Good afternoon, and welcome to the Fourth Quarter 2016 earnings discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available from PennyMac Mortgage Investment Trust website at www.pennymac-reit.com. Before we begin, please take a few moments to read the disclaimer on Slide 2 of the presentation. Thank you. .

Now I'd like to turn the discussion over to Stan Kurland, PMT's Executive Chairman. .

Thank you, Chris. For the fourth quarter, PMT reported net income of $31.2 million or $0.44 per diluted share, representing an annualized return on equity of 9%. PMT paid a dividend of $0.47 per share for the quarter, and the book value per share increased to $20.26 at quarter end from $20.21 for the prior quarter..

PMT's fourth quarter results were driven by strong contributions from our GSE credit risk transfer investments, or CRT, Correspondent Production and an income tax benefit.

The income tax benefit was primarily driven by the performance of interest rate hedges held in the taxable REIT subsidiary, which produced a loss, offset by gains on other interest-rate sensitive assets. .

Investment Activities and Correspondent Production. The Investment Activity segment reported pretax income of $2.1 million in the fourth quarter. The correspondent segment reported pretax income of $11.7 million for the quarter. .

Our distressed loan investments underperformed expectations. The decrease in value was primarily driven by recidivism of previously performing loans and reduced expectation for future loan performance and recoveries.

Our fourth quarter activities included continued investments in GSE credit risk transfers and mortgage servicing rights resulting from PMT's Correspondent Production business.

Conventional correspondent loan production totaled $7.5 billion in unpaid principal balance, up 3% from the third quarter, resulting in the addition of $101 million in new mortgage servicing rights.

CRT-eligible deliveries for the fourth quarter totaled $2.6 billion in UPB, resulting in $24.1 million in new CRT investments, which will increase to approximately $92 million upon completion of the aggregation period..

Cash proceeds from the liquidation and pay down of distressed mortgage loans and real estate owned were $92 million. After quarter end, we entered into an agreement to sell $89 million in UPB of performing loans, reflecting the continued progress we are making in liquidating and resolving our distressed mortgage investments. .

Now let's turn to Slide 4 and discuss our perspective on the current mortgage market. Mortgage rates rose sharply in the fourth quarter from the near-historic low levels of the third quarter. The average 30-year fixed-rate mortgage ended the quarter at approximately 4.3%, up from 3.4% in October.

So far in 2017, we have seen rates decline slightly from year-end levels. .

With a new administration in Washington, any regulatory or policy changes affecting the mortgage industry remain uncertain at this point. Regulations enacted since the financial crisis have resulted in higher origination and servicing standards and many positive outcomes, including improved consumer protection.

However, increased regulation also resulted in substantially higher cost to originate and service mortgages, which has increased the cost of homeownership for consumers.

Over the long term, we believe there will be more balanced consideration of the costs and benefits of regulation, but any significant impact on the mortgage industry in the near term is likely to be limited. .

Over the last few years, FHFA has supported efforts to reduce taxpayer risk by increasing the role of private capital in the mortgage market.

FHFA's score card for Fannie Mae and Freddie Mac in 2017 continues to prioritize these efforts and has established an objective for the GSEs to transfer a meaningful portion of credit risk on at least 90% of the single-family mortgages in targeted categories.

This makes 2017 the third year in a row that FHFA has expanded the scope of credit risk transfer, or CRT, transactions, creating additional investment opportunities for PennyMac Mortgage Investment Trust, or PMT..

Despite incrementally higher interest rates, home sales growth is expected to continue, driven by strong underlying macroeconomic trends. While mortgage rates remain near historic lows, the lack of available housing inventory is likely to remain a challenge in some areas of the country..

Now let's turn to Slide 5 to discuss PMT's equity allocations and mortgage-related strategies. PMT invests in mortgage-related strategies that leverage the unique operational capabilities of PMT's manager and service provider, PennyMac Financial.

PMT's equity allocation has shifted as we have deployed capital into different strategies due to changes in market opportunities and risk-adjusted returns available to PMT. As the chart indicates, our capital deployment has more recently favored MSRs and GSE credit risk transfer transactions related to our Correspondent Production..

Today, less than 40% of PMT's equity remains allocated to distressed loan investments compared to nearly 70% 2 years ago. We expect our equity allocation to continue to shift over time as we redeploy capital into newer strategies. .

Now let's turn to Slide 6 and discuss our progress in reducing PMT's distressed investments through liquidations and sales. The UPB of PMT's portfolio of nonperforming loans has decreased 40% from the same period a year ago, representing an average reduction of approximately $171 million per quarter.

This underscores the progress we have made in resolving the nonperforming portfolio. .

A major driver in resolving distressed loans is REIT performance primarily through modifications. REIT-performing loans can ultimately be sold into a well-established market for these assets after at least 6 months of performance history has been achieved.

PMT's portfolio of performing loans increases as nonperforming loans transition to performing status and decreases with loan sales, payoffs or recidivism.

We remain focused on pursuing strategies to expedite the resolution of the nonperforming portfolio in transition of PMT's capital into other unique opportunities, including GSE credit risk transfer from our Correspondent Production activities..

Now let's turn to Slide 7 and discuss the fourth quarter's results by strategy. PMT's investments in the fourth quarter generated an annualized return on equity of 9.2% net of expenses and overhead. Distressed loan investments contributed a pretax loss of $2.1 million in the quarter, which equates to a negative 1.5% return on equity.

Credit risk transfer investments generated pretax income of $8.7 million, driven by a growing CRT investment and credit spreads tightening. In total, credit-sensitive strategies contributed $6.2 million in pretax income and a 3.3% annualized return on equity during the fourth quarter..

Interest rate-sensitive strategies, which include the performance of our MSRs, excess servicing spread and agency and nonagency MBS positions and related interest rate hedges together generated $5.5 million in pretax income and a 5.6% annualized return on equity in the fourth quarter.

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

Valuation gains on the MSR and ESS assets resulted from fair value changes attributable to lower expected prepayment activity as interest rates increased in the fourth quarter..

The contribution from Correspondent Production represented $12.9 million in the fourth quarter, down from $32 million in the prior quarter. This was driven primarily by lower lock volumes and lower margins. .

Now let's turn to Slide 8 and discuss the run rate income potential for PMT's strategies. We believe PMT's mortgage-related strategies as a whole have the potential to produce earnings in line with our current dividend level.

The income potential depicted here does not reflect any share repurchases, gains or losses related to fair value changes or bulk asset sales, such as distressed loans..

Returns on net credit-sensitive strategies are expected to improve over time with more capital allocated to CRT investments and away from distressed loans. In addition, returns on net interest rate-sensitive strategies are expected to improve from fourth quarter levels as MSR and ESS amortization normalizes.

We also expect contributions from Correspondent Production to moderate in the near term, driven by a reduced origination market.

While higher mortgage interest rates are expected to result in a smaller overall origination market in 2017, we anticipate some offset for market share growth in conventional Correspondent Production and PMT's emphasis on purchase originations..

PMT's objective is to distribute a dividend consistent with earnings per share. In our evaluation of earnings potential for PMT and the appropriate dividend for PMT, we consider the income required to be distributed for the year in order to maintain our tax-advantaged status as a REIT. REIT-taxable income is a floor for dividend payments. .

This concludes my overview of PMT's fourth quarter performance.

Before we move forward with a review of our mortgage investment activities, I'd like to call your attention to recent changes in the roles of certain executives at PMT in conjunction with organizational changes announced in December by PennyMac Financial, PMT's manager and service provider..

As of the first of this year, I have taken on the role of Executive Chairman of PMT. My primary focus now is advising and guiding our senior management team in their areas of responsibility where I have strong experience, knowledge and business acumen.

David Spector, who previously served as President and Chief Operating Officer, has become President and Chief Executive Officer of PMT..

In addition, we named Andy Chang, who previously was Senior Managing Director and Chief Business Development Officer, to the role of Senior Managing Director and Chief Financial Officer of PMT. You will hear from David and Andy shortly. .

I would also like to note that Anne McCallion, Andy's predecessor as CFO, has moved into the role of Senior Managing Director and Chief Enterprise Operations Officer for PMT. Doug Jones has moved into the role of Senior Managing Director and Chief Mortgage Banking Officer for PMT.

He previously served as Senior Managing Director and Chief Institutional Mortgage Banking Officer. These changes are very positive steps in the evolution of PMT, and I am confident that we have the right leadership team in place to ensure PMT's continued success. .

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

Thank you, Stan. Let's turn to Slide 10 and discuss the resolution activity on PMT's distressed home loan investments. Here, we show the 5-quarter trend for distressed loan resolutions, which include liquidation and modification activities and totaled $237 million in UPB during the fourth quarter. .

Quarterly resolution activity was robust and increased as a percentage of the nonperforming loan portfolio to 23% in the fourth quarter of 2016 from 15% in the fourth quarter of 2015.

Modifications totaled $114 million in UPB during the quarter and comprised 48% of total resolution activity compared to 52% in the third quarter and 39% in the fourth quarter a year ago..

Our focus on driving REIT performance through loss mitigation programs results in positive outcomes for both the homeowner and PMT, generally allowing homeowners to remain in their homes with improved mortgage terms and helping to expedite PMT's transition out of distressed loan investments.

For the fourth quarter, streamline modifications totaled $82 million in UPB, up from $78 million in the prior quarter. Streamline modification programs are helpful because they eliminate income documentation requirements and move borrowers into a trial modification once they make their first modified payment. .

Liquidation activities totaled $118 million in UPB, up from $105 million in the third quarter and comprised 50% of total resolutions. Liquidation activities include payoffs, foreclosure sales to third parties, short sales and sale of REO properties to third parties. .

In the fourth quarter, REO property sales were $84 million, up from $76 million in the prior quarter and comprised 35% of total resolution activity. REO inventory declined to $274 million at December 31, down from $288 million at September 30.

In addition, new REO rentals totaled $6 million in the fourth quarter, down from $7 million in the prior quarter, while the REO rental portfolio was $29 million at December 31, up from $26 million at September 30..

Now let's turn to Slide 11 and discuss the operational results for Correspondent Production. Correspondent Production totaled $20 billion in UPB for the fourth quarter, up 6% from the third quarter, while conventional loan acquisitions were $7.5 billion in UPB, an increase of 3% from the prior quarter.

On a year-over-year basis, our Correspondent Production volumes increased 100%, and conventional conforming acquisitions increased 117%..

In addition, total interest rate lock volume was $19.2 billion in UPB, down 11% from the previous quarter. January correspondent acquisitions totaled $5 billion in UPB, while interest rate lock commitments totaled $4.5 billion in UPB. .

Purchase-money loans accounted for 62% of our correspondent production during the quarter. Purchased-money volumes continued to comprise a majority of production in the fourth quarter, outpacing the overall origination market, which as Stan mentioned earlier, positions us well for the anticipated production mix in 2017. .

We continue to grow seller relationships in the fourth quarter, driven by success in expanding our nondelegated correspondent program launched in the second quarter of 2016. During the quarter, the number of seller relationships increased to 522 in the fourth quarter, up from 504 in the prior quarter. .

Now let's turn to Slide 12 and discuss the continued developed of our investments in GSE credit risk transfer relating to our Correspondent Production activities. At the end of the fourth quarter, PMT's total credit risk transfer, or CRT investments, totaled $450 million, which after leverage, resulted in an equity allocation of $161 million. .

During the quarter, we completed $2.6 billion in UPB of deliveries to Fannie Mae. The structure of our most recent CRT commitment allows a more efficient deployment of capital during the aggregation period, resulting in a slower pace of cash investment until the aggregation period is completed..

The total income contribution from CRT investments in the fourth quarter represents an annualized return on equity of 20.8%, including market-driven gains from credit spread tightening. Excluding market-driven value changes, the annualized return on equity was 16.8%, driven by a growing CRT investment and strong performance on the underlying loans.

We have included additional performance and credit metrics on CRT on Slides 20 and 30..

Now let's turn to Slide 13 and discuss our MSR and ESS investments. PMT's current investment in MSRs and ESS is $945 million, up from $805 million at September 30. As of December 31, the related loans underlying the MSRs totaled $56.3 billion in UPB, while the related loans underlying ESS totaled $32.4 billion in UPB.

Organic investments in MSRs, which result from PMT's Correspondent Production activities, increased to $657 million, up from $525 million at September 30, reflecting strong Correspondent Production volumes. .

As of the end of the fourth quarter, our ESS investments resulting from bulk, mini-bulk and flow MSR acquisitions by PennyMac Financial totaled $289 million, up from $280 million at September 30. Higher carrying values reflect expectations for lower future prepayment activity resulting from the rise in mortgage rates during the fourth quarter..

Now I'd like to turn the discussion over to Andy Chang, PMT's Chief Financial Officer, to review the fourth quarter's financial results. .

Thank you, David. On Slide 15, we show the pretax income contributions from each of PMT's segments over the last 5 quarters. As Stan mentioned earlier, PMT's fourth quarter pretax income totaled $13.9 million, comprised of $2.1 million in pretax income from Investment Activities and $11.7 million of pretax income from Correspondent Production..

Now let's turn to Slide 16 and review the results of the Investment Activities segment. The Investment Activities segment income is derived from the performance of PMT's investment portfolio. In the fourth quarter, segment revenues totaled $26.3 million, a decrease of $15 million from the third quarter.

The quarter-over-quarter decrease in revenues was driven primarily by an $8 million decrease in net loan servicing fees, a $4.3 million increase in other losses and a $2 million decrease in net gain on investments. .

Net gain on investments was $12.3 million in the fourth quarter compared with $14.3 million in the third quarter.

Net gain on investments for this quarter was primarily driven by $18.9 million in ESS gains and recapture income, a $10.4 million gain on CRT, and $7.5 million of gains from hedging derivatives, partially offset by a $23.1 million valuation loss on mortgage-backed securities due to higher interest rates. .

Net loan servicing fees, which represents revenue associated with PMT's investments in MSRs and the related hedging derivatives, were $7.8 million in the fourth quarter, down from $15.8 million in the third quarter. Net interest income decreased $800,000 quarter-over-quarter, which I will discuss in greater detail on the following slide.

Other investment losses were $5.4 million compared with losses of $1.1 million in the third quarter, driven by REO valuation losses and higher REO-related advances due to a seasonal increase in real estate tax payments. .

Segment expenses were $24.1 million in the fourth quarter, a decrease from $27.6 million in the prior quarter, driven by adjustments to estimates of liquidation expenses, partially offset by $1.3 million in servicing activity fees related to a sale of performing loans from the distressed portfolio completed in the fourth quarter. .

Now let's turn to Slide 17 and discuss the components of interest income for the Investment Activities segment. Net interest income from Investment Activities was $11.6 million, a 6% quarter-over-quarter decrease.

Interest income from PMT's distressed mortgage loans totaled $25.9 million, an 11% quarter-over-quarter decrease due to a modest decline in capitalized interest from loan modifications during the quarter. .

Interest income from distressed mortgage loans in the fourth quarter included $22 million of capitalized interest from loan modifications. Capitalized interest from modifications increases interest income and reduces valuation gains on performing loans in the period when the loan is modified.

Total interest expense for the Investment Activities segment was $29.6 million, a decrease of 4% from the prior quarter. .

Now let's turn to Slide 18 and discuss the revenue and cash flows related to PMT's distressed loan portfolio. PMT's distressed mortgage loan portfolio generated realized and unrealized losses on mortgage loans totaling $1 million in the fourth quarter versus losses of $3.4 million in the third quarter.

Valuation losses on distressed loans totaled $2.1 million in the fourth quarter compared to losses of $4.8 million in the third quarter. A significant portion of the valuation losses this quarter reflect loans modified to performing status that result in capitalized interest, which increases interest income and reduces loan valuation gains.

Combining the total net losses with net interest income, revenue from distressed loans was $13.1 million compared with $14.1 million in the third quarter. .

The revenue from the distressed loan portfolio underperformed PMT's expectations, primarily resulting from increased recidivism of previously performing loans and adjustments to future expectations of loan performance and recoveries.

Positively impacting valuation gains for the distressed loan portfolio were home prices, which were better than prior forecasts. Gains from the payoff of distressed loans totaled $174,000 compared with $1.3 million in the prior quarter. Liquidation and paydown activity on distressed loans increased significantly from the prior quarter.

For the fourth quarter, gross cash proceeds from the liquidation of mortgage loans and REO before debt repayment and payment of related expenses totaled $92 million, up from $75 million in the third quarter, reflecting steady progress in our resolution activities. .

With respect to the distressed loans and REO liquidated during the quarter, $1.1 million in net valuation gains were recognized over the holding period of the assets, and $3.8 million of gains were realized at liquidation.

PMT also completed its previously announced bulk sale of performing loans during the fourth quarter, which generated $139 million in gross cash proceeds and an approximately $41 million in net cash proceeds after debt repayment and related expenses. .

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 subserviced by PennyMac Financial, grew to $56.3 billion in UPB, up from $50.9 billion at the end of the third quarter.

PMT also owns investments in ESS, with a UPB on the underlying loans of $32.4 billion. .

MSRs and ESS comprise a significant portion of PMT's long-term investments, and their fair value generally increases when interest rates rise and decreases when rates fall. In the fourth quarter, these investments generated fair value gains as a result of lower expected future prepayment activity.

ESS income during the fourth quarter also included $1.8 million in recapture income from PennyMac Financial..

The chart on Slide 19 shows some of the key metrics for PMT's MSR and ESS portfolio. We account for most of PMT's MSRs at the lower of amortized cost or fair value, or LOCOM. For MSRs accounted for at LOCOM, the slide also highlights the difference between the carrying value of PMT's MSRs and their fair value.

At the end of the quarter, the fair value of PMT's LOCOM MSRs was $33.9 million greater than their carrying value on the balance sheet. .

Let's now turn to Slide 20 and discuss the income statement and balance sheet treatment for the GSE credit risk transfer transactions. Our investments in CRT are 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 the M1 bonds, restricted cash and a net derivative consisting of the expected future cash inflows related to our assumption of the 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 December 31, a total of $15.8 million in UPB of residential mortgage loans has been delivered to Fannie Mae through the CRT special purpose vehicles.

We have deposited cash into the SPVs, and it is recorded as a separate line item 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 investment represent cash income or loss to PMT from the SPVs. Gains and losses represented by fair value changes, which in the fourth quarter, were gains resulting from credit spread tightening are noncash. .

Payments made to Fannie Mae to settle our contractual losses are made in cash delivered from the SPVs. To date, PMT's CRT investments have paid $90,000 in credit losses. .

loans that as of December 31 are current to 89 days delinquent, loans that are 90 days or more delinquent and loans in foreclosure. More detail on the performance of the loans underlying the CRT investment is presented on Slide 30 of this presentation.

Restricted cash included in deposits securing credit risk transfer agreements on the balanced sheet was $450 million at December 31, and the net derivative position was an asset of $15.6 million at quarter end. .

As we mentioned last quarter, the latest CRT agreement contained a structural change, which adjusts the timing of cash due to the cash collateral account, allowing PMT to more efficiently deploy capital during the aggregation period.

As a result, the schedule includes a line item titled Commitments to Fund Deposits Securing CRT Agreements, which represents the amount that is due to the cash collateral account upon completion of the loan aggregation period. .

Finally, let's move to Slide 21 and review results for the Correspondent Production segment. As we mentioned previously, Correspondent Production pretax income was $11.7 million in the fourth quarter compared to $31.4 million in the third quarter.

Segment revenues totaled $42.7 million in the fourth quarter compared with $62.1 million in the prior quarter, driven by lower lock volumes and margins. Net gains on mortgage loans acquired for sale totaled $23.3 million, a 47% decline from the third quarter, driven by a 20% quarter-over-quarter decline in conventional lock volumes and lower margins.

The third quarter results also benefited from a $5.1 million reduction in the provision for representations and warranties. .

Net interest income for the segment was $5.5 million, relatively unchanged from the third quarter. Other income, which is primarily comprised of loan origination fees, was $13.9 million, a 9% increase from the prior quarter due to increased loan funding volumes. .

Expenses in the Correspondent Production segment remained essentially unchanged from the prior quarter as a lower weighted average fulfillment fee was offset by higher expenses resulting from increased loan funding volumes.

The weighted average fulfillment fees paid for the quarter was 36 basis points, down slightly from 38 basis points in the third quarter. .

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

Thank you, Andy. While earnings from PMT's investments in the fourth quarter were lower, largely driven by underperformance of the distressed loan portfolio, the cash flows from PMT's existing investments remained strong. .

As we enter what appears to be a period of higher interest rates, we expect the mortgage market will normalize from the elevated margins and volumes seen in 2016. However, robust macroeconomic trends bode well for home purchase demand and PMT's purchase money-oriented Correspondent Production.

In addition, higher rates and a vibrant economy are expected to positively impact the performance of the company's CRT, MSRs, ESS and distressed loan investments. .

We will continue to transition our capital away from distressed loan investments and into organically generated investments that result from our Correspondent Production activities, including GSE credit risk transfers, MSRs and ESS.

We believe that these strategies have the potential to produce earnings over time, in line with our current dividend level. Lastly, we encourage investors with any questions to reach out to our Investor Relations team by email or phone. Thank you. .

This concludes PennyMac Mortgage Investment Trust's fourth quarter 2016 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..