Good afternoon, and welcome to the First Quarter 2018 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 Executive Chairman. .

Thank you, Chris. For the first quarter, PMT reported net income attributable to common shareholders of $22 million on net investment income of $75.7 million or $0.35 per diluted share, representing an annualized return on average common equity of 7%. PMT paid a dividend of $0.47 per share for the quarter.

Book value per common share increased to $20.24 at quarter-end from $20.13 at December 31, 2017. Our operating results reflect strong contributions from PMT's Interest Rate Sensitive Strategies and GSE credit risk transfer, partially offset by distressed loan investment losses. .

Credit Sensitive Strategies, which contributed $3.6 million in pretax income; Interest Rate Sensitive Strategies, which contributed $37.8 million in pretax income; Correspondent Production, which contributed $6.6 million in pretax income; and Corporate with a pretax loss of $10.2 million..

During the first quarter, we continued to grow our investments in CRT and mortgage servicing rights resulting from PMT's correspondent production activities. Conventional correspondent loan production totaled $4.2 billion in unpaid principal balance, down 28% from the prior quarter.

CRT deliveries totaled $3.2 billion in UPB, which is expected to result in approximately $112 million of new CRT investments once the aggregation period is complete. We also added $67 million in new MSR investments. .

We continue to reduce our investments in distressed mortgage loans, completing the previously announced sale of $347 million in UPB of nonperforming and performing loans from the distressed mortgage portfolio. .

In notable activity after the quarter-end, we issued $450 million of 5-year term notes at attractive rates under our Fannie Mae MSR financing structure. PMT's issuance of term notes is an important development for the company's capital structure and represents the culmination of a year-long effort in close partnership with Fannie Mae.

The term notes significantly strengthen PMT's liquidity profile by providing long-term financing from a broad group of institutional investors at attractive economic terms. .

Now let's turn to Slide 4, and discuss our perspectives on the current mortgage market. There was significant volatility across financial markets in the first quarter. Interest rates increased sharply with the average 30-year fixed-rate mortgage rising from less than 4% at the start of the quarter to nearly 4.5% at quarter-end.

Mortgage rates have continued to rise after quarter-end and are now at the highest levels in over 4 years. .

Total mortgage originations were down 21% quarter-over-quarter according to Inside Mortgage Finance, driven by a decline in refinancing activity and resulting in prepayment activity reaching multiyear lows. While the refinancing market is experiencing significant headwinds, demand for home purchases is expected to remain strong.

Home sales forecasts indicate multiyear growth of approximately 6% in home sales through 2020, driven by continued strong consumer demand for homes. .

Over the past several years, the U.S. housing market has experienced broad home price appreciation, resulting in a record level of tappable home equity totaling $5.4 trillion according to Black Knight Financial Services. Of this amount, nearly $3 trillion is held by borrowers with FICO scores of 760 or higher..

This large potential market, along with the growth in nonmortgage consumer debt, is expected to create demand for loan products that allow access to home equity.

We expect refinance demand to shift increasingly from rate and term activity to more cash-out refinances, in addition to increased use of home equity lines of credit, which will allow borrowers to access their home equity without refinancing their first-lien mortgage. .

Mortgage delinquencies increased modestly from a year ago. According to Black Knight Financial Services, the total U.S. loan delinquency rate for loans 30 days or more past due, including areas affected by last year's severe hurricanes, was 3.7% at the end of the quarter compared to 3.6% as of March 31, 2017.

Excluding the impact of hurricanes, mortgage performance improved from the same period a year ago. .

a variable funding note, which is designed to address fluctuations in collateral value; and term notes..

The VFN can increase to a maximum of $375 million as our MSR asset grows. In April, we successfully issued $450 million in term notes from the trust at a rate of 1-month LIBOR plus 235 basis points. The notes have a 5-year term, which can be further extended by 2 years at our option.

Term financing better aligns with the expected life of the MSR asset and helps increase liquidity and reduce PMT's reliance on bank lenders. .

The deal was met with strong demand from a diverse group of institutional investors. A portion of the term notes proceeds was used to reduce the variable funding note outstanding balance. .

Now let's turn to Slide 6 to review PMT's continuing transition to correspondent-generated investments, such as CRT and MSRs.

The chart on Slide 6 shows the ongoing progress we have made towards transforming PMT's balance sheet, reducing the equity allocated to distressed mortgage loans and redeploying capital to MSRs and GSE credit risk transfer investments generated from PMT's Correspondent Production. .

As of March 31, approximately 13% of PMT's equity was allocated to distressed loan investments compared with 58% 2 years ago, while CRT, MSR and ESS investments now make up 70% of PMT's equity allocation. This includes the impact of our bulk sale of $347 million in UPB of nonperforming and performing loans completed in the first quarter..

The green line on this chart grew to 17% in the first quarter, driven by the growth of our mortgage-backed securities holdings. The larger MBS position is used to offset the interest rate exposure of a larger MSR asset as well as replace some of our hedges which had been in the form of forward MBS purchases of to-be-announced securities. .

Now let's turn to Slide 7 and discuss the run rate quarterly income potential for PMT strategies. The PMT investment strategies are expected to deliver a run-rate diluted EPS of $0.49 per quarter, which would result in an annualized return on common equity of approximately 10.2%..

The run-rate potential reflects our expectations for the returns over the next several quarters. Our income potential is driven by CRT and MSRs, where MSRs are part of our net interest rate-sensitive strategies.

Expectations for continuation of the current market environment, including the credit market conditions, drives our outlook for performance of these investments. .

Our income potential also reflects our expectation that we will maintain a larger MBS position going forward for the reasons I discussed on the previous slide. Correspondent Production potential reflects expectations for a highly competitive mortgage market.

We also project that as the distressed portfolio continues to wind down, its impact is expected to result in a loss..

This concludes my overview of PMT's first quarter performance. Now I'd like to turn the discussion over to David Spector, PMT's President and Chief Executive Officer, who will review our mortgage investment activities. .

Thank you, Stan. Let's turn next to Slide 9 for a look at our Correspondent Production highlights. .

Correspondent acquisitions by PMT in the first quarter totaled $13.1 billion in UPB, down 15% from the prior quarter and 6% year-over-year. Conventional conforming acquisitions, for which PennyMac Financial performed fulfillment services for PMT, totaled $4.2 billion in UPB in the first quarter, down 28% from the prior quarter and 9% year-over-year. .

Total lock volume was $13.6 billion in UPB, down 14% from the prior quarter and 6% year-over-year. The volume declines were driven by higher mortgage rates and competitive factors as well as some seasonal impact. Pretax income as a percentage of interest rate lock commitments decreased 7 basis points quarter-over-quarter to 15 basis points.

The purchase-money percentage of our correspondent acquisition volume was 77% in the first quarter, up from 76% in the prior quarter, and continues to position us well for the forecasted growth in purchase market origination volumes..

And as Stan discussed earlier, we are re-emphasizing the prime jumbo product in order to better serve our customers and drive additional purchase volume. The jumbo product also creates potential new investments in the subordinate tranches of future securitizations. .

Monthly production volumes increased in April. Total correspondent loan acquisitions were $4.7 billion in UPB, while interest rate lock commitments totaled $5.6 billion in UPB, an increase from $4.4 billion in acquisitions and $4.8 billion in locks in April 2017..

Now let's turn to Slide 10 and discuss PMT's investments in GSE credit risk transfer. During the quarter, we completed $3.2 billion in UPB of CRT deliveries to Fannie Mae, which is expected to result in commitments to fund approximately $112 million of new CRT investment once the aggregation period is complete.

$42 million of this had been invested as of quarter-end. .

The fair value of PMT's CRT investments benefited from our ongoing capital deployment and continued strong credit markets. The performance of the underlying loans improved from the fourth quarter.

60-plus days delinquencies decreased to 0.55% at quarter-end, down from 0.64% at December 31, 2017, driven by the improving credit performance of hurricane-impacted loans. .

During the first quarter, cumulative losses on our CRT investments increased by $0.8 million to $2.3 million on an outstanding unpaid principal balance of $29.7 billion, reflecting portfolio seasoning and in line with expectations.

We're currently working with Fannie Mae on a new REMIC structure for PMT's future CRT investments and expect to begin delivering into this new structure in the second quarter. Excluding the impact of fair value changes, first quarter income contribution from CRT was $18.8 million and the return on average CRT equity was 18.6%. .

Now let's turn to Slide 11 and discuss our MSR and ESS investments.

PMT's organic MSR investments, resulting primarily from its Correspondent Production activity, increased to $957 million at quarter-end, up from $845 million at December 31, 2017, driven by an increase in MSR values from higher mortgage rates and growth from our loan production activities. .

PMT's excess servicing spread investments resulting from bulk, mini-bulk and flow MSR acquisitions by PennyMac Financial decreased modestly to $236 million in the first quarter from $237 million at December 31, 2017.

This decrease was driven by the ongoing pay down of the loans underlying the ESS investment, partially offset by valuation gains resulting from higher mortgage rates and recapture income..

PMT's MSR portfolio totaled $75.3 billion in UPB at March 31, up from $72.1 billion at December 31, 2017. The UPB associated with ESS investments totaled $26.2 billion at March 31, down from $27.2 billion in the prior quarter. .

Now let's turn to Slide 12 and discuss our progress in reducing PMT's distressed loan investments through liquidations and sales. During the first quarter, we continued to make progress reducing the distressed loan portfolio and transitioning PMT's capital into correspondent-generated opportunities in CRTs and MSRs.

As part of these activities, we completed the previously announced sale of $347 million in UPB of nonperforming and performing loans from the distressed portfolio. .

At quarter-end, total performing loans in our distressed portfolio stood at $334 million in UPB, down 36% from the end of the prior quarter and 55% from a year ago. The nonperforming loan portfolio ended the quarter at $312 million in UPB, a 41% decline from the end of the prior quarter and down 66% from March 31, 2017.

These declines have been driven by programmatic bulk sales of the distressed loans in addition to our continued focus on liquidation activities..

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

Thank you, David. Let's turn to slide 14 and discuss the first quarter's income and return contributions by strategy. .

PMT's investments in the first quarter generated an annualized return on common equity of 7%, net of all expenses and overhead. In total, credit-sensitive strategies contributed $3.6 million to pretax income or a 2% annualized return on equity during the first quarter. .

Within the segment, distressed loan investments contributed a loss of $18.4 million in the quarter. Distressed loan investments continued to underperform, primarily driven by valuation losses on both the nonperforming and performing loan portfolios, which I will discuss in more detail on the next slide. .

CRT investments contributed pretax income of $22 million. As David discussed, the fair value of these investments benefited this quarter from ongoing capital deployment into our current CRT transaction with Fannie Mae and continued strong markets for credit-related investments. .

Interest rate sensitive strategies, which include the performance of our MSRs, ESS and Agency and non-Agency senior MBS positions and related interest rate hedges together contributed $37.8 million of pretax income or a 22% annualized return on equity in the first quarter..

Income from our MSR investments increased as a result of a growing portfolio and market-driven valuation gains. Valuations of MSRs and ESS increased due to lower projected prepayment activity, driven by the rise in interest rates during the quarter.

Conversely, the market value of our Agency MBS positions was adversely impacted by the rise in interest rates.

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

Correspondent Production contributed $6.6 million in the first quarter or an annualized return on equity of 37%. The contributions from PMT's investment strategies were reduced by $10.2 million from corporate activities and $9.7 million of income tax expense..

Now let's turn to Slide 15 and discuss the performance of PMT's distressed loan portfolio in greater detail. Net losses on nonperforming and performing loans totaled $10 million compared to $8.2 million in the prior quarter. Valuation losses on the performing loans were $4.2 million, while valuation losses on nonperforming loans were $5.1 million.

The losses were driven by multiple factors, including adverse valuation impact related to the bulk sale of nonperforming and performing loans due in part to increased investor yield requirements as a result of higher interest rates. .

Other drivers of valuation losses on the distressed portfolio were the higher-than-forecasted recidivism of previously performing loans and lower-than-forecasted transition of loans to performing status as well as higher expenses related to the maintenance of PMT's lien interest in the nonperforming loans.

These expenses include property taxes, repair and property maintenance costs, insurance, and legal fees..

Losses for the quarter in connection with the bulk sale, including sale-related expenses, totaled approximately $8 million. Gross cash proceeds from the liquidation of mortgage loans and REO, before debt repayment and payment of related expenses, totaled $47 million.

The bulk sale of nonperforming and performing loans generated $258 million in gross cash proceeds and approximately $80 million in net cash proceeds after debt repayment and related expenses..

For distressed loans and REO liquidated or sold during the quarter, $12.3 million in net valuation gains were recognized over the holding period of the assets while $1.1 million of gains were realized at liquidation. .

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

Thank you, Andy. We continued to make advances in the strategic transformation of PMT during the first quarter. We remain focused on reducing the distressed loan portfolio and increasing those initiatives related to correspondent production, which provides such long-term investments as GSE credit risk transfer and mortgage servicing rights. .

In addition, we continue to pursue initiatives to optimize our liability structure, as evidenced by our recent issuance of term notes to finance Fannie Mae MSRs. Altogether, we believe the combination of our strategies should produce attractive returns on equity, as reflected in our run rate earnings potential. .

Lastly, 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 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..