Good afternoon, and welcome to the Second 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 second quarter performance on Slide 3. PMT earned $75.2 million in net income or $0.93 per diluted share, which represents an annualized return on equity of over 19%.

PMT paid a dividend of $0.59 in the second quarter and book value rose to $21.27 per share, up from $20.88 per share at the end of the first quarter. This quarter's results continued our track record of regular dividend distributions and growing book value..

The Investment Activities segment earned $70.9 million in pretax income as a result of strong performance from PMT's investment portfolio, driven by gains on distressed mortgage loans resulting from both an improving outlook for home prices and continued progress towards loan resolutions supported by higher market prices for performing loans. .

The Correspondent Production segment earned $2.4 million in pretax income, profitably generating attractive new MSR investments on newly originated conventional conforming and jumbo loans.

PMT generated $191 million in cash proceeds from the liquidation of mortgage loans and REO from its distressed mortgage loan portfolio during the quarter, $70 million of which came from selling a pool of performing loans with an unpaid principal balance of $81 million.

We continued to focus on maximizing the returns from our existing investments while continuing to make both investments in MSRs, sourced through the Correspondent Production business and excess servicing spread, in addition to selective new investments in distressed whole loans.

MSR and ESS investments grew to $506 million during the second quarter, representing $56 billion in UPB at June 30. .

For the quarter, direct investments in MSRs from conventional Correspondent Production activities totaled $29 million, representing $2.7 billion in UPB. Investments in excess servicing spread from many bulk and flow acquisitions of Agency, mortgage servicing rights by PennyMac Financial totaled $53 million, representing $5.5 billion in UPB.

Finally, we completed a previously announced acquisition of nonperforming loans, totaling $38 million in unpaid principal balance..

Now let's turn to Slide 4 and review our current perspectives on the market environment. During the second quarter, the average rate on the 30-year mortgage declined, helping to drive an increase in refinance activity.

By historical standards, mortgage rates remain relatively low, which helps to maintain the attractiveness of purchasing a home compared to renting in many markets across the country. Over the long run, we expect rates to rise as the Fed continues to taper its bond purchases and as signs of economic improvement continue to emerge.

While home prices on a national basis continued to increase, home price appreciation thus far in 2014 has slowed significantly from the rapid pace in 2013. Most industry forecasts expect that moderate home price appreciation will continue in 2014, with price increases likely driven by the improvement in the economy and a tight supply of housing. .

In recent months, we have seen signs of improvement in the U.S. economy, most notably in job growth, where more than 2 million new jobs have been added over the last 12 months. One trend that stands out is job growth in the very important 25- to 34-year-old age geographic, which is a key age cohort for first-time homebuyers.

This demographic segment accounted for nearly 34% of total job growth over the past year. .

Another factor impacting home prices is the supply of homes available for sale. Inventory of existing homes for sale is averaging 5.5 months, which reflects the tight supply in many areas of the country.

To summarize, moderate home price appreciation, coupled with a strengthening economy, bodes well for both an improving market for housing and the market for related financing. .

During the second quarter, we observed increasing prices for distressed loans, driven by strong investor demand and, in particular, demand for re-performing loans with clean payment histories..

Rising prices are incenting more sellers to bring assets to the market, which we believe will increase the supply of distressed loans available for sale in the future. We continue to believe that opportunities will exist to participate in this market, but it takes patience and diligence to find the right opportunities..

For the foreseeable future, the mortgage origination market will remain dominated by the GSEs, Fannie Mae and Freddie Mac and Ginnie Mae. Recent legislative initiatives aimed at developing an alternative structure to the GSEs have stalled and are not likely to move forward this year.

Further, we believe that it is unlikely that we will see a reduction to conforming loan limits. We view the agencies as essential to the mortgage market, but we believe that a healthy and normally functioning mortgage market should also have an active private-label securitization market, which remains limited today and continues to slowly emerge..

Opportunities exist in the market for further development of prime, non-Agency loan products and these opportunities may be a driver of growth in the non-Agency market over time. Recently, there has been increased scrutiny of non-bank mortgage companies and discussions about the risks they may pose.

We believe that our manager and service provider, PennyMac Financial, is distinguished among mortgage companies with its organically built operating platform, strong corporate governance culture and appropriate levels of capital. Our businesses are subject to considerable external oversight, including from the GSEs, regulators and our bank partners.

Furthermore, PMT does not have any business arrangements with affiliated companies for ancillary real estate-related services..

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

At present, these strategies include distressed whole loans, correspondent loan production and resulting investment in MSRs, excess servicing spread on MSRs acquired by PennyMac Financial, Agency and non-Agency MBS and retained interest from jumbo securitizations.

Together, we expect these investments to deliver attractive returns on equity for shareholders. In addition, we continue to see opportunities to improve PMT's returns by building out its capital structure with prudent increases in debt financing. PMT's current leverage ratio was 2.0x equity at June 30.

As we continue to build our investment portfolio, we will accomplish this through judicious use of debt financing..

Let's now turn to Slide 6 and discuss PMT's mortgage-related investments. On Slide 6, we illustrate our progress in achieving our objectives by demonstrating how PMT's mortgage investments have grown and diversified over the last 5 quarters.

We have added investments in excess servicing spread, retained interest from private-label securitizations of prime jumbo loans and Agency MBS, in addition to distressed whole loans, mortgage servicing rights and correspondent loan inventory.

Distressed mortgages loans comprise more than half of PMT's mortgage assets and are investments that, we believe, will continue providing attractive returns over time. Additionally, we added a combined $82 million to PMT's investments in MSRs and ESS during the second quarter and the total investment stood at $506 million at June 30.

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

Now I would like to turn to Slide 7 and discuss PMT's interest rate risk management approach. PMT invests in a variety of strategies, which have complementary sensitivities to interest rates. Some of our investments, such as MBS and retained interest from securitizations, rise in value with decreases in interest rates.

Other assets, such as MSRs and excess servicing spread, tend to rise in value with higher interest rates. These offsetting sensitivities moderate the overall balance sheet exposure to interest rate movements..

On Slide 7, we show the change in fair value during the second quarter of the various mortgage-related investments in PMT's portfolio, along with the related hedge positions.

We strategically manage to the overall interest rate exposure of PMT's investments through a variety of strategies that, we believe, minimize the impact from changes in interest rates.

What you see from this chart is that the fair value changes in the MBS and retained interest from securitizations were offset by a decline in the fair value of MSRs and ESS, in combination with fair value changes of certain hedging derivatives.

Overall, these positions limit PMT's overall interest rate exposure while earning current period income, such as interest income and servicing fees..

Now let's turn to Slide 8 and discuss our current strategic focus. PMT's overarching objective is to deliver long-term returns on equity and dividends to shareholders by managing an investment portfolio consisting of multiple residential mortgage-related strategies enabled by PennyMac Financial's unique capabilities and specialized operations.

We remain disciplined in pursuing investments in distressed whole loans and will be a selective buyer of these assets where the transactions meet our targeted returns. Investments in MSRs are generated through the acquisition of newly originated conventional conforming and jumbo loans through our Correspondent Production business.

PMT also invests in excess servicing spread from many bulk and flow acquisitions of Agency MSRs by PennyMac Financial, which totaled $74 million the first 6 months of 2014. MSRs and ESS continue to be attractive investments and we believe that additional opportunities exist to deploy capital in these investments going forward. .

The prime non-Agency loan market is another area of significant opportunity. We are working to develop new prime non-Agency products and working with our partners in the industry to gain greater comfort in implementing Appendix Q, which has been a challenge for lenders in the non-Agency market.

Non-Agency loan products are acquired by PMT through its Correspondent business and financed by private-label securitizations or through alternative financing.

We believe that holding non-Agency loans aggregated through the Correspondent business represents an attractive investment opportunity that, we believe, will deliver attractive returns while further diversifying PMT's investment portfolio..

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 10 and review our investments in distressed whole loans during the quarter. During the second quarter, we acquired $38 million in unpaid principal balance of nonperforming whole loans. Distressed whole loans have seen strong investor demand this year, which continues to drive prices higher.

As Stan mentioned in his remarks, we believe that the increase in prices for nonperforming and re-performing loans in today's market is incenting more sellers to the market and the supply of distressed whole loans that could come to market is expected to increase.

The higher prices for nonperforming loans appear to be driven by a combination of factors, including more optimistic investor expectations for future home price appreciation and their ability to monetize loans that ultimately re-perform.

Similarly, re-performing loans have seen strong demand as investors seek yield, with particularly strong demand for loans with clean pay histories. You can see the impact of the strong market for distressed assets reflected in PMT's gains on mortgage loans this quarter, which I will discuss in more detail in the next slide.

We also continue to manage our existing portfolio of nonperforming and re-performing loans to their optimal resolution and see bulk sales of performing loans as one of several means we can utilize to achieve that outcome..

Let's now move to Slide 11 and discuss in greater detail the factors driving the valuation gains in the distressed loan portfolio. During the second quarter, PMT recorded $63.7 million in net gains on mortgage loans in the distressed portfolio.

Contributing significantly to these gains during the quarter was the strong demand in the market for re-performing loans. Observed increase in market prices results in an adjustment to the weighted average discount rate, which drove a significant portion of performing loan gains this quarter.

Additionally, home price appreciation greater than prior expectations was also a contributor to valuation gains for both performing and nonperforming loans this quarter..

PMT also sold $81 million in unpaid principal balance of performing loans from the distressed portfolio during the quarter. As I mentioned, we continuously look at a variety of options to optimize execution for the assets in the distressed loan portfolio.

At June 30, the unpaid principal balance of performing loans in the portfolio was $910 million, up from $786 million at March 31. The loans in this portfolio are at varying stages of re-performance. Given current market conditions, as these loans continue to perform, we expect to see continued gains in fair value..

Let's now turn to Slide 12 and review the operational results of our Correspondent Production business. PMT's Correspondent acquisitions totaled $7 billion in unpaid principal balance in the second quarter, up 44% from the first quarter.

Conventional conforming and jumbo loan acquisitions were $3 billion in unpaid principal balance, an increase of 56% from the prior quarter. Correspondent lock volume for the quarter was $8.1 billion in unpaid principal balance, a 47% increase from the first quarter.

Conventional conforming and jumbo locks totaled $3.7 billion in unpaid principal balance, a 66% increase in the prior quarter..

PMT maintained its ranking as the #3 correspondent aggregator in the country and our volumes this quarter resulted in market share gains. In July, total correspondent loan acquisitions were $3 billion in unpaid principal balance and interest rate lock commitments were $2.9 billion in unpaid principal balance.

During the second quarter, we continued to deliver on initiatives to grow the number of seller relationships and deepen our relationships with existing sellers..

Our group of approved correspondent sellers increased from 271 at the end of last quarter to 316 lenders at June 30, with a target of reaching 350 approved sellers by year end. We remain focused on serving the needs of smaller originators, which we believe can benefit from our broad array of programs, delivery options and our proven execution.

We believe that these differentiating factors offer a compelling value proposition to these small sellers. .

Now let's turn to Slide 13 and review the economics of the Correspondent Production business. Pretax income in the Correspondent Production segment declined in the second quarter, reflecting narrower margins due to strong competition.

Segment pretax income as a percentage of interest lock commitments totaled 6 basis points during the quarter, a decline of 8 basis points from last quarter. Higher conventional and jumbo lock volumes during the quarter were largely offset by a decline in margins due to strong competition.

Our Correspondent Production also resulted in $29 million of new MSR investments on newly originated conventional conforming and jumbo loans, which generate income for our investment portfolio over time..

Turning to Slide 14. I'd like to discuss the growth in PMT's investment in MSRs and ESS. PMT's investment in MSR and ESS reached $506 million, up from $452 million at March 31, with the related loans underlying the investment totaling $56 billion at June 30.

New investments in excess servicing spread continued to supplement the organic MSR investments generated from conventional conforming and jumbo loans acquired through the Correspondent Production business during the second quarter.

ESS investments have become a meaningful portion of PMT's mortgage-related investments portfolio over the past year and we continue to seek additional opportunities for investment. .

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

Anne?.

Thank you, David. On Slide 16, we show the pretax earnings contribution from each of PMT's segments over the last 5 quarters. In the second quarter, pretax earnings totaled $73.3 million, $70.9 million from Investment Activities and $2.4 million from Correspondent Production. .

Now let's turn to Slide 17 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, including distressed mortgage loans, mortgage servicing rights, excess servicing spread, mortgage-backed securities and retained interest from private-label securitizations.

In the second quarter, segment revenues totaled $105.1 million, up 64% from the first quarter. Net gain on investments, which includes valuation gains on our investment portfolio, increased 72% from the first quarter.

The increase resulted from valuation gains on distressed loans totaling $63.7 million, a 92% increase from the first quarter, and payoffs and sales gains on distressed loans totaling $9.9 million, an increase of 47% from the prior quarter.

Valuation gains on MBS and retained interest were largely offset by losses on excess servicing spread as a result of their inverse relationships to interest rate changes..

The Investment Activities segment revenue also benefited from a $6.4 million quarter-over-quarter increase in net interest income and a $1.3 million increase in net servicing fee revenue..

Segment expenses increased 10% quarter-over-quarter to $34.2 million in the second quarter, primarily driven by higher professional services expenses and an increase in incentive fees paid to PennyMac Financial due to PMT's improved performance..

Now I'd like to turn to Slide 18 and dive a little deeper into the performance of the distressed loan portfolio in the second quarter. PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans, totaling $73.6 million in the second quarter, compared to $39.9 million in the first quarter.

Valuation gains totaled $63.7 million in the second quarter compared to $33.2 million in the first quarter. The nonperforming loan portfolio increased in value by $24.6 million in the second quarter, driven by an improvement in actual and forecast home prices in most geographic areas across the U.S.

and the progression of loans closer to their resolution, partially tempered by an increase in the projected loss severity for long-owned severely delinquent loans. Valuation gains on performing loans totaled $39.1 million during the second quarter due to strong investor demand for these assets.

As a result, the weighted average discount rate of the distressed portfolio overall decreased from 12.4% at the end of the first quarter to 11.8% at June 30..

Liquidation activity on distressed loans continues to generate significant cash proceeds. For the second quarter, gross cash proceeds totaled $191.1 million, which includes $70.3 million of proceeds from the sale of performing loans completed this quarter. Excluding the bulk sale of performing loans, cash proceeds totaled $120.8 million.

With respect to the distressed loans liquidated during the quarter, $30.8 million in valuation gains was recognized over the holding trade of the assets and another $13.7 million of gains was 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 $29.4 billion in UPB, up from $27.3 billion at the end of the first quarter.

PMT also owns investments in excess servicing spread totaling $190.2 million, with the UPB related to the underlying loans totaling $27 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.

The chart on Slide 19 shows some of the key metrics of PMT's MSR and ESS portfolio and it also 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 prepayments 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 $20.5 million greater than its carrying value..

Let's now turn to Slide 20 and discuss the Correspondent segment second quarter performance. The Correspondent Production segment revenues totaled $15.4 million compared to $12.3 million in the first quarter.

Net gain on mortgage loans acquired for sale increased 3% from the prior quarter, resulting from higher conventional and jumbo lock volumes during the quarter, which was largely offset by a decline in margins due to strong competition. Net interest income for the segment was $704,000 compared to a $20,000 loss in the first quarter.

Other income, which is primarily comprised of loan origination fees, increased by 90% from the prior quarter to $4.5 million, resulting from a 56% quarter-over-quarter increase in conventional conforming and jumbo loan acquisition volumes..

Expenses in the Correspondent Production segment increased 42% quarter-over-quarter, primarily as a result of higher fulfillment fee expense from increased Correspondent acquisition volumes. .

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

Thank you, Anne. Our investment portfolio continues to perform well and deliver attractive returns on equity. Across the market, a variety of opportunities exist in residential mortgage-related assets.

We remain focused on continuing to invest in MSRs resulting from our Correspondent Production activities, pursuing new ESS acquisitions in partnership with PFSI and working diligently to develop opportunities in prime non-Agency loans, while remaining patient in deploying new capital in distressed mortgage loans. .

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's second 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..