. .

HELOC securitizations represent another attractive investment opportunity. Home equity loans have become attractive as rising rates reduce refinance opportunities for borrowers looking to access equity in their homes. Furthermore, rising home prices have increased tappable home equity, which exceeded $6 trillion as of June 2018..

Our initial strategy for HELOCs would focus on HELOC securitizations backed by second lien loans sourced from PennyMac Financial's servicing portfolio customers. .

This concludes my presentation. I'd now like to turn the discussion over to David Spector, PMT's President and Chief Executive Officer, who will review our mortgage investment activities. .

Thank you, Stan. Let's turn next to Slide 10 for a look at our Correspondent Production highlights. .

Correspondent acquisitions by PMT in the third quarter totaled $16.5 billion in UPB, up 10% from the prior quarter, while down 5% year-over-year.

Conventional conforming acquisitions, for which PennyMac Financial performed fulfillment services for PMT, totaled $7.5 billion in UPB in the third quarter, up 39% from the prior quarter and 15% year-over-year.

PMT also acquired $897 million in UPB of conventional conforming loans originated by PennyMac Financial during the third quarter, up 41% from $634 million in the prior quarter. .

Total lock volume was $17.7 billion in UPB, up 9% from the prior quarter and 2% year-over-year. Pretax income as a percentage of locks was 7 basis points in the third quarter, unchanged from the prior quarter.

While the market for conventional conforming loans remains competitive, our Correspondent Production segment results reflects PMT's unique capabilities and improved market conditions during the quarter. .

The weighted average fulfillment fee in the third quarter was 35 basis points, up from 27 basis points from the previous quarter, which reflects lower discretionary reductions by PennyMac Financial to facilitate successful loan acquisitions by PMT. .

Purchase money loans comprised 87% of total third quarter acquisitions, up from 85% in the prior quarter, and 83% in the third quarter of 2017..

We remain focused on growing correspondent seller relationships through initiatives to expand non-delegated relationships and targeted efforts aimed at growing relationships with community banks and credit unions who can benefit from our operational scale and risk management expertise..

Monthly production volumes remained strong in October. Total correspondent loan acquisitions were $6.3 billion in UPB, while interest rate lock commitments totaled $6.8 billion in UPB. .

Now let's turn to Slide 11, and discuss PMT's investments in GSE credit risk transfer. During the quarter, CRT eligible loan deliveries to Fannie Mae totaled $6.8 billion in UPB, which resulted in firm commitments to purchase approximately $237 million of CRT securities.

Eligible CRT loan deliveries represented 81% of PMT's total loan production, up from 64% in the prior quarter, with the increase enabled by our new CRT transaction structure. After quarter end, we settled our fourth CRT transaction with Fannie Mae, representing $837 million..

On a pro forma basis at September 30, PMT's outstanding CRT investments totaled $1.7 billion, with the UPB of the loans underlying the CRT agreement totaling $39 billion. .

The underlying credit performance of our CRT loans remained strong. Delinquency levels decreased from the end of the second quarter, while actual losses increased modestly, bringing the cumulative lifetime losses on our CRT investments to $2.9 million, consistent with our performance expectations.

At the same time, we have realized income of $139.8 million on our CRT investments since inception. .

Now let's turn to Slide 12, and discuss MSR and ESS investments. PMT's organic MSR investments, resulting from its Correspondent Production activity as well as conventional conforming loans acquired from PennyMac Financials, increased to $1.1 billion at quarter end, up from $1 billion at June 30.

The change was driven by an increase in MSR values resulting from higher mortgage rates and additions from our loan production activities net of runoff..

PMT's ESS investments resulting from bulk, mini-bulk and flow MSR acquisitions by PennyMac Financial decreased slightly from $229 million at the end of the second quarter to $223 million at the end of the third quarter.

This decrease was driven by the ongoing paydown of the loans underlying the ESS investment, partially offset by valuation gains resulting from higher mortgage rates and recapture income..

PMT's MSR portfolio totaled $84.4 billion in UPB at September 30, up from $78.4 billion at June 30. The UPB associated with ESS investments totaled $24.1 billion at September 30, down from $25.1 billion at the prior quarter end. .

Now let's turn to Slide 13, and discuss our progress in reducing PMT's distressed loan investments through liquidations and sales. During the third quarter, we continued to make progress reducing the distressed loan portfolio and transitioning PMT's capital into correspondent generated opportunities in CRT and MSRs.

At quarter end, the distressed loan portfolio totaled $488 million in UPB, down from $619 million in UPB at the end of June..

Performing loans in our distressed portfolio stood at $262 million in UPB, down 23% from the end of the prior quarter and 61% from a year ago. The quarter-over-quarter decrease was primarily driven by the previously-announced $96 million bulk sale of performing loans.

Additions to the performing loan portfolio came from the reperformance of previously nonperforming loans totaling $49 million, up from $36 million in the prior quarter..

The nonperforming loan portfolio ended the quarter at $226 million in UPB, a 19% decrease from the end of the prior quarter, and down 68% from a year ago, driven by ongoing liquidations through special servicing activities and sales. .

As Stan discussed, we entered into 4 agreements to sell approximately $300 million in UPB of performing and nonperforming loans from the distressed portfolio after quarter end. These transactions demonstrate the success of our strategy to expedite the transition of capital out of distressed loans and into CRT and MSR investments. .

Now I'd like to turn the discussion over to Andy Chang, PMT's Chief Financial Officer, to break down the third quarter's financial results. .

Thank you, David. Let's turn to Slide 15, and discuss the third quarter's income and return contributions by strategy..

PMT's investments in the third quarter generated an annualized return on common equity of 13%, net of all expenses. In total, Credit Sensitive Strategies contributed $33.1 million to pretax income or a 19% annualized return on equity during the third quarter. Within the segment, CRT investments contributed pretax income of $42.1 million.

These investments benefited from continued strong markets for credit-related investments, in addition to growth of our CRT investments. .

Distressed loan investments underperformed and contributed a loss of $9 million in the quarter, which I will discuss in further detail on the next slide. .

Interest Rate Sensitive Strategies, which include the performance of our MSRs, ESS, and Agency and non-Agency senior MBS positions, and related interest rate hedges, together, contributed $24.1 million of pretax income or a 14% annualized return on equity for the quarter. .

Income from MSRs and ESS benefited from market-driven valuation changes due to higher mortgage rates and expectations for lower prepayment activity. Conversely, the market value of our Agency MBS positions were adversely impacted by the increase in mortgage rates during the quarter. .

While we show the income contribution for each of these Interest Rate Sensitive Strategies separately, they are managed together as the interest rate sensitivity of MSRs and ESS is inversely correlated to MBS and many of our interest rate hedges..

Correspondent Production contributed $6 million in the third quarter or an annualized return on equity of 22%, and benefited from the quarterly increase in conventional loan production and other factors David discussed earlier. .

The contributions from PMT's investment strategies were reduced by $11.5 million of corporate expenses and $5.1 million of income tax expense. .

Now let's turn to Slide 16 and discuss the performance of PMT's distressed loan investments in greater detail. Net losses on nonperforming and performing loans totaled $3.1 million compared to $4.7 million in the prior quarter.

Valuation losses on nonperforming loans were $2 million and were driven by an adverse impact from higher projected costs related to liquidation and protecting PMT's lien interest. Also, sales of deeply delinquent nonperforming loans resulted in a loss of approximately $2 million. .

For distressed loans and REO liquidated or sold during the quarter, $12.3 million in net valuation gains were recognized over the holding period of the assets, while $227,000 of gains were realized at time of liquidation. .

The liquidation and paydown of mortgage loans and REO generated gross proceeds of $30.1 million and $8.3 million in net cash proceeds after debt repayment and related expenses.

Meanwhile, the bulk sale of performing loans that closed during the quarter generated $89.5 million in gross proceeds and $24.5 million in net proceeds, after debt repayment and related expenses. .

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

Thank you, Andy. PMT's unique investment strategies and capabilities to organically create attractive investments, sourced from its loan production business, are delivering strong returns. Our correspondent business has delivered profitable volume growth this year, driving increased capital deployment into attractive CRT and MSR investments..

Our new REMIC structure for CRT investments allows a greater percentage of loans to be eligible for CRT, further accelerating growth of this opportunity..

Looking forward, we see tremendous opportunities in the mortgage market as we focus on product expansion in the prime, non-agency and HELOC markets, to continue to drive investment opportunities and leverage our mortgage market expertise and risk management capabilities. .

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

This concludes PennyMac Mortgage Investment Trust's third 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..