Good afternoon, and welcome to the First Quarter 2016 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 first quarter, PMT earned a total of $14.5 million in net income or $0.20 per diluted share, representing an annualized return on equity of 4%..

PMT paid a dividend of $0.47 per share for the quarter, and book value per share increased to $20.59 at quarter end..

Investment Activities and Correspondent Production..

The Investment Activities segment reported pretax income of $135,000 in the first quarter.

Segment results were adversely impacted by noncash valuation losses on GSE credit risk transfer investments, in addition to valuation losses on mortgage servicing rights, or MSRs, and excess servicing spread investments, or ESS, net of offsets from value gains on mortgage-backed securities and hedging activities..

The losses primarily resulted from credit spread widening and a significant decline in mortgage rates during the quarter, driven by concerns regarding overseas economic growth and the impact of low oil prices..

We also incurred higher costs related to the resolution of nonperforming loans and the sale of REO properties during the quarter..

Overall, PMT's investment returns underperformed our expectations in the first quarter..

Underperformance in distressed loan investments was approximately $10 million, approximately $6 million in valuation losses related to other credit investments and approximately $10 million for interest rate-sensitive strategies..

The Correspondent Production segment pretax income was $10.9 million for the quarter..

In the first quarter, PMT made new investments in credit risk transfer, or CRT, and mortgage servicing rights from its own correspondent production activity. Investments in GSE credit risk transfer totaled $67 million on $1.9 billion of PMT's conventional conforming production.

New investments in mortgage servicing rights from our correspondent production activities totaled $36 million..

We continued to execute on other strategic initiatives to enhance shareholder value this quarter through ongoing share repurchases and the sale of lower-yielding investments. We are redeploying capital from the resolution of distressed mortgage loans and asset sales into additional share repurchases and continued investment in CRT and MSRs..

In the first quarter, we repurchased 5.3 million PMT common shares at a cost of $66 million, and our Board of Trustees authorized an increase in the previously announced share repurchase program from $150 million to $200 million..

Turning to Slide 4. Cash flows from PMT's existing investment portfolio remain strong. Cash proceeds from the liquidation and paydown of distressed mortgage loans and REO totaled $96.5 million during the quarter..

We sold the ESS related to Fannie Mae and Freddie Mac MSRs for $59 million, which was a lower-yielding investment, because it was owned without leverage..

And after quarter-end, we sold $419 million in UPB of performing loans that resulted in approximately $100 million in net cash proceeds..

We have made progress transitioning our capital to investments, which are expected to deliver attractive returns on equity over time, such as GSE credit risk transfer on PMT's correspondent production. .

We remain committed to producing more stable results and distributing dividends that are consistent with such performance..

Now let's turn to Slide 5 and discuss our current perspectives on the mortgage market..

During the first quarter, financial markets worldwide experienced considerable volatility as concerns over global economic slowdown and the collateral impact from lower oil prices in the energy sector weighed on investor sentiment. These concerns drove a flight to quality in U.S.

treasuries, driving the 10-year bond yield to its lowest level in 2 years and credit spreads wider..

As a result, 30-year fixed mortgage rates declined by over 26 basis points during the quarter, resulting in a significant increase in refinancing activity. .

While lower rates are likely to benefit mortgage origination volumes and margins in future periods, they adversely impact the value of mortgage servicing rights, as the mortgages underlying these assets experience higher actual and projected future prepayment activity..

As the quarter progressed, we saw credit spreads begin to tighten as investors fears began to ease. One segment of the market that widened and did not rebound was mortgage credit, in particular, the first loss tranches of GSE credit risk transfer transactions.

We believe that this widening resulted from technical factors and the lack of liquidity in these securities, while the fundamental performance of these transactions remained strong..

In contrast to the volatility in the financial markets, housing fundamentals continued to show strength in existing sales, home prices, single-family housing starts this quarter, and in continued improvement in employment data for key home-buying age demographics.

Increased focus by homebuilders in the construction of starter homes, coupled with greater availability of low down payment mortgage products, are expected to drive more homebuyers into the market and propel continued strength in the purchase market, as we enter the spring/summer home-buying season..

The mortgage business is a highly regulated industry, and the company's approach to, and execution of, effective governance, compliance and operating systems is critical in today's environment. We've seen numerous recent examples in the industry of what can happen when controls are not effective. .

We believe that the quality of PennyMac's efforts in this regard and the focus we place on ensuring robust governance and operational controls continues to distinguish us versus the industry and will remain integral to our continued future success..

For the first quarter, PMT's investments generated an annualized return on equity of 3.9%, net of expenses and overhead. .

Distressed loan investments contributed an annualized return of 6.7% in the first quarter compared to a negative 1.4% in the prior quarter. .

While improved from the prior quarter, distressed mortgage loan investments underperformed our expectations as a result of several factors, including higher advances on nonperforming loans and increased REO resolution costs, partially offset by current period home price appreciation that was better than our prior forecast. .

Returns on the credit risk transfer investments were adversely impacted by valuation losses as a result of credit spread widening, partially offset by income related to the investment. .

Other credit-sensitive strategies include non-agency subordinate bonds and commercial real estate loans, which were adversely impacted by credit spread widening as well..

Combined credit-sensitive strategies delivered a 3.8% pretax annualized return on equity and $8.4 million of pretax income in the first quarter, but underperformed expected results by approximately $16 million..

Interest rate-sensitive strategies, which include the performance of our MSRs, ESS and agency and non-agency MBS positions and the related hedges, together generated a 2% pretax annualized return on equity, and $2.1 million of pretax income in the first quarter.

While we show the income contribution of each of these interest rate-sensitive strategies separately, they are managed in the aggregate as the interest rate sensitivity of MSRs and ESS are inversely correlated to the MBS positions. .

Valuation losses on the MSR and ESS assets, net of offsetting gains on hedges and MBS, primarily resulted from the decline in mortgage rates. .

The magnitude of the rate decline experienced resulted in approximately $10 million of underperformance for the interest rate-sensitive strategies.

Our hedge strategy was not positioned to fully offset the magnitude of the rate decline we saw, as we expect to benefit from increased recapture income and production-related earnings in subsequent periods..

Returns on Correspondent Production declined from the previous quarter, but remained well above the high end of the range of our targeted returns..

Now let's turn to Slide 7, and review PMT's targeted returns for each of these strategies..

PMT's current capital deployment strategies are focused on investments that can be generated from our own correspondent production activities, which include newly-created agency MSRs and GSE credit risk transfer investments. .

PMT is unique among mortgage REITs in its access to operational capabilities that allow it to generate these types of attractive investments..

MSRs, CRT and correspondent production..

Notable changes to our targeted return levels from the last quarter include a lower range for the unlevered and levered yields on distressed whole loans. This change acknowledges extended time lines and higher expenses related to the resolution of nonperforming loans and REO. .

GSE credit risk transfer levered returns increased primarily as a result of improved advance rates from financing and CRT investments..

Return for agency MBS increased as well, also resulting from improved financing terms..

Now let's turn to Slide 8, and discuss in greater detail the progress we made this quarter on PMT's share repurchase program..

As I mentioned in my opening remarks, we continued to execute on our stated objective of enhancing shareholder value. In the first quarter, we repurchased 5.3 million of PMT's common shares at a cost of $65.8 million. And since the inception of the program in August 2015, we have repurchased 6.3 million shares at a total cost of $82.2 million..

The estimated book value of the shares repurchased during the first quarter was $106.6 million for an effective purchase price discount to book value of 38%. The value at which we repurchased the shares contributed to the increase in PMT's book value to $20.59 from $20.28 at December 31..

As a result of our share repurchase activity, PMT's outstanding share count has decreased from approximately 75 million shares at the inception of the program last summer to just under 69 million shares as of April 4. Cash generated from our existing investments as well as asset sales are providing the capital necessary to fund share repurchases..

Now let's turn to Slide 9 and discuss our recent sale of performing mortgage loans..

PMT completed the sale of a performing loan pool totaling $419 million in UPB, generating approximately $100 million in net cash proceeds. All of the loans sold had at least 12 consecutive months in current payment status..

Investors in this asset class place the greatest value on loans with longer current payment history, and the sale helps demonstrate that a strong market exists for performing loans with high-quality attributes..

The sale represents the execution of our ongoing strategy of resolving segments of our distressed portfolio through loan modifications and subsequent sale of the seasoned re-performing loans..

After this sale, PMT's performing loan portfolio totaled approximately $800 million in UPB and consists of loans in varying states of re-performance. Approximately 2/3 of the performing loans have a current payment history of less than 6 months and will require seasoning before they are candidates for sale..

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 11 and discuss the resolution activity on PMT's distressed whole loan investments..

Here we show the 5-quarter trend for distressed loan resolutions, which includes liquidation and modification activities and totaled $241 million in UPB during the first quarter of 2016. Our resolution volumes show a positive long-term trend, driven by the sustained increase in modification activity..

Modifications totaled $115 million in UPB and comprised 47% of total resolution activity compared to 27% a year ago. Our focus on driving more resolutions through modification results in better outcomes for both the homeowner and PMT.

At March 31, the pipeline of modifications in process was $363 million in UPB, up from $277 million in UPB at the end of the same quarter last year..

Liquidation activities include payoffs, foreclosure sales to third parties, short sales and sales of REO properties to third parties. The UPB of total liquidation activities totaled $127 million and comprised 53% of total resolutions..

The percentage of resolutions achieved through liquidation outcomes has decreased, as new modification strategies implemented last year have gained traction. REO property sales have decreased over time as a percentage of total resolutions but have remained fairly consistent on an absolute basis..

In the first quarter, REO sales decreased modestly from the prior quarter, primarily as a result of the slowdown in home sales that typically occurs during the winter months and, to lesser degree, more properties converting to rentals.

We have also seen a sustained decrease in short sales and foreclosure sales as more loans are resolved through modifications..

Now let's turn to Slide 12 and discuss the operational results for Correspondent Production..

Correspondent Production totaled $9.7 billion in UPB for the first quarter, a 3% decline from the fourth quarter and a 21% increase in the first quarter of 2015..

Conventional loan acquisitions were $3.3 billion in UPB, a decrease of 6% from the prior quarter. The modest decrease in production volumes was in line with the overall origination market and reflects seasonal factors due to the purchase money focus of PMT's Correspondent Production..

Correspondent lock volume was $10.4 billion in UPB, a 3% decrease from the fourth quarter. Conventional locks were $3.9 billion in UPB, a 6% increase from the fourth quarter..

The decline in mortgage rates is driving higher mortgage demand. In April, total correspondent loan acquisitions were $4 billion in UPB, while interest rate lock commitments were $4.6 billion in UPB. April acquisitions represent a 24% increase from the average of $3.2 billion per month during the first quarter..

During the quarter, we continue to grow our correspondent seller relationships and focus on disciplined execution. At the end of the first quarter, we reached 437 correspondent seller relationships, up from 432 at the end of the prior quarter and up from 356 a year ago.

Additionally, purchase money loans accounted for 72% of our correspondent production. Our high concentration of purchase money volume continues to position us well, as we enter the spring/summer home buying season that will be aided by improved affordability resulting from the recent decline in mortgage rates..

Now let's turn to Slide 13 and discuss the continued development of our investments in GSE credit risk transfer related to our correspondent production..

In March, we announced a third credit risk transfer flow commitment with Fannie Mae, which is expected to total $5 billion in UPB of PMT's production and create a CRT investment totaling approximately $175 million when completed..

During the first quarter, PMT invested $66.7 million in CRT, backed by $1.9 billion in UPB of PMT's conventional conforming production. At the current time, approximately 70% of PMT's conventional conforming production is being delivered into CRT transactions, and we expect the percentage to increase to up to 75%..

In total, PMT's investments in CRT reached $214 million as of March 31, with a net equity investment of $84 million after the effects of leverage.

As Stan mentioned earlier in his remarks, our CRT investment incurred fair value losses of $6.7 million this quarter, as a result of credit spread widening. It is important to note that the underlying collateral performance of our CRT investment remains strong and was not a factor in the fair value loss.

As of March 31, 60-day-or-greater delinquencies were 5 loans in total or less than 2 basis points of outstanding UPB, and there have been no credit losses to date on our CRT investments. We continue to see significant potential for deploying additional capital into this strategy.

And in the bottom right hand corner of the slide, we've illustrated our forecasted capital requirement for ongoing CRT investments, which ranges from $24 million to $30 million, assuming total conventional conforming production of between $3.6 billion and $4.5 million in UPB per quarter..

Now let's turn to Slide 14 and discuss our investments in MSR and ESS. PMT's investment in MSRs and ESS is $777 million, down from $872 million at December 31, with the related loans underlying the investments totaling $82 billion in UPB at March 31.

Investments in MSRs, which result from PMT's correspondent production activities, totaled $455 million, down from $460 million at December 31, due to a reduction in carrying value..

As of quarter end, our investments in ESS totaled $322 million, down from $412 million at December 31, driven primarily by PMT's sale of ESS related to Fannie Mae and Freddie Mac MSRs to PennyMac Financial..

The Fannie Mae and Freddie Mac ESS was a lower-yielding investment that had been owned by PMT without leverage..

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?.

David, thank you. On Slide 16, we show the pretax earnings contribution from each of PMT's segments over the last 5 quarters. In the first quarter of 2016, PMT's pretax earnings totaled $11 million, comprised of $135,000 of pretax income from Investment Activities and $10.9 million of pretax income 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..

In the first quarter, investment segment revenues totaled $26.4 million, up 17% from the fourth quarter. The quarter-over-quarter increase in revenues was driven primarily by higher net loan servicing fees and an increase in interest income, partially offset by a decrease in net gain on investments..

Net gain on investments generated a loss of $3.9 million in the first quarter compared to a gain of $3.0 million in the prior quarter..

Net gain on investments in the first quarter included valuation gains on distressed loans of $14.4 million and a $4.1 million loss on CRT investments, primarily driven by credit spread widening..

Gains on distressed loans increased $12.4 million from the fourth quarter, which I will discuss in greater detail on Slide 19..

Our interest rate-sensitive strategies include several types of investments, some of which have offsetting exposures that help PMT manage interest rate risk. These investments include agency and non-agency MBS, MSRs and excess servicing spread..

Lower interest rates in the first quarter drove a fair value gain totaling $3.5 million in the agency and non-agency MBS portfolio..

Lower rates, which result in higher expected prepayments, contributed to valuation losses on ESS totaling $17.7 million net of recapture income totaling $1.8 million..

Net loan servicing fees resulting from PMT's investment in MSRs was $15.6 million in the first quarter, up from $7.5 million in the fourth quarter..

Hedge gains of $30 million exceeded MSR valuation losses of $11.4 million and provisioning for impairment of $17.7 million. The hedging activities are intended to manage PMT's net exposure across all interest rate-sensitive strategies..

Net interest income increased 7% quarter-over-quarter, which I will discuss in greater detail on the next slide..

Other investment losses were $3.7 million compared to a $5.1 million loss in the fourth quarter, driven by advances related to PMT's inventory of REO properties, accounted for at the lower of cost or fair value, which exceeded gains from the liquidation of REO properties..

Segment expenses were $26.3 million in the first quarter, down from $28.7 million in the fourth quarter, due to a decrease in the management fee resulting from share repurchases and a lower servicing fee expense resulting from a smaller distressed portfolio..

On Slide 18, we show the components of interest income for the Investment Activities segment, which is becoming an increasingly important contributor to the company's earnings..

PMT's net interest income grew 7% quarter-over-quarter and 58% year-over-year. The driver of this growth has been interest income earned from the distressed loans, which is largely comprised of capitalized interest from loan modifications..

Capitalized interest increased 2% in the first quarter to $23.3 million, resulting from growth in loan modification activity during the quarter..

Capitalized interest from loan modifications increases interest income and reduces gains from loan valuations..

Interest income on our excess servicing spread investments was $7 million, down 10% from the prior quarter, due to runoff of the underlying loans and the sale of ESS to PFSI..

Now let's turn to Slide 19 and discuss the gains and cash flows related to PMT's distressed loan portfolio..

PMT's distressed mortgage loan portfolio generated realized and unrealized gains on mortgage loans totaling $14.4 million in the first quarter compared to $2 million in the previous quarter..

Valuation gains on distressed loans totaled $12.9 million in the first quarter compared to a $700,000 loss in the fourth quarter..

Valuation gains on performing loans were $4.9 million, and valuation gains on nonperforming loans totaled $8 million.

Valuation gains on nonperforming loans were positively impacted this quarter by better current period home price performance than our prior forecast, while the long-term forecast for home price appreciation remained relatively unchanged..

The distressed loan portfolio also continues to be adversely impacted by lower realization values on certain loans, due to higher servicing advances resulting from the slower-than-expected transition of loans from foreclosure status to REO and reduced expected REO realization values due to elevated resolution costs..

Performing loan valuations were positively impacted by the recent loan sale, which helped demonstrate a strong market for performing loans with high-quality attributes. Additionally, performing loan valuations benefited from strong modification activities, from which some of the benefit flows through interest income and reduces loan valuation gains..

In addition, the performing portfolio has grown and increased in value over time as the loans season..

Payoff gains on distressed loans totaled $1.6 million compared to $2.6 million in the prior quarter..

Liquidation and paydown activity on distressed loans continued to generate significant positive cash flows. For the first quarter, gross cash proceeds totaled $96.5 million, down from $113.5 million in the fourth quarter..

With respect to the distressed loans and REO liquidated during the quarter, $4.9 million in valuation gains had been recognized over the holding period of the assets and another $6.1 million of gains were realized at liquidation..

Now let's turn to Slide 20 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 $44.2 billion in UPB, up from $42.3 billion at the end of the fourth quarter..

PMT also owns investments in ESS totaling $322 million, with the UPB related to the underlying loans totaling $38 billion..

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

In the first quarter, the fair value of the ESS investment decreased, in part due to the sale of ESS related to Fannie Mae and Freddie Mac MSRs to PennyMac Financial as well as a reduction in carrying value..

ESS valuation changes also included recapture income from PennyMac Financial totaling $1.8 million..

The chart on Slide 20 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..

At the end of the quarter, the fair value of PMT's MSR asset was $11.6 million greater than its carrying 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..

Let's now turn to Slide 21 and discuss the income statement and balance sheet treatment for the credit risk transfer transactions..

Our investments in credit risk transfer, or CRT, are largely evidenced by M1 bonds, which we own and pledge as collateral in financing transactions.

However, for accounting purposes, our investments in CRT are depicted as the components of M1 bonds, restricted cash and a net derivative consisting of the expected future cash inflows related to our assumption of credit risk and expected future losses of the credit guarantee..

This slide illustrates how the CRT transactions are carried on the balance sheet and flow through the income statement..

From inception of the CRT investment program last year through March 31, 2016, a total of $6.5 billion in UPB of residential mortgage loans has been delivered to the CRT special purpose vehicles, or SPVs, and in turn sold to Fannie Mae. We have deposited cash into the SPVs and it is recorded in other assets on our balance sheet..

The restricted cash balance combined with the net value of expected future cash inflows related to our assumption of credit risk and expected future losses, represent PMT's investment in credit risk on the delivered loans and largely comprise the M1 bonds..

Realized gains and losses recognized on the CRT investments represent cash income or loss to PMT from the SPVs. Gains and losses resulting from valuation changes represent mark-to-market valuations in this quarter, primarily resulting from changes in credit spreads.

Any payments made to Fannie Mae to settle our contractual losses would be made from restricted cash, and our losses are limited to the amount of restricted cash in the SPVs. To date, PMT's CRT investments have not experienced any losses..

the UPB of loans that, as of March 31, are current to 89 days delinquent; and the UPB of loans that are 90 days or more delinquent..

Finally, restricted cash included in other assets was $214 million at March 31. The net derivative was a liability of $4.2 million at quarter end. More detail on the performance of the loans underlying the CRT investment is presented on Page 35 of today's presentation..

Moving to Slide 22. Correspondent Production segment revenues totaled $25.8 million in the first quarter compared to $28 million in the prior quarter..

Net gains on mortgage loans acquired for sale totaled $15 million, a 5% decrease from the fourth quarter, primarily resulting from a decline in margins, which offset an increase in lock volumes during the quarter.

Net interest income for the segment decreased to $3.9 million from $5.2 million in the fourth quarter, largely due to a lower average balance of loan inventory during the first quarter versus the prior quarter..

Other income, which is primarily comprised of loan origination fees, was $6.8 million, a 2% decrease from the prior quarter..

Expenses in the Correspondent Production segment were relatively unchanged quarter-over-quarter, as the decline in acquisition volumes was offset by a higher weighted average loan fulfillment fee. The weighted average fulfillment fee rate in the fourth quarter was 40 basis points, up from 37 basis points in the prior quarter..

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

Thank you, Anne. As we described in our March strategic update presentation, we are focused on executing strategic initiatives that we believe will enhance value for PMT shareholders. We have been active in repurchasing PMT's common shares at a substantial discount to book value.

We are also committed to deploying capital in GSE credit risk transfer investments and mortgage servicing rights, which result from PMT's unique correspondent production business at attractive returns.

We are funding these activities with ongoing cash flows supplemented by the sale of lower-yielding investments, such as the successful sales of seasoned performing loans and Fannie Mae and Freddie Mac excess servicing spread, which we recently completed.

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 first 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..