Good afternoon, and welcome to the First Quarter 2014 Earnings Discussion for PennyMac Mortgage Investment Trust..

The slides that accompany this 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. I would like to begin with the highlights of PMT's first quarter performance on Slide 3. PMT earned $37.9 million in net income, or $0.50 per diluted share, which represents an annualized return on equity of 10%.

The reduction in earnings versus the last quarter was driven by reduced income from Correspondent Lending and lower gains in the distressed loan portfolio..

The Investment Activities segment earned $33.1 million in pretax income, which comprised 91% of PMT's pretax income for the quarter..

The Correspondent Lending segment earned $3.1 million in pretax income. Correspondent loan acquisitions totaled $4.8 billion in the first quarter, down 16% from the fourth quarter..

Lock volumes totaled $5.5 billion, down 8%..

During the first quarter, PMT completed selective new investments in distressed whole loans and excess servicing spread..

We completed the previously announced acquisition of nonperforming loans totaling $316 million in UPB and acquired an additional pool of nonperforming loans and REO totaling $120 million in UPB..

As part of our ongoing co-investment strategy, PennyMac Financial acquired $2.4 billion in UPB of MSRs during the quarter, and produced $21 million in excess servicing spread investments for PMT..

MSR and ESS investments reached $452 million, an increase of 5% from last quarter..

Also, PMT raised $80 million of equity to support the company's growth through at-the-market issuances of common shares..

After quarter-end, PMT entered into transactions to acquire $41 million in UPB of nonperforming whole loans, which are expected to settle in May, and approximately $26 million in excess servicing spread on MSRs that PennyMac Financial is expected to acquire in mini-bulk and flow transactions in the second quarter. .

Now, let's turn to Slide 4. PMT's overarching objective is to deliver superior long-term returns to shareholders by managing an investment portfolio consisting of multiple residential mortgage-related strategies..

Distressed whole loans; correspondent loan aggregation, and the resulting investment in MSRs; excess servicing spread on MSRs acquired by PennyMac Financial; retained interest from jumbo securitizations; and agency and non-agency MBS..

Together, we expect these investments to deliver an attractive return on equity for PMT, even with changes in the market environment such as the rise in interest rates that we have witnessed over the last year..

In addition, we see the opportunities to improve the returns on equity by building out PMT's capital structure with prudent increases in debt financing. PMT's current leverage ratio is 1.6x equity and is relatively low. We expect it to increase over time. .

While our objective is to deliver long-term return on equity, periodic results can fluctuate and are driven by many factors, such as changes in the value of our assets and liabilities due to the fact that PMT employs fair-value accounting broadly across most of the balance sheet.

For example, during the fourth quarter of last year, PMT saw higher levels of gains in the performing loan investments within its distressed mortgage loan portfolio. .

Our quarterly dividend level, which was $0.59 in the first quarter, is established by PMT and our Board of Trustees based on our performance outlook, which takes into account our expectation for the company's return on equity and our expected taxable income for the year in accordance with PMT's annual distribution requirements as a REIT..

On Slide 5, we demonstrate our progress in achieving our objective by showing PMT's mortgage investments at March 31, 2014, compared to the same time a year ago..

Significant additions of investments in excess servicing spread; retained interest from private-label securitizations of jumbo loans; and agency MBS; in addition to distressed whole loans; mortgage servicing rights; and our correspondent loan inventory..

We believe that our approach of multiple investment strategies allows the company to pursue attractive opportunities across the U.S. mortgage market as it continues to evolve and new opportunities emerge..

Furthermore, PMT's mix of investments has complementary sensitivities to fluctuations in interest rates, which can help moderate adverse impacts in the changing market environment..

Now, I would like to turn to Slide 6, and discuss the market environment and how these trends impact the opportunities in which PMT participates. Mortgage rates remain relatively low even though they have risen over the past year from historically low levels.

This has helped to maintain the attractiveness of purchasing a home compared to renting in many markets across the country..

Improvements in the overall U.S. economy remain modest. However, recent indicators, such as the latest Fannie Mae Home Ownership survey, provide optimism that home purchase demand is strengthening as we enter the traditional home-buying season..

While home prices on a national basis have risen significantly from year-ago levels, we have seen the rate of appreciation slow in recent months. Some of which appears to be a result of severe winter weather experienced in many parts of the country during the first quarter.

However, most industry forecasts suggest that home price appreciation will continue in 2014 albeit at a slower pace than last year..

Industry forecasts predict that the mortgage origination market in 2014 will reach $1.2 trillion compared to $1.9 trillion in 2013.

Agency and government-ensured loan products are expected to continue to comprise the bulk of mortgage originations, with activity in non-agency products remaining largely limited to bank originations and acquisitions of jumbo loans for their own balance sheets..

With the decline in refinance activity due to higher interest rates, over 60% of origination volume this year is expected to be purchase-money originations. The contraction in the U.S. mortgage origination market has increased competition, but also presents opportunities..

When origination margins were wider in 2012 and early 2013, it was easier for smaller originators to retain MSRs, as the net capital outlay required was lower than it is today.

What we're seeing now is a shift by these lenders towards both selling the MSRs that they had been retaining in order to raise capital, and selling more of their loans servicing released to correspondent aggregators such as PMT..

There has been a lot of discussion recently about GSE reform, with a new director leading FHFA, the regulator of the GSEs, and the recently proposed Johnson-Crapo bill in the Senate. We do not see a high likelihood of any significant changes in the role of the GSEs occurring in the near term..

While we believe that over the long term, a healthy and normally functioning mortgage market should consist of a combination of private-label and agency originations, with private-label mortgage originations comprising a greater percentage of total originations than the current level..

Nevertheless, we view agencies as essential components of the U.S. mortgage finance system, with a significant ongoing role to play. As a result, we expect that the agencies will remain strong and important business partners for PMT and PennyMac Financial in the future..

The non-agency origination market remains limited today. But the recent spread tightening and agency and private-label mortgage-backed securities leads us to feel more optimistic. Spread tightening helps make private-label securitization of jumbo mortgage loans more competitive with banks that originate and acquire loans for their balance sheet..

Also, we see the potential for additional prime loan products outside the definition of a qualified mortgage or what are being called non-QM loans, that are likely to emerge in order to satisfy consumer demands that are not currently being met in the market..

The market for MSRs remains active, with many smaller bulk and flow transactions occurring in the market, and there continues to be intermittent opportunities to acquire large bulk portfolios. I will elaborate on the nuances of this market in greater detail in a moment..

Finally, we continue to see opportunities to acquire distressed whole loans, and PMT remains a selective buyer of these assets where transactions meet its targeted returns..

Now, let's turn to Slide 7 and further discuss the opportunities in MSR acquisitions and ESS investments for PMT.

Our servicer, PennyMac Financial, continues to pursue opportunities to acquire MSRs, such as the mini-bulk and flow acquisitions it completed this quarter, in addition to larger acquisitions, such as the 2 bulk portfolios it acquired in the fourth quarter, and PMT continues to pursue opportunities to co-invest in excess servicing spread on these MSR acquisitions..

Given the recent discussions in the industry over the viability of this market and activities by PennyMac Financial's competitors, we wanted to provide you our perspective on the current market and where we see opportunities..

I'd like to begin with the fundamentals of why companies are selling MSRs. Larger banks are selling MSRs due to the combination of continuing operational pressures, higher regulatory capital requirements and the desire to shed non-core customers such as those that lack cross-sell potential..

As I mentioned earlier, independent mortgage lenders are increasingly selling MSRs in order to raise capital, as origination volumes have declined abruptly, and with reduced margins, many face operational losses..

Given these different motivations to sell, MSR transactions come to market in different ways. Large bulk transactions, by nature, tend to be intermittent. These transactions require considerable amounts of coordination among the various parties involved and can take months to complete.

There is a tension on these transactions from regulators, the agencies and the selling banks, and the capabilities of the acquiring servicer have become increasingly important..

There is, what we call, a mini-bulk market that consists of smaller MSR portfolios, which we expect to be a more consistent market throughout the year. In addition, there are flow transactions, which occur on a monthly basis.

These are typically MSRs sold by larger independent mortgage originators, who deliver loans directly to the agencies and simultaneously sell the MSRs. MSRs acquired by PennyMac Financial on a flow basis currently range between $100 million and $150 million in UPB per month..

Not all MSRs available in the market are attractive co-investments for PennyMac Financial and PMT.

For example, we tend to like GSE and Ginnie Mae MSR portfolios, where we believe PennyMac Financial has a distinctive expertise versus private-label MSRs in which there are often large delinquency-related advances, which could lead to misalignment with bond investment -- investors and borrowers..

There have been transactions in the market where the financial MSR asset is sold, but the loans remain subserviced either by the seller or another third party.

We are most interested in portfolios where there is operational transfer of the servicing to PennyMac Financial due to the importance of operational capabilities on performance and ability to recapture..

Lastly, PennyMac Financial is concerned about taking on undue liability to repurchase loans as a result of MSR acquisitions, as originator representation and warranty liability can't be significant.

As a result, we tend to focus on so-called bifurcated transactions in which the origination liability remains with the seller in the case of Fannie Mae and Freddie Mac portfolios, and Ginnie Mae MSRs where such liability is limited.

We also conduct significant due diligence, which can be very resource-intensive in order to mitigate our exposure to liability..

As MSR transactions come to market, we believe that PennyMac Financial is uniquely positioned to be a successful acquirer working with the selling institutions, agencies and regulators.

It has a proven track record of transferring and boarding MSRs acquired in complex transactions and numerous portfolios of distressed whole loans over the past 6 years..

PennyMac Financial also has an industry-leading operating platform with physical capacity in California and Texas, including space, infrastructure and processes to service more than $200 billion of UPB versus a portfolio of $84 billion in UPB today..

Lastly, our ability to co-invest in excess servicing spread provides a competitive edge in these acquisitions..

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 quarter..

In addition to completing the previously announced acquisition of the $360 million in unpaid principal balance of nonperforming loans, we acquired an additional pool of $120 million in unpaired principal balance.

Additionally, after quarter-end, we agreed to acquire $41 million in unpaid principal balance of nonperforming loans, which we expect to settle in May..

We are seeing some notable changes in the market for distressed whole loans. While we see and expect to see a continued supply of distressed whole loans for sale, in general, we find the pricing for these transactions to be unattractive..

We have seen new capital enter the market, and we believe that some of these investors are willing to invest in loans at unlevered yields that are below PMT's targeted returns and may be making more aggressive assumptions, for example, about expectations for future home price appreciation..

We remain patient and selective in making new investments in distressed whole loans, and we continue to monitor the market to assess best execution opportunities for our existing distressed portfolio investments..

Let's move to Slide 10 and turn to Correspondent Lending. PMT's correspondent acquisitions totaled $4.8 billion in unpaid principal balance in the first quarter, down 16% from the fourth quarter. Conventional and jumbo loan acquisitions were $1.9 billion in unpaid principal balance, a decline of 21% from the prior quarter..

Correspondent lock volume for the quarter was $5.5 billion in unpaid principal balance, an 8% decline from the fourth quarter. Conventional and jumbo locks totaled $2.2 billion dollars in unpaid principal balance, a decline of 13% from the prior quarter..

Volumes in correspondent acquisitions were affected by the 23% quarter-over-quarter decline in the U.S. origination market. Our volumes resulted in market share gains, and PMT maintained its ranking as the #3 correspondent aggregator in the country..

In April, total correspondent loan acquisitions were $2.2 billion in unpaid principal balance and interest rate lock commitments were $2.5 billion in unpaid principal balance..

During the first quarter, we made significant strides in growing the number of seller relationships and deepening relationships with existing sellers. We are particularly focused on serving the needs of small originators, which is a growing segment of the market.

We think that our broad array of programs, including deliveries on a best-efforts basis, offers a compelling value proposition to these lenders..

During the quarter, we increased our group of approved correspondent sellers from 229 to 271 lenders, and we expect additional growth through 2014, with a target of 350 approved sellers by year-end.

We have also seen progress in our initiatives to grow seller relationships and volumes in the Northeast, with approximately 40% of the new sellers added during the quarter coming from that region..

Now, let's turn to Slide 11 and review the economics of the Correspondent Lending business. Pretax income in the Correspondent Lending segment declined in the first quarter, reflecting the continued market contraction and heightened competition for conventional conforming loans. .

Segment pretax income, as a percentage of interest rate lock commitments, totaled 14 basis points during the quarter, a decline of 11 basis points from last quarter.

This decline was primarily driven by lower revenue from net gains on mortgage loans acquired for sale, which fell to 45 basis points, as a percentage of conventional and jumbo lock volume..

In addition to creating ongoing MSR investments for PMT, we believe Correspondent Lending produces desirable returns on equity due to rapid operational turn times resulting in short holding periods for correspondent inventory and access to low-cost debt financing for the inventory..

Turning to Slide 12, I'd like to discuss the continued growth in PMT's investment in MSRs and excess servicing spread or ESS. PMT's MSR assets are sourced organically as a result of PMT's conventional and jumbo correspondent aggregation activity.

PMT makes investments in excess servicing spread when it co-invests in agency MSRs acquired by PennyMac Financial from third-party sellers..

In such ESS investments, PMT acquires the right to receive a portion of the servicing fee cash flows over the life of the underlying loans without some of the credit operational market risks that are associated with owning the base MSR. We believe that MSRs and ESS are attractive investments for PMT that will provide meaningful returns over time..

During the first quarter, PMT's MSR investments grew by $11 million from the prior quarter-end, net of prepayments and valuation changes. PMT's investments in excess servicing spread grew by $12 million..

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

Anne?.

Thank you, David. On Slide 14, we show the pretax earnings contribution from each of PMT's segments over the last 5 quarters. In the first quarter, pretax earnings totaled $36.3 million, $33.1 million from Investment Activities and $3.1 million from Correspondent Lending..

Now, let's turn to Slide 15, and look at the results of the Investment Activities segment. This segment's income is derived from the performance of our investment portfolio, including distressed mortgage loans, mortgage servicing rights, excess servicing spread, mortgage-backed securities and retained interests from private-label securitizations..

In the first quarter, the Investment Activities' segment revenues totaled $64.3 million, down 18% from the fourth quarter. Net gain on investments, which includes valuation gains on our investment portfolio, declined 11% from the fourth quarter..

The decline resulted from lower distressed loan valuation gains and a fair-value loss on excess servicing spread investments due to lower interest rates at quarter-end, partially offset by recapture income of $1.9 million from PFSI..

Segment net interest income declined 13%, due in part to a $1.3 million quarter-over-quarter decline in capitalized interest income from loan modifications due to lower modification activity. .

Net servicing fee revenue declined 39%, largely due to fair-value adjustments and impairment on MSRs for the quarter, driven by expectations for higher prepayment speeds as a result of lower interest rates at quarter-end..

Segment expenses rose 5%, quarter-over-quarter, primarily due to higher servicing expense from a growing servicing portfolio of both nonperforming loan investments and MSRs..

Also, PMT incurred a $2.9 million liquidation fee on the sale of performing loans, which closed in January..

Now, I'd like to turn Slide 16, and dive a little deeper into the performance of the distressed loan portfolio in the first quarter. PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans totaling $39.9 million in the first quarter compared to $50.6 million in the fourth quarter..

Valuation gains totaled $33.2 million in the first quarter, compared to $44.7 million in the fourth quarter. Gains on nonperforming loans, which are driven by the progression of loans closer to their resolution and changes in home prices from forecast levels, increased by 5% from the fourth quarter..

Valuation losses on performing loans totaled $3.3 million in the first quarter, compared to a gain of $9.9 million in the fourth quarter, primarily due to adjustments for capitalized interest resulting from loan modifications.

Capitalized interest on loan modifications is recorded as interest income and is generally offset by a negative adjustment to the fair value of the loan..

The fourth quarter's performing loan valuation gains reflected a strong market for performing loans. However, the first quarter's valuation gains did not include similar changes in the prices for these assets..

Overall, valuation changes were impacted by slower-than-forecast rates of home-price appreciation, which was due in part to severe winter weather across much of the U.S. during the quarter..

Distressed loans continued to generate significant cash flows. For the first quarter, gross cash proceeds totaled $285.6 million. Proceeds from the loan sale of performing loans completed in the quarter totaled $194 million. Excluding the bulk sale of performing loans completed in the quarter, cash proceeds totaled $91.6 million.

Of the proceeds realized in the first quarter, $56.2 million was attributable to valuation gains recognized over the holding period of the loans and another $9 million of gains were realized debt liquidation..

Now, let's turn to Slide 17 and discuss the value of PMT's mortgage servicing rights and excess servicing spread assets. PMT's mortgage servicing rights portfolio, which is subserviced by PennyMac Financial, grew to $27.3 billion in UPB, up from $25.8 billion at the end of the fourth quarter..

MSRs 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. The chart on Slide 17 shows some of the key metrics of PMT's MSR portfolio and highlights the difference between the carrying value of PMT's MSRs and their fair 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.

At the end of the quarter, the fair value of PMT's MSR asset was $24.7 million greater than it's carrying value..

Now, let's turn to Slide 18, and discuss the Correspondent segments' first quarter performance. Correspondent Lending segment revenues totaled $12.3 million compared to $18 million in the fourth quarter. .

Net gain on mortgage loans acquired for sale declined 28% from the prior quarter, largely resulting from lower conventional and jumbo lock volumes during the quarter..

The net interest loss was caused by a higher average financing cost from lower warehouse line utilization during the quarter. .

Other income, which is primarily comprised of loan origination fees, decreased by 21% from the prior quarter..

Expenses in the Correspondent Lending segment fell 22% quarter-over-quarter, primarily as a result of lower fulfillment fee expense from lower correspondent acquisition volumes..

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

Thank you. Anne. We believe that PMT is well-positioned to continue delivering on its investment objective, and our outlook remains positive..

The existing investment portfolio should continue to generate strong returns, and we expect to grow PMT's investments in a patient and prudent manner. We see a flow of opportunities in excess servicing spread and distressed loan pools, where we are being selective. .

At present, we believe that the taxable earnings generated by PMT's assets and future investment opportunities are consistent with the current dividend level. We remain vigilant in pursuing investment opportunities, and working to deliver superior long-term returns for our shareholders..

Finally, 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 first quarter earnings discussion. For any questions, please visit our website at www.pennymac-reit.com or call our Investor Relations Department at 812-224-7028. Thank you..