Good afternoon, and welcome to the Fourth Quarter 2014 Earnings Discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available from 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. PMT's diversified investment portfolio continues to generate strong cash flow, which are consistent with our current dividend level, despite fourth quarter earnings that were adversely affected by reduced valuation gains.

In addition, we have entered into significant new investments in nonperforming loans and excess servicing spread that we expect will deliver strong contributions to PMT's returns going forward..

I would like to begin with the highlights of PMT's fourth quarter on Slide 3. For the fourth quarter, PMT earned $26.5 million in net income or $0.34 per diluted share, which represents an annualized return on equity of 7%.

PMT paid a dividend of $0.61 per share in the fourth quarter, and book value declined to $21.18 per share from $21.42 per share at the end of the third quarter..

Investment Activities and Correspondent Production. The Investment Activities segment earned $11 million in pretax income.

This represented a meaningful reduction from the third quarter due to the impact of lower current and future home price expectations on the valuation of distressed mortgage loans and a seasonal slowdown in the progression of loans towards ultimate resolution..

The Correspondent Production segment earned $900,000 in pretax income, which reflected the highly competitive correspondent market for newly originated conventional conforming loans.

Correspondent loan acquisitions totaled $7.3 billion during the fourth quarter, down 10% from the third quarter, primarily resulting from a 21% decline in conventional conforming loan acquisitions. Investments in MSRs and excess servicing spread, or ESS, investments totaled $549 million at year-end, which relates to $63 billion of UPB of servicing..

During the quarter, PMT made $32 million of direct investments in MSRs from conventional correspondent production activities, representing $2.9 billion in UPB.

Investments in ESS totaled $17 million during the quarter, related to $2.3 billion in UPB of Agency mortgage servicing rights sourced through mini-bulk and flow acquisitions and owned by PennyMac Financial..

PMT also acquired 2 pools of nonperforming loans totaling $641 million in UPB from large banks; 1 during the fourth quarter and 1 after quarter-end. We have remained selective in pursuing distressed loan opportunities. These are PMT's first sizable acquisitions of distressed loans since early in 2014.

David Spector will review these acquisitions later in the presentation..

Lastly, we are pleased to announce our expectation to co-invest with PennyMac Financial in the acquisition of Agency MSRs, totaling $21 billion in unpaid principal balance. PMT is expected to invest approximately $175 million in excess servicing spread related to these portfolios..

Now let's turn to Slide 4 and discuss our current perspectives on the mortgage market. Mortgage rates continue to trend lower during the fourth quarter and are currently at their lowest levels since mid-2013.

In addition, the Federal Housing Administration announced in January that it would reduce its annual mortgage insurance premiums, paid by borrowers on new FHA loans, by 50 basis points.

As you can see from the chart in the lower right-hand portion of the slide, this action results in annual FHA mortgage insurance premiums that are now significantly lower than the levels for new loans originated over the last 4 years. The lower premium should help reduce the cost of homeownership.

In addition, this change will increase the ability of many FHA and other borrowers to refinance and lower their mortgage payments. As a result of the lower interest rates and policy change, the industry has seen an increase in refinance activity.

More broadly, we believe these changes will have a meaningful impact on mortgage origination volumes in the near term..

Forecasts for 2015 origination volume from Fannie Mae, Freddie Mac and the Mortgage Banking Association have increased on average by approximately 10% as a result..

Over the last several months, we have seen home price appreciation across the U.S. moderate. Home price gains are estimated to be approximately 6% on a national basis for 2014, which is a significant decline from the double-digit home price appreciation seen in 2012 and '13.

This year, home prices are forecast to rise by 4.9% nationally, which is much closer to the average home price appreciation rate over the last 30 years of 4.1%. Our expectation is that price gains going forward will be driven more by underlying economic fundamentals than a rebound from the housing crisis levels..

Lastly, we continue to see regulatory scrutiny of nonbank mortgage companies, which, in our view, highlights the importance of operational excellence, governance and compliance systems. These have been areas of heavy emphasis for PennyMac Financial since our inception. It is also important for mortgage companies to maintain adequate levels of capital.

And we view the expansion of minimum financial requirements for mortgage seller servicers proposed by FHFA last week as a positive development. PennyMac Financial currently operates with capital levels well above the proposed minimums..

Now let's turn to Slide 5 and review PMT's investment objectives. PMT aims to deliver superior long-term returns to shareholders by managing an investment portfolio consisting of multiple residential mortgage-related strategies.

These strategies require specialized operational capabilities, which are provided by PennyMac Financial, including capabilities for loan fulfillment and correspondent aggregation, loan servicing and the sourcing and management of investments, including commercial mortgage loans..

We are focused on several attractive opportunities in the U.S. mortgage market.

These opportunities include distressed whole loans, correspondent loan aggregation and the resulting investment in MSRs, excess servicing spread on MSRs acquired by PennyMac Financial, Agency and non-Agency MBS and the retained interests from the securitization of prime jumbo loans.

Newer opportunities that we are building or evaluating include investments in commercial real estate loans and GSE risk transfers on our production. I'll discuss our new initiatives in commercial real estate finance a little later in the presentation..

Together, we expect our investments to deliver attractive long-term returns on equity for PMT shareholders. In addition, we continue to see opportunities to enhance PMT's returns through prudent increases and debt financing..

Let's now turn to Slide 6 and review the changes in PMT's investment portfolio. On Slide 6, we show the trends in PMT's mortgage investments over the last 5 quarters. Distressed mortgage loans comprise more than 1/2 of PMT's mortgage assets at quarter-end and our investments that we believe will continue providing attractive returns over time.

New investment activity during the quarter included acquisition of nonperforming loans valued at $272 million and a combined $49 million in value of MSRs and ESS. During the fourth quarter, we prudently increased the use of leverage at PMT to finance new investments and enhance the long-term investment returns to shareholders.

PMT's overall leverage ratio increased to 2x equity at quarter-end versus 1.8x equity a quarter earlier. The increased leverage primarily resulted from higher advanced rates on our financing facilities for distressed loans..

Now let's turn to Slide 7 and discuss PMT's new initiatives in commercial real estate finance. PennyMac Financial recently launched PennyMac Commercial Real Estate Finance, or PCREF, a new division focused on loans for multifamily, office, retail and mixed-use properties, with a typical loan balance between $1 million and $10 million.

The origination market for small-balance commercial real estate loans is highly fragmented, with the top 15 lenders in the country estimated to account for less than 1/4 of the total market.

Annual originations are approximately $160 billion, and we expect this market to grow as the economy continues to improve and as borrowers of commercial real estate address upcoming loan maturities over the next few years. PennyMac Financial plans to originate conventional, mini-perm, bridge and Agency multifamily commercial real estate loans.

PMT is expected to purchase and aggregate these newly originated commercial loans for eventual securitization. We intend to focus our commercial lending footprint in the nation's 50 largest MSAs..

In addition to new originations, PMT plans to pursue opportunities to acquire legacy performing and sub-performing loans from banks and other commercial loan owners. PennyMac Financial expects to develop the special servicing capabilities necessary for the resolution of nonperforming commercial real estate loans on behalf of PMT..

PennyMac Financial has attracted a team of seasoned industry professionals, who we believe have the industry knowledge and expertise necessary to successfully penetrate the commercial mortgage market and build PCREF into a significant market participant over time.

The commercial real estate lending business complements our existing businesses in residential mortgages and has the potential to deliver attractive returns for PennyMac Financial and PMT..

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

Thank you, Stan. I'd like to begin my comments on Slide 9 and review our investments in distressed whole loans. During the fourth quarter, we acquired $331 million in UPB of nonperforming whole loans from a large bank and entered into an agreement with another large bank to purchase $310 million in UPB of nonperforming loans, which settled in January.

These 2 transactions marked the first significant nonperforming loan acquisitions by PMT since the first quarter of 2014.

These pools fit well into PMT's portfolio strategy and have attractive characteristics that include high average property values, geographical locations in or close to major cities, equity in a large percentage of underlying properties and significant modification and reperformance opportunities.

We continue to see a strong supply of distressed whole loans and remain an active bidder in the distressed market, while we continue to be patient and disciplined in making new investments. We also continue to manage our existing investments of nonperforming and reperforming loans to their optimal resolution..

Lets now turn to Slide 10 and review the operational results of our Correspondent Production business. PMT's correspondent acquisitions totaled $7.3 billion in UPB in the fourth quarter, down 10% from the third quarter. Conventional conforming jumbo loan acquisitions were $2.9 billion in UPB, a decrease of 21% from the prior quarter.

Correspondent lock volume for the quarter was $7.5 billion in UPB, an 11% decrease from the third quarter. Conventional conforming and jumbo locks were $3.0 billion in UPB, a 20% decrease from the prior quarter. In January, total correspondent loan acquisitions were $2.3 billion in UPB, and interest rate lock commitments were $2.4 billion in UPB..

During the fourth quarter, we continued to deliver on initiatives to grow the number of seller relationships and deepen our relationships with existing sellers. We are focused on optimizing our seller network to make certain that we have the right number of sellers with each one representing a meaningful relationship.

Our group of approved correspondent sellers has grown considerably over the last year, reaching 344 at the end of 2014, up from 229 at the end of 2013, with the goal of reaching 480 sellers by the end of 2015.

We believe that much of this growth can be achieved by growing market share in states where we are underrepresented as well as by leveraging the value proposition we offer to smaller sellers..

Now let's turn to Slide 11 and review the economics of the Correspondent Production business in the fourth quarter. Pretax income in the Correspondent Production segment decreased 66% from the third quarter to $900,000, driven by a 21% quarter-over-quarter decrease in conventional and jumbo loan production volumes.

As Stan mentioned earlier, these results reflect the highly competitive correspondent market environment for conventional conforming loans..

Segment revenues as a percentage of interest rate lock commitments totaled 47 basis points during the quarter, a decrease of 7 basis points from last quarter, partially offset by a 2 basis point decline in expenses as a result of lower weighted average fulfillment fees during the quarter and reduced funding volumes.

The average fulfillment fee paid by PMT during the quarter was 41 basis points of loans funded compared to 42 basis points in the third quarter.

Despite the tight margins, correspondent aggregation activities continue to provide attractive returns on equity as a result of the short inventory holding periods and cost-effective financing of the mortgage loan inventory. The Correspondent Production business results in MSRs which are attractive long-term investments for PMT..

Now let's turn to Slide 12 and discuss the growth in PMT's investment in MSRs and ESS. PMT's investment in MSR and ESS reached $549 million, up from $533 million at September 30, with the related loans underlying the investment, totaling $63 billion in UPB at December 31.

New investments in ESS continue to supplement the MSRs generated by the Correspondent Production business during the fourth quarter. ESS investments have become a meaningful portion of PMT's mortgage-related investment portfolio over the past year.

The anticipated acquisition of approximately $175 million of additional ESS investments by PMT will be a meaningful increase to the ESS investment in future periods..

Now let's move to Slide 13 and discuss the pending bulk MSR acquisitions with PennyMac Financial. The prospective investment in MSRs by PennyMac Financial and the subsequent excess servicing spread investment by PMT will be derived from multiple MSR pools acquired by PennyMac Financial, totaling $21 billion in unpaid principal balance.

The pending acquisitions consist of seasoned, high-quality Agency loans, and the combined prospective portfolio has a weighted average note rate of 3.86% and a weighted average delinquency rate of 4.25%.

The weighted average servicing fee on the portfolio is 33.4 basis points, and PMT is expected to invest approximately $175 million in ESS related to these pools, which represents a servicing fee strip [ph] of 17.5 basis points.

ESS is an attractive investment opportunity on an unlevered basis, and we are working on debt structures to obtain financing on these assets to enhance their returns. This pending acquisition reflects PennyMac Financial's track record of successfully boarding bulk MSR portfolio.

PennyMac Financial's operational platform is highly scalable with the capabilities, processes and systems in place to facilitate these types of transfers and is well positioned for future growth..

Now I'd like to turn the discussion over to Anne McCallion, PMT's Chief Financial Officer, to review the fourth 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, pretax earnings totaled $11.9 million, $11 million from Investment Activities and $900,000 from Correspondent Production. Additionally, fourth quarter net income included a tax benefit of $14.6 million.

This benefit was related to a loss in the taxable REIT subsidiary and an improvement in that entity's estimated tax rate..

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, segment revenues totaled $38.8 million, down 55% from the third quarter.

The quarter-over-quarter decline in revenues was driven by a decline in net gains on investments, partially offset by increases in net interest income, higher net loan servicing fees and a reduction in expenses, driven by lower management and servicing fees..

Net gain on investments, which includes realized and unrealized gains and losses on our distressed loan investments, Agency and non-Agency MBS and excess servicing spread, decreased by 78% from the third quarter.

Net gain on investments includes valuation gains on distressed loans of $20.7 million and gains on MBS of $3.4 million, partially offset by valuation losses on retained interest positions of $5.4 million and losses on ESS of $3.0 million.

Losses on ESS largely resulted from the reduction in mortgage rates during the quarter and expectations of increased prepayment speeds in the future. As those prepayments occur in future periods, however, PMT receives recapture income. PMT received $1.2 million of recapture income in the fourth quarter..

Partially offsetting lower Investment Activities segment revenues was a $2.8 million quarter-over-quarter increase in net interest income due to increased capitalized interest from loan modifications, which totaled $14.1 million versus $10.5 million in the previous quarter.

Capitalized interest on loan modifications is recorded as interest income and is generally offset by a negative adjustment to the fair value gains or losses of the loan. As a result, the increase in capitalized interest during the quarter was generally offset by losses in the fair value of the distressed loan portfolio..

Net loan servicing fees were $11.2 million, a $600,000 increase from the third quarter, which was partially offset by other losses of $6 million generally related to reductions in the value of REO properties as well as valuation adjustments for property preservation, taxes and maintenance costs.

Because our REO properties are recorded at the lower of cost or fair value, downward adjustments in value are recognized as a current period item, but increases in value generally are not recognized until the properties are sold..

Segment expenses decreased 11% quarter-over-quarter to $27.8 million, primarily due to a smaller distressed loan portfolio and seasonally lower resolution activity, in addition to lower incentive fee expense related to PMT's reduced financial performance in the fourth quarter..

Now I'd like to turn to Slide 17 and discuss the performance of the distressed loan portfolio in the fourth quarter in greater detail. PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans totaling $20.7 million in the fourth quarter compared to $81.3 million in the third quarter.

Valuation gains on distressed loans totaled $17.5 million in the fourth quarter compared to $75.2 million in the third quarter. Valuation gains on performing loans were $4.8 million, and on nonperforming loans were $12.7 million.

These gains are a significant decline from the third quarter due to lower current home price levels compared to prior forecasts and a lowered expectation for future price appreciation. Furthermore, seasonally lower reperformance and resolution activity also contributed to the decline in valuation gains compared to the prior quarter.

Payoff in sales gains on distressed loans totaled $3.2 million compared to $6.1 million in the prior quarter..

Liquidation activity on distressed loans continued to generate significant cash flows. For the fourth quarter, gross cash proceeds totaled $103.8 million.

With respect to the distressed loans liquidated during the quarter, $10.1 million in valuation gains have been recognized over the holding period of the assets, and another $7.2 million of gains were realized at liquidation..

Now let's turn to Slide 18 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 $34.3 billion in UPB, up from $32.3 billion at the end of the third quarter.

PMT also owns investments in ESS totaling $191.2 million, with the UPB related to the underlying loans totaling $28.2 billion..

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

This quarter, the value of the ESS investment was adversely impacted by the projection of higher future prepayment speeds resulting from the lower interest rate environment. When those prepayments occur, however, PMT will benefit from contractual recapture income..

The chart on Slide 18 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.

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

At the end of the quarter, the fair value of PMT's MSR asset was $21.8 million greater than its carrying value..

Let's now turn to Slide 19 and discuss the Correspondent segment's fourth quarter performance. Correspondent Production segment revenues totaled $14.2 million compared to $20.1 million in the third quarter.

Net gains on mortgage loans acquired for sale decreased 37% from the prior quarter, caused by a decline in the volume of interest rate lock commitments due to strong competition in the correspondent channel and a seasonal decline in volume. Net interest income for the segment was $3.4 million compared to $4.1 million in the third quarter.

Other income, which is primarily comprised of loan origination fees, declined 25% from the prior quarter to $4.9 million, driven by lower conventional conforming and jumbo loan acquisition volumes.

Expenses in the Correspondent Production segment decreased 23% quarter-over-quarter as a result of lower fulfillment fee expense from a decline in conventional and jumbo loan acquisition volumes during the quarter and a lower weighted average fulfillment fee..

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

Thank you, Anne. PMT continues to grow and diversify its investments. We continue to make new investments and prudently increase our use of leverage, which enhances returns to shareholders. PMT is investing in assets such as MSRs and ESS, which are well positioned in today's low interest rate environment.

And we see considerable opportunities for PMT to continue making attractive investments in mortgage-related assets as the U.S. economy strengthens. 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..