Good afternoon and welcome to the Second Quarter 2015 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 Chairman and Chief Executive Officer. .

Thank you, Chris. For the second quarter, PMT saw an improvement in its financial results driven by improved performance in the distressed loan portfolio and strong performance in Correspondent Production. PMT earned a total of $28.1 million in net income or $0.36 per diluted share, which represents an annualized return on equity of 7%. .

Investment Activities and Correspondent Production. .

The Investment Activities segment reported $19.9 million in pretax income. Our investment activity results were driven by gains on distressed mortgage loans.

Gains on MSRs and ESS were partially offset by valuation losses on the MBS portfolios reflecting our approach to interest rate risk management, which includes investments with offsetting exposures. .

The Correspondent Production segment earned $5.2 million in pretax income. While producing new investments in MSRs and GSE credit risk transfers, our correspondent loan acquisitions totaled $11.9 billion during the second quarter, up 49% from the first quarter. In addition, PMT reported a tax benefit of $3 million for the quarter. .

PMT's new investments during the second quarter were primarily in mortgage servicing rights and excess servicing spread. We invested $32 million in new MSRs representing $3.6 billion in unpaid principal balance from our conventional Correspondent Production activities.

Investments in PennyMac Financial-related ESS totaled $141 million, which represents a portion of $15.8 billion in UPB of bulk and flow acquisitions of Agency MSRs. .

The value of PMTs MSRs and ESS totaled $754 million at the end of the quarter, which relates to $83 billion of UPB. After quarter end, we completed the previously announced acquisition of $75 million in PennyMac Financial-related ESS from the bulk acquisition of Ginnie Mae MSRs totaling $8.5 billion in UPB. .

We also completed the deliveries for our first credit risk transfer transaction with Fannie Mae on $1.1 billion of PMT's own Correspondent Production. We are continuing to pursue similar transactions for our future Correspondent Production. .

PMT added significant amounts of financing, utilizing the structures we announced last quarter, including approximately $132 million in new MSR and ESS-related financing and $138 million in advances from the Federal Home Loan Bank of Des Moines at quarter end. .

PMT continued to generate strong cash flows from the liquidation of distressed mortgage loans and REO totaling $128.6 million during the second quarter. Net cash flows from our existing investments net of all operating expenses and after the repayment of debt associated with liquidated assets was $60.4 million for the quarter..

For the second quarter, PMT's results from distressed loan investments was in the range of our targeted returns.

Our interest rate-sensitive strategies underperformed due to actual prepayments in excess of modeled expectations that affected our MSR and ESS investments and a widening in mortgage-backed security spreads to interest rates swaps during the quarter. These items had a negative impact totaling approximately $10 million.

We believe that we made good progress during the quarter towards achieving our long-term targeted returns for PMT, which I will discuss in greater detail later in the presentation. .

Now let's turn to Slide 5 and discuss the returns on our investments during the second quarter. For the second quarter, PMT's investments generated an annualized return on equity of 7.3% after all expenses and overhead. Distressed loan investments contributed an annualized return of 13.1% compared to 5.5% in the prior quarter.

Performance of the distressed loan portfolio improved, as a result of higher loan resolution activity and better home price appreciation versus our prior forecast. .

Our interest rate-sensitive strategies, which include the performance of Correspondent Production, MSRs, ESS and agency and non-agency MBS positions collectively contributed an 8.8% return on equity.

These strategies are managed in aggregate, as the interest rate sensitivity of MSRs and ESS is inversely correlated to the MBS positions and to Correspondent Production, which helps to moderate the impact of interest rate movements to PMT's balance sheet. .

Returns on Correspondent Production improved from the first quarter, as a result of a 27% increase in lock volumes during the quarter. MSRs and ESS experienced valuation gains during the quarter, primarily resulting from lower projected prepayment activity due to higher mortgage rates..

These gains were muted by elevated actual prepayment activity on loans underlying the MSR and ESS investments. Conversely, our agency and non-agency MBS positions experienced valuation losses in the quarter due to higher mortgage rates and a widening of mortgage spreads to the interest rate swap curve. .

Now, let's turn to Slide 6 and review the growth of PMT's balance sheet and leverage. On Slide 6, we show the trends in PMT's mortgage assets over the last 5 quarters. PMT's balance sheet grew significantly, during the second quarter, largely driven by higher levels of Correspondent Production and inventory at quarter end..

Investment activity during the quarter included significant capital deployment in MSRs and ESS, which I discussed earlier. We funded these investments in part using the new financing structures we announced last quarter and added $132 million in new financing for our MSR and ESS assets, continuing to prudently increase the use of leverage. .

PMT's overall leverage ratio increased to 3.2x equity at quarter end versus 2.6x equity the quarter earlier.

Higher levels of correspondent inventory as well as $649 million of loans delivered to the CRT structure awaiting settlement that remains consolidated on the balance sheet, drove the increased weighted average leverage ratio, as these short-term assets are typically financed at advance rates exceeding 90%..

Now let's turn to Slide 7 and discuss our current perspective on the mortgage market. During the second quarter, we saw a robust mortgage origination market and a meaningful improvement in home purchase activity. The 30-year fixed rate mortgage remained low through most of the second quarter and has hovered around 4% in recent weeks. .

Low rates coupled with the impact of the FHA reduction in its annual insurance premiums continued to result in elevated refinance activity, which is expected to decrease in the third quarter. In addition, home purchase demand increased during the quarter..

Existing home sales reached an annualized rate of 5.5 million units, which is the highest pace since February of 2007, according to the National Association of realtors.

Combined with higher refinance activity, industry forecasts from Fannie Mae, Freddie Mac and the Mortgage Bankers Association have been revised upward and now predict a $1.4 trillion mortgage origination market for 2015. .

The demand for purchase money loans has also been driven by greater first-time homebuyer participation and a reduction in all cash transactions. A continued low inventory of homes for sale across many markets has contributed to the continued appreciation in home prices..

Lastly, regulatory actions against nonbank mortgage companies and pending regulation, including the new TILA-RESPA requirements set to take place later this year, reinforce the importance of effective governance, compliance and operating systems. .

Our manager and service provider, PennyMac Financial, remains focused on these areas, and we believe that the quality of our governance and our operating effectiveness distinguishes us from our competitors. .

Turning to Slide 8. I'd like to review PMT's strategy and how it continues to evolve. As a reminder, PMT's objective is to deliver superior returns over the long-term by investing in mortgage-related strategies that take advantage of the specialized operational capabilities of our manager.

Our investment strategies include distressed residential whole loans, which were PMT's initial focus and remain the majority of PMT's equity allocation today. We continue to consider new investments in distressed loans, but on an opportunistic basis.

PMT's recent capital deployment has focused on our interest rate-sensitive strategies and newer investment strategies. .

Our interest rate-sensitive strategies are comprised of correspondent loan production, the resulting MSRs, excess servicing spread, agency and non-agency MBS and retained interests from securitization of prime jumbo loans..

We manage these strategies together as part of our global hedge strategy, as they have offsetting sensitivities to interest rate changes.

We are also pursuing newer strategies, which we believe will deliver attractive returns on equity including GSE risk transfer investments based on our Correspondent Production and small balance commercial real estate loans. .

We remain diligent in pursuing a range of unique and attractive investment opportunities, such as MSRs and credit risk transfer, that over the long term should produce our targeted returns on equity. .

Now let's turn to Slide 9 and review PMT's performance for each of its strategies during the second quarter. On Slide 9, we lay out the long-term returns on PMT's investment strategies.

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

The ROEs shown are the targeted contribution for each strategy on a pretax basis and are net of direct expenses associated with the strategy. .

Each of our strategies exists within a broader global strategy that utilizes offsetting interest rate-sensitive investments to strategically manage the overall interest rate exposure of PMT's investments and minimize the impact from changes in interest rates..

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

Let’s now turn to Slide 10 and discuss the multiple ways in which PMT's unique correspondent business creates attractive investment opportunities. One of the key distinctions for PMT is its correspondent business.

The ability to generate attractive returns from aggregation activities, newly created agency MSRs and now credit risk transfer investments is unique among mortgage REITs. .

The correspondent business generates attractive returns from the acquisition, aggregation and securitization of newly originated mortgage loans. The majority of this production is high-quality agency eligible loans with financing advance rates of over 90%, making equity requirements relatively small.

Combined with short holding periods, this results in attractive returns on equity for this activity..

MSRs resulting from the securitization of aggregated loans through Fannie Mae and Freddie Mac create a valuable long-term asset for PMT and their returns generally improve in a rising rate environment.

These assets provide an attractive yield from the receipt of servicing fee income over the life of the asset in addition to potential future recapture income. Also, PMT is able to enhance the return on equity of these MSR investments with the addition of leverage. .

Lastly, PMT's high-quality Correspondent Production provides an opportunity to invest in the credit risk on loans delivered by PMT to Fannie Mae. PMT's investment generated from the credit risk transfer structure is a certificated security that can be efficiently financed.

We believe that this is a significant new opportunity for PMT, which further enhances the value of the correspondent business..

Now, I'd like to turn to Slide 11 and discuss PMT's credit risk transfer transaction in greater detail. We are pleased to announce that in July, we completed the delivery of loans into our first risk transfer deal backed by $1.1 billion of PMT's Correspondent Production.

These types of unique credit risk transfer investments have the potential to be a significant opportunity for PMT to deploy capital at attractive returns. And as I said previously, this structure provides PMT the ability to invest in the credit risk on its own Correspondent Production..

We have a strong desire to invest long-term capital in the high-quality nature of conventional conforming Correspondent Production, which results from the diligence and loan quality reviews performed in our correspondent operations. .

Our first credit risk transfer transaction will result in a bond totaling $38.5 million. Credit risk transfer is an exciting development that aligns the interests of PMT as the aggregator and owner of the first loss credit risk.

And while Fannie Mae remains the guarantor of the MBS, this structure significantly changes the government's loss exposure on these loans. We believe that further participation of private capital in mortgage credit risk is essential to the normalization of the mortgage market and ultimately reduces the risk to the U.S. taxpayer. .

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

Thank you, Stan. Let's turn to Slide 13 and discuss the value of the distressed whole loan portfolio. We believe that PMT offers investors an effective way to gain exposure to an improving housing market in the U.S., while we also believe that there is significant embedded value in our distressed portfolio, which is illustrated here. .

This slide shows where PMT's distressed loan portfolio was marked as of June 30, split between nonperforming and performing loans in the distressed portfolio. The bars on the right in blue are the outstanding principal balance or face value of the loans.

The green bars in the middle show the estimate of the current collateral value or the current value of the properties underlying the loans. We use several methods to estimate the current value of the properties, but they are primarily based on broker price opinions. .

The bars on the left in gray are our fair value marks for the assets as recorded on PMT's balance sheet. What you will note is that the fair value of the loans held by PMT is significantly lower than the value of the underlying properties.

The mark on the nonperforming loans is held on average at a 29% discount to current property value, while the mark on the performing loans is held on average at a 31% discount to current property value.

This embedded value is generally realized over time through a variety of loan resolution strategies we pursue, which are executed by the servicing operations of PFSI. .

In the case of nonperforming loans, valuation gains are recorded as each loan progresses closer to liquidation or is rehabilitated to a re-performing loan. Performing loans also have a significant embedded value, but their resolution options differ and include restructure through modifications and refinance strategies.

Many of PMT's performing loans were acquired as nonperforming loans and were brought back to performing status through successful servicing activities, which may have included a loan modification. .

Rehabilitated loans can continue to be held in our portfolio and earned interest income, as the underlying borrowers make their scheduled monthly payments or gains can be realized through portfolio sales after a repayment history is established. These loans become more valuable as re-performance history improves.

We continue to analyze the best execution for these portfolios and our manager, PennyMac Financial, is experienced in the opportunistic acquisition, sale and active management of these assets. PMT remains a leading investor in distressed whole loans with a track record of realizing value through this strategy..

During the second quarter, we did not purchase any new pools of distressed mortgages. However, as a leading investor, we remained active in reviewing pools available for sale in the market.

Distressed whole loans make up almost half of PMT's mortgage assets and it is important to understand that our distressed portfolio with a weighted average life of over 4 years is well-positioned to continue delivering strong cash flows to PMT for the foreseeable future. .

Let's turn to Slide 14 and discuss the resolution activity that occurred in PMT's distressed loan portfolio during the second quarter. Here we show the various resolution activities, which include liquidation activities, modifications and loan transitions from foreclosure REO.

Liquidation activities are payoffs, foreclosure sales to third parties, short sales and sales of REO properties to third parties. The UPB of total liquidation activities increased 11% from the first quarter. .

Modification activity increased by 10% quarter-over-quarter driven by the broadening of HAMP Tier 2 eligibility in January, which increased the number of loans approved for the trial modifications. .

These changes, in addition to the launch of a new proprietary modification program, helped to increase the pipeline of modifications in process from $58 million in UPB in the first quarter to $64 million in UPB in the second quarter..

As the modification pipeline increased, foreclosure to REO activity decreased 28% quarter-over-quarter driving down the number of completed foreclosures and ultimately the number of properties entering PMT's REO portfolio.

Additionally, the monthly average UPB in foreclosure that are in the loss mitigation pipeline increased by approximately 39% from the first quarter. These activities ultimately transition loans to the re-performing loan portfolio, often successfully helping borrowers avoid foreclosure and preserve homeownership. .

Now let's turn to Slide 15 and discuss the operational results for Correspondent Production. Correspondent Production totaled $11.9 billion in UPB for the second quarter, a 49% increase in the first quarter. Conventional conforming jumbo loan acquisitions were $3.6 billion in UPB, an increase of 24% from the prior quarter.

Correspondent lock volume for the quarter was $14.4 billion in UPB, a 52% increase in the first quarter. Conventional conforming and jumbo locks were $4.4 billion in UPB, a 27% increase in the prior quarter. .

In July, total correspondent loan acquisitions were $5.6 billion in UPB and interest rate lock commitments were $4.9 billion in UPB. Our increases in production volumes was the result of a larger overall origination market and our ability to capture the market opportunity and gain share..

Our correspondent platform was able to effectively scale to the higher demand and maintain service levels, while competitors struggled to keep up.

This performance reflects the investment in systems made by PennyMac Financial, many of which have been internally developed, and we believe is one of many significant barriers to entry in the correspondent business. .

Our correspondent clients need the loans they sell to us processed and funded in a timely manner, so they can clear their warehouse financing lines and make new loans. The ability of our platform to maintain consistent execution is a key reason for our success and the steadily increasing market share we've achieved over time..

Additionally, the market for whole loans sold to aggregators like us expanded, as private equity buyers for newly originated MSRs backed away from what is known as the co-issue market. This dynamic in particular resulted in an additional opportunity in the conventional conforming correspondent market..

During the quarter, we continued to execute on a number of strategic initiatives to grow market share and optimize our business relationships with existing sellers.

We have made significant gains in growing our presence in New England, which accounted for approximately 4% of our total production volume in the second quarter, and we now believe that we are well represented in that region..

Several other opportunities exist to expand into geographic markets where we are under indexed, such as the Midwest and Southeast. We've had success adding new correspondent seller relationships, which reached 377 at the end of June.

Our manager, PennyMac Financial, continued to have sales resources during the quarter to support our growth initiatives. Our efforts are aided by proprietary technology that enables us to identify seller-specific areas of opportunity. .

An important focus our growth is small- to medium-sized originators that can benefit most from our operational expertise and risk management capabilities. These sellers accounted for $2.3 billion of lock volume in the second quarter, up from $1.5 billion of lock volume in the first quarter..

We expect these relationships to contribute $1 billion per month of lock volume by the second quarter of 2016. Our goal is to grow our number of approved sellers by approximately 10% by year end, while continuing to maximize the business we do with each relationship. .

Now let's turn to Slide 16 and discuss MSR and ESS investment activity. PMT's investment in MSR and ESS reached $754 million, up from $581 million at March 31, with the related loans underlying the investment totaling $83 billion in UPB at June 30.

Investments in MSRs, which resulted from PMT's Correspondent Production totaled $395 million, up from $359 million at March 31. .

Investment in ESS totaled $359 million, up from $222 million at March 31, resulting from bulk, mini-bulk and flow MSR acquisitions by PFSI..

Our growth has been fueled in part through recently completed MSR and ESS financing facilities, which total approximately $240 million, including $132 million in new financing in the second quarter, which enhances returns and underscores PMT's partnerships with banking institutions. .

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 18, we show the pretax earnings contribution from each of PMT's segments over the last 5 quarters. In the second quarter of 2015, PMT's pretax earnings totaled $25.1 million, $19.9 million of pretax income from Investment Activities and $5.2 million of pretax income from Correspondent Production.

Additionally, second quarter net income included a tax benefit of $3 million. This benefit was related to a loss in PMT's taxable REIT subsidiary. .

Now let's turn to Slide 19 and look at the results of the Investment Activity segment. The Investment Activity segment income is derived from the performance of PMT's investment portfolio. In the second quarter, segment revenues totaled $47 million, up 149% from the first quarter.

The quarter-over-quarter increase in revenues was driven primarily by an increase in net gains on investment and higher net loan servicing fees. .

Net gain on investments in the second quarter included valuation gains on distressed loans of $30.1 million, a 75% increase from the first quarter, which I will discuss in greater detail on the next slide..

We strategically manage our overall interest rate exposure through a variety of strategies with inversely correlated interest rate sensitivities. These strategies include MSRs, ESS and agency and non-agency MBS. The net impact of valuation changes on ESS, agency MBS and non-agency MBS was a $7.5 million valuation loss during the quarter.

ESS had an $8.6 million valuation gain, while agency and non-agency MBS experienced valuation losses totaling $16 million during the quarter. .

Valuation gains on ESS resulted from lower projected prepayment activity on the loans underlying the investment driven by a rise in mortgage rates during the quarter. However, actual prepayments on the loans underlying the ESS investment remained elevated.

Recapture income paid to PMT by PennyMac Financial from recapture on loans underlying the ESS totaled $1.5 million for the second quarter and is included in the ESS valuation gains. .

Valuation losses in our MBS portfolios resulted from higher mortgage rates during the quarter, a widening in mortgage spreads to the interest rate swap curve and losses on the related hedges. .

Net interest income declined 2% quarter-over-quarter driven by a $300,000 decline in capitalized interest from loan modifications, which totaled $9.9 million for the second 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. .

Net loan servicing fees resulting from PMT's investment in MSRs were $13 million in the second quarter, up from $8 million in the first quarter. The higher income was driven by an increase in servicing fees collected from a growing MSR portfolio.

The rise in mortgage rates during the quarter resulted in MSR valuation gains and impairment recovery due to lower projected prepayment activity, which were offset by hedging losses. Other investment gains totaled $100,000 compared to a $4.2 million loss in the first quarter.

The improvement was driven by improved performance in PMT's inventory of real estate owned properties. .

Segment expenses were $27.1 million, unchanged from the prior quarter. PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans, totaling $30.1 million in the second quarter compared to $17.2 million in the first quarter. .

Valuation gains on distressed loans totaled $27.2 million in the second quarter compared to $15.4 million in the first quarter. Valuation gains on performing loans were $3.3 million and on nonperforming loans were $23.9 million.

Valuation gains benefited from higher actual home prices versus prior forecasts and improved transition, or roll rates of loans, transitioning into re-performance. .

Home price data used in our valuation model indicate home prices in various regions of the country have improved in recent months. Additionally, improving home prices increased the expected realization value of certain properties, transitioning from foreclosure to REO status during the second quarter. .

Payoff in sales gains on distressed loans totaled $2.9 million compared to $1.8 million in the prior quarter. .

Liquidation activity on distressed loans continue to generate significant cash flows. For the second quarter, gross cash proceeds totaled $128.7 million, up from $111.9 million in the first quarter.

With respect to the distressed loans and REO liquidated during the quarter, $9.2 million in valuation gains had been recognized over the holding period of the assets and another $7.7 million of gains were realized at liquidation..

Now let's turn to Slide 21 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 $37.1 billion in UPB, up from $35.2 billion at the end of the first quarter.

PMT also owns investments in ESS totaling $359.2 million with a UPB related to the underlying loans totaling $46.2 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 increased, primarily as a result of lower projected prepayment activity due to an increase in mortgage rates during the quarter.

However, actual prepayments on loans underlying the ESS investment remained elevated during the quarter, primarily due to the FHA mortgage insurance premium reduction that went into effect in the first quarter. ESS valuation gains also included recapture from PFSI totaling $1.5 million. .

The chart on Slide 21 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 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 $25.5 million greater than its carrying value. .

Let's now turn to Slide 22 and discuss the correspondent segment's second quarter performance. Correspondent Production segment revenues totaled $22.8 million compared to $18.8 million in the first quarter.

Net gains on mortgage loans acquired for sale totaled $11.2 million, a 10% increase from the prior quarter, resulting from a 27% quarter-over-quarter increase in conventional conforming and jumbo lock volumes. .

Net interest income for the segment was $4.2 million compared to $3.3 million in the first quarter. Other income, which is primarily, comprised of loan origination fees, increased 37% from the prior quarter to $7.3 million.

As a percentage of interest rate lock commitments, segment revenues totaled 51 basis points in the second quarter compared to 54 basis points in the first quarter. .

The decline resulted from strong competition in the conventional conforming loan market and normalization of industry capacity to process the elevated demand for mortgage loans experienced over the 2 quarters..

Expenses in the Correspondent Production segment increased 3.2% quarter-over-quarter, as a result of higher acquisition volume, partially offset by a 2-basis-point quarter-over-quarter reduction in the fulfillment fee to 43 basis points. .

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

Thank you, Anne. PMT's focus remains on investing in distinctive mortgage-related strategies that are enabled by our relationship with PennyMac Financial and its specialized operational capabilities.

Our credit risk transfer structure with Fannie Mae is the most recent example, allowing PMT to invest and further capture value from our correspondent production activities. We remain diligent in pursuing a range of unique and attractive investment opportunities.

We believe that over the long term, these strategies should produce our targeted returns on equity. .

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 PennyMac Mortgage Investment Trust's second quarter earnings discussion. For any questions, please visit our website at www.pennymac-reit.com or call or our Investor Relations Department at (818) 224-7028. Thank you..