PMT - Earnings call transcript Q3 2017 | PennyMac Mortgage Investment Trust

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Operator

Good afternoon, and welcome to the third quarter 2017 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 two of the presentation. Thank you.

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

Stanford Kurland

Chris. you, Thank

Slide with Let’s X. begin

from per For the common to a Sensitive and Rate lower PMT partially a earned of equity than in credit net an paid $X.XX attributable XX. $X.X Strategies, which of $XX.X from PMT X%. reports investments PMT loss end, losses shareholders pretax expected widening, which share quarter, $XX.X loan return disasters. income; of average believe or income natural million reported common contribution investment $XX.XX $XX.X earned due at $XX.X pretax June income net with spread representing in $X.XX of results to third million million. is which million generated $XX.X for which on Corporate, results share, diluted recent we income; million, pretax annualized in book reflect Production, and GSE Sensitive and Strategies, credit investment through Credit transfer quarter quarter, a $XX.XX Correspondent common per at of dividend segments: PMT’s distressed the income; value share Interest per to the attributable decreased risk to cents four on pretax million

totaled totaled grow billion third eligible quarter, is approximately up from period investments billion production balance, the we $XXX Conventional in investments During resulting the and CRT prior unpaid continued our $X.X new servicing activities. deliveries UPB, $X.X of CRT loan correspondent rights to principal mortgage in PMT’s once which production correspondent complete. the CRT quarter. result million XX% in will in from aggregation

million. from from common new activities. in million approximately we XX at of October correspondent $XX our X shares to $X $XX.X cost Also, million a added MSR investments repurchased also resulting PMT August We

let’s our review Turning X, to the highlights. Slide of continue

sale performing of completed to to loans of After third announced from $XXX quarter. XX% distressed we loans the We equity UPB of nonperforming quarter equity, ago. nonperforming loans a year We reduce sell of bulk continued PMT to in further from of the third-party. the by will and a and during end, XX% performing in of paydown to portfolio accelerate total first distressed and mortgage to the mortgage sale distressed cash of during a previously allocated proceeds mark down portfolio million agreed million. and this equity $XXX totaling REO the loans the loans. loans will Upon to million of allocated The liquidation quarter generated UPB distressed $XX reduction completion,

rates our mortgage to on turn year their XX discuss X of declined Freddie of yield, to levels have Survey closely all current the of quarter rate let’s around year. in application declines. level its activity September, rates, about XX% year The X%, the but below reaching as Application by refinance mortgage is currently level hovering response in thus at index Slide the the increased, third market. steadily far last XX lower the increase by the year they perspective the XXXX. Mac’s fixed in and tracking with MBA’s to same September. early increased bond tracked second-highest Mortgage and for Since lowest then in time Now Mortgage reversing as the Treasury Primary average levels consistent XXXX reported Market early

since in increases refinance loan home and led As the Services, at index activity recent consumer from delinquency credit the rate delinquency end other slowed delinquency performance at as sales total slowed U.S. remains temporary, the home new cards. data Knight been during spring. rates was renewed levels low Black products, September. with strong, levels uptick mortgages high subsequent of quarter growth. multi-year as Financial loans September of affected third recent and month remaining such existing credit areas According fundamentals recent recent in during, to XXXX in appears delinquencies, to recent increase rates, was has a of have and macroeconomic the the natural with strength, the sales shown disasters long-term is a credit X.X% remain by supportive which delinquencies slowdown to the to Both the their auto September last The despite increased. result in sales interest peak. increase concentrated July temporary Recent expected what first of the The residential has mortgage since XXXX hurricanes. be X% about

now generated redeploying turn have MSRs. capital ongoing Now, made as allocated distressed generated the PMT’s was distressed X years and as slide GSE and reducing equity loans, into to investments has investments PMT’s risk XX% equity on On mortgage loan to X investments ago, PMT allocated returns. chart let’s position with to CRT September make Slide ESS, a shows and the continuing assets MSRs correspondent CRT, to allocation. new equity toward from of XX% its transfer correspondent consistently investments MSRs own top producer The XXth, of conventional credit such up attractive mortgage to the approximately generate MSR we using XX% PMT’s transition PMT’s organically discuss ESS allocated compared progress to while CRT, production. grown market capital with two and to

distressed Slide loan reducing PMT’s to and through discuss and X let’s sales. progress liquidations Now in turn investments our

back as status. supports are focused in at sales, million portfolio opportunities. resolution in stood has be by to the continue generated transition correspondent on portfolio primary capital modifications, at resolving PMT’s activities our UPB loans the Total balance performing quarter, into portfolio be payoffs, of the status nonperforming shows $XXX with modifications loan bulk Our seasoned, the quarter-over-quarter these the of distressed in loans bulk can increases end portfolio, the nonperforming sale UPB. recidivism The reduced million performing loan success performing third prior left $XXX in into at million slide the nonperforming of loan XX% end changes chart for bottom PMT’s driven decrease once from loans the portion the of which, nonperforming portfolio for into on was performing including and loans the down a by quarter. from prior of to that drove The strategy performing which year quarter. $XXX components the to nonperforming a The and established our the activities, back loans from status of of well transition of sold of ago. markets decreases loans. The bringing loan Loan our end

earlier, XX. PMT XX% loans The to nonperforming and at quarter or loans. in mentioned million performing $XXX September loans of distressed loan XX% approximately in a sell I portfolio As the comprise this distressed almost UPB loans, agreed of sale

on equity income to the return $XX.X million a quarter’s of in and X.X% discuss the net turn and to of generated X overhead. during annualized equity In return annualized income common investments strategy. on let’s and Now, PMT’s slide the an quarter third strategies and third contributions return expenses X%, total, pretax by credit contributed third sensitive quarter.

a million. price which to million to Distressed home prior Within the distressed investments equity contributed of pretax equates return $XX.X by on below annualized primarily loan investments that loss quarter, of $X.X loan the continued an segment, driven posted indications of forecasts. were CRT underperform, in investments negative income X.X%.

the we widening this I quarter and the Hurricanes the impacted believe these of in partially As the Irma. such servicing return strategies, mentioned, and our together annualized Interest include for was value and related Harvey fair to securities credit is adversely spreads $XX.X of pretax which sensitive quarter, rate third X.X% spread by excess senior interest non-Agency a hedges, of performance during attributable equity million investments on MBS Agency which MSRs, and of the and rate positions contributed income quarter.

each consistent sensitivity were during ESS we fair tax prepayment the and higher million income on impact with MBS from third value negative Agency inversely XX.X%, tightening While lower activities of production interest $X.X of managed The MSRs benefitted rate expense. and equity quarter. and the of and MSRs of rates strategies rate from prior impacted contributed adversely from losses these the hedges. is quarter correlated income show separately, to interest rate PMT’s of $X.X are sensitive this from and contribution return and resulting an Returns Corporate they Correspondent were a the interest by annualized offset in as activity. $XX.X quarter interest contributions aggregate positions investment the in million ESS many by for partially our on quarter. projected spread MBS million strategies

market from on of distressed loan correspondent the for preferred X.X%, expected to PMT acquisition optimize common our production. Correspondent from loan bulk $X.XX. dividend which segment let’s here Together, execution from future and investment the results raises drive arrangements. contemplates to improvement contribution not level does financing reflect would proceeds in of the improvements strategies to by strategies. are The annualized for losses income also turn from quarter, Slide run-rate reduced, PMT’s expenses. to equate related continued liquidation discuss approximately higher potential Now the X these to MSR gain to items the has quarterly and asset for an driven any potential for portfolio run-rate return the The to deployment expectations secondary with per expected in-line strategies been potential depicted $X.XX ROEs is of are investments. CRT The sales. The into or and rate and income opportunities benefit PMT’s capital current run equity

time. distribute a In a with also required my earnings evaluation dividend our the performance. as concludes of a potential forms at PMT effectively the year the share payments. be objective floor distributed of REIT, to Our consider for PMT’s our status appropriate advantaged for which dividend continuing third and per for over income PMT earnings quarter tax This consistent dividend, to we overview the maintain is to

President over Mortgage Officer, Now Investment Executive Spector, Activities. review to our the and David turn like to PMT’s I’d Chief who will discussion

David Spector

Stan. you, Thank

and Let’s third activity loan discuss the resolution quarter. PMT’s in whole turn Slide investments to XX distressed on the

quarter. activities, for the resolutions, including UPB five and the which in $XXX Here show totaled we million liquidation during quarter modification distressed trend loan

million third-parties, $XX REO total total sales or include Liquidation activities of XX% UPB totaled in of in third activity, of from from million a million third-parties. in $XX million total balances, UPB, in activities Liquidation streamlined or the comprised quarter. represented XX% in short UPB, As these, prior quarter. $XX quarter up and XX% from from percentage foreclosure in million the the down of XX% prior resolutions, prior REO quarter resolution of Of properties of in quarter, the in the sales of XX% and prior down in $XX modifications up UPB, the resolution prior compared sales XXXX. with average to the to and sales REO total quarterly from XX% XX% comprised third activity, quarter. resolutions, $XX comprised and Modifications in payoffs, resolution unchanged activity nonperforming quarter. the XX% loan totaled

make with resolving pipeline, to XX, of REO $XXX $XXX to inventory in continued the at progress carrying We declining June from million foreclosure at million value September the down XX.

from rentals for REO the the New million X quarter. down $X prior in million quarter, were$

turn our second $X.X prior X% from factor X% quarter let’s billion volumes the by money to and correspondent XX% acquisitions, lock XX a quarter production in from at slide from PMT to increase reflects XX% year-over-year. down performed up for The UPB, totaled PMT's year-over-year. production, the PennyMac in differentiating in production while important $XX.X of in the up X% quarter, purchase and Conventional volume Now, for UPB, this from acquisitions fulfillment an our look the billion third the third billion in Correspondent Financial was down services be orientation quarter of XX% which for $XX.X for XXXX. continues third conforming highlights. totaled PMT. the correspondent in correspondent Total down prior quarter quarter, which UPB the quarter PMT,

to quarter, previous continued our a of XXX the the versus grow at XXX relationships of in quarter. relationships, We third seller seller total with end the

UPB, were in at October billion interest totaled commitments lock $X.X rate while loan in total UPB. acquisitions volumes, Looking correspondent $X.X billion

million. GSE million, PMT’s Now after let’s an $XXX end which $XXX equity quarter, investments turn risk PMT’s investments credit of in the discuss to and resulted allocation transfer. leverage XX of unique third Slide totaled the in At

During been UPB CRT to approximately commitments of quarter, complete, the during the the expectations had at end. contribution resulted $XX to which we investments $X.X billion in spreads income in from Fannie credit third our CRT of Mae, completed CRT The the $X million which quarter, million than of of million once quarter lower deliveries reflecting quarter. $XXX period for aggregation invested the fund widening new is was

reflects fair of XX.X%. changes, contribution losses from The on increase and Excluding $XX.X the natural CRT fair was potential could the in the impact expectations credit disasters. was equity $XX.X million, from recent an PMT’s value income average CRT investments value market of prior million the the higher quarter, return for result that

we credit by initiatives targeted a to we launched. losses However, of mitigate actual number disaster related servicing expect have

loans In to of value the loan underlying high addition, the with of average credit origination quality are at XX%.

investments, percentage of our when recognized a borrower CRT in fixed the on UPB. reaches XXX delinquency, For a severity is while are losses days calculated loan’s

PennyMac disruptions by returns If subsidiary designed other experienced successful that Our of initiatives would investments. servicer, we delinquencies, from flow that and Financial, serious modification is has customers. improvements a are preventing cash affected in to CRT our address be servicing servicer may in implemented on our benefit

million the June turn facilitate growth resulting to from discuss investments, our MSR pursuing term at XX. for million organic MSR $XXX ESS June financing quarter will grow. and continued while the production structures To $XXX are PMT’s and equity the PMT’s MSR PMT’s mini-bulk $XXX which PFSI increased process our in $XXX XX, continue September let’s to improving up we million provide activity, investments, bulk, at of Slide help ESS Now from of XX. investments, by at on MSR flow investment XX at to from and that end, primarily investments. resulting new from decreased million to MSR and acquisitions return financing correspondent

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

Andy Chang

we you, each quarters. income the XX, On of last over operating PMT’s segments Thank the David. contributions Slide from five show pretax

drive four as million, results. financial and the the segment of Stan breakdown report that PMT’s As in strategies segments the earlier, the reflect third by noted $XX.X on results pretax with activities totaled its we PMT’s the income which in quarter evolution slide. noted

were gain income on prior XX% was Sensitive Lower commercial driven widening $XX gains Segment during revenue a from the a bonds decline for prior quarter net investments. a turn Strategies significant the million, Net million, XX% The quarter. third XX% the million, Credit Slide decrease $XX.X segment. Credit from includes to loans quarter, on CRT Interest prior quarter, capitalized decrease income million, investments. revenues a $X income $XX.X the due loan decrease a the quarter. from loan in from quarter quarter. down of increases X% from estate capitalized the expense from losses Capitalized interest reduction the advance the down Segment to interest third the quarter, from were million income expenses $X.X quarter, gains. to distressed driven services XX% primarily million Interest fees included from of in by quarter. $XX.X ongoing in Other Interest from investment from $X.X prior with the prior from valuation losses due of decrease modifications, the sale resulting the decrease Strategies from Net XX% results let’s mortgage Credit subordinate to gain was $X.X by in investments the a decreased on non-Agency interest $XX.X prior and in and was Now distressed reductions distressed million primarily Sensitive driven primarily a review CRT, modifications. down portfolios. professional $XXX,XXX, quarter. performing portfolio. XX and million in XX% loans, in spread losses results reduces and the loan and of the mortgage was PMT’s of the real prior Strategies REO interest and in totaled loan million, segment prior compared Sensitive by in interest

revenue holding the the to quarter. announced cash respect a in net of payoff distressed realized paydown PMT $XXX,XXX, the activity consistent REO remaining $XXX,XXX loans liquidation of while the of cash after loans mortgage million quarter, debt decreased million debt from approximately the liquidation sale NPLs. loans in gains PMT’s with on before loan million on million gross the $X loan with the for totaled and loans the the were from changes and $XX.X the repayment cash as prior loans prior the million liquidated from the certain were in With gains Now the totaling in of was which PMT’s Valuation in $XXX loans Valuation $from on by and in let’s $X.X with loan were from for million, - realized proceeds valuation size revenue gains Gains turn million discuss Combining compared loans recognized as $X.X $X.X bulk expense quarter. well prior expenses of and million during $X.X valuation portfolios to performing portfolio and prior related prior quarter. versus were with quarter. and $X.X losses income, in Slide also generated mortgage the compared in million valuation of net flows the from distressed loan strong totaled attributes, increased by mortgage cash XX down performing the period related generated indications with distressed forecasts, distressed during for in portfolio. performing with as the distressed totaled XX proceeds to million, payment of proceeds home gains distressed liquidation. compared Positive expenses. the distressed previously Valuation quarter, price Liquidation portfolio. of loan of adversely below interest over the and benefitted Gross in related net the prior losses $XXX,XXX REO million at the changes nonperforming loans well loans a and portfolio the $XX negative quarter. quarter, continued changes net risk nonperforming offset prior reduced - portfolio as that market assets, completed third portfolio in performance payment the similar were loan and of distressed $XX portfolio. and forecast partially repayment litigation portfolio. affected unrealized

review balance XX for GSE the to and risk Slide transfer credit let’s income Now statement the sheet turn transactions. and treatment

CRT by in transactions. investments pledge bonds, in collateral evidenced M-X and financing Our are we as own which

statements, to included credit representing been in our loans through inception the future investment vehicles From the expected the in the components billion expected of $XX.X CRT of which is financial in residential credit and agreements September the guarantee, bonds assets. asset of through M-X assumption future investments reported derivative or of delivered and risk of transfer credit mortgage related of deposits Mae UPB in our as risk program losses securing - derivative cash XX, special our CRT a SPVs. the However, cash CRT are inflows total to Fannie purpose the has a

under related We Agreements have secure Deposits made CRT at gains and the investments underlying Valuation which $X our a million SPVs totaling bottom were in-line and securing losses is CRT derivative CRT end. valued CRT loan investment PMT’s to CRT upon the are to value credit loans investments settle income and investments losses, was of the are our performance in CRT Fannie from status. quarter. date, on on the table related our from the the losses information slide and this to the to our contractual expectations. settle loss in at non-cash. These agreements, CRT $XXX by losses, separate quarter fair balance resulting on deposited balance cash million SPVs. To recognized cash under into cash of balance our as on outstanding of of the million on and line obligations seasoning payments it The have provides item gains XX, is Mae asset represent sheet SPVs. sheet. Realized delivery PMT the credit Agreements, or quarter are the with losses the CRT were delinquency September reflect this losses from third gains paid recognition the to Payments including $XX to presented made for XX credit $XXX,XXX the on loans the presentation. Detail recorded

due adjusts efficiently deploy Fannie the transaction the change, more the a CRT aggregation latest timing contained PMT cash to of Our period. capital to cash with structural collateral allowing which account, during Mae

Deposits fund cash settlement is collateral As represents to at presently a and amount this of we titled a due CRT of “Commitments to the million period. aggregation amount that That through the transaction. item completion result, agreements” September the to account financing upon CRT fund repurchase XX, schedule securing it which was expect largely line loan includes the $XXX upon

revenues net was consisting of $XX.X and Agency the a from prior investments turn in Rate produced and Strategies discuss Interest increase from a million Net XX% resulting the net Segment third fees of increase quarter, quarter million, placement quarter. million, Slide to prior Rate escrow in exposures resulting XX% servicing the gains segment Interest segment. X% non-Agency that expense X% prior was of The mortgage interest a increase a from $X.X ESS, income deposits. let’s results losses of MBS, MBS, MSR Strategies hedges. million from reduced valuation increase primarily prior Now to MBS; servicing loan by in interest the fees, of senior $XX.X on higher XX million million, quarter Sensitive quarter, million from related and net totaled the $XX.X investments from rate changes. segment from interest Interest million including a rates, includes results on and $X.X the $X $X.X totaled quarter-over-quarter million, derivatives; related driven impact $X.X an a $X.X to Sensitive loss for have on ESS. of Segment income hedging on the losses compared offsetting Interest growing portfolio MSRs, the a short-term higher Segment were million in of for tighter losses mortgage in from curve by ESS borrowing servicing included mortgage the to the losses fees, income Net quarter, fees million, $XX.X during activity loan of prior $XX.X servicing were up receivable recapture million amortization and $XX.X by fees reduced servicing spreads, million primarily due loan million a quarter. driven servicing Net costs. segment carried activity included from $XX.X fair fair income. during or million MSRs amortized prepayment impairment a $X.X combination value, and of value MSRs and $X mortgage the the on lower fees value Net $X.X million net provision mortgage included loss at Net $XXX,XXX gains. PFSI recapture fair and fees a servicing carried flows. of million for loan mortgage portfolio valuation realization valuation of than of resulted MSR at cash also quarter. flattening, the growth. expected of ESS yield increase related MSR from servicing MSR expenses in million quarter, totaling $X.X quarter. the loan third prior are higher hedging the $X.X for from prepayment XX% also cost

assumption; turn PennyMac the Financial, investment; of valuation key UPB. rights the the loans to which some metrics portfolio of coupon and servicing cost rights PMT the grew Slide average PMT’s speed investments let’s prepayment also owns loans fee. as servicing Financial of pool spread XX multiple We in servicing mortgage of value, underlying at and mortgage MSRs underlying with the Now the such XX PMT’s ESS shows excess discuss PennyMac from subsidiary such lower on of and for or value chart is UPB on a amortized and slide of servicing of by assets. account portfolio, lifetime of characteristics fair and for servicing PMT’s $XX.X in the fee average of or the The most to $XX.X or a billion. purchased billion LOCOM. subserviced as including the the metrics ESS PMT’s MSR spread

and the value PMT’s million quarter, fair also between the greater At $XX.X was value carrying the slide the difference on than carrying MSRs highlights LOCOM end of the MSRs for fair value. the PMT’s sheet. the MSRs value accounted at balance their their of For of LOCOM,

the and the of Production Now let’s review XX results move to segment. Slide Correspondent

the $X.X quarter quarter. Segment pretax million revenues gain prior previously, totaled $XX.X sale the prior with average was lock the the from XX% the million, increased mentioned with of the fees, quarter income, The fee in compared for for prior to from the basis Correspondent and prior $XX.X strong the volumes. from fulfillment margins. continued $X.X on increase Expenses driven versus quarter Production quarter mortgage balances higher segment quarter comprised by compared volumes driven fee income $XX.X up quarter. was from acquired quarter. by which is income was prior inventory production resulting loans we from stable X% $XX.X prior the segment a Other totaled million, the Net Production prior primarily origination in loan loan interest weighted in As million, fulfillment higher was million, $X.X $XX increase expense prior X% higher XX% million, for points, resulting Correspondent volumes. from an unchanged quarter. by million Net in million, average the driven XX increase funding from paid conventional a

$XXX,XXX fee incentive investments, turn in reduction Now let’s closing that, related a discussion quarter. compared remarks. based quarter. expenses. the $were by million with from interest in prior review with Segment fees, short-term cash up including the share a decrease move the the fees, X Management Corporate X% the in No versus with certain paid and management were includes in totaled PMT’s compensation. second with higher quarter, the to expenses fees raise. to capital services fees was over equity in quarter’s Corporate paid prior fees, million the equity in prior XX% $X.X segment back prior quarter. Other compared to million, the expenses The for third the and some Series-B base. $XXX,XXX $X.X results from Stan $X.X and I’ll Slide segment. preferred quarter, of XX incentive incentive segment from expenses revenues driven included professional income resulting corporate compared prior Segment million $XXX,XXX The $XX.X the in were quarter, And million, also

Stanford Kurland

into transitioning progress risk continues solid make correspondent related servicing such PMT rights. as loans to credit Andy. and you, Thank from distressed and mortgage transfer investments

should as specific expect volumes, that from that financing are production. business correspondent as correspondent to our improve initiatives focused production earnings in We on well deliver higher our we optimized

deploying We returning higher also more are capital into MSR the strategies. CRT and

that In are raised together, these of our Taking on believe full that common all PMT’s have dividend strategies we yet is more improved current earning its addition, not earnings initiatives will we stock. capital potential. with quarterly consistent generate

Lastly, out any with or you. we email Investor Relations to our team investors questions Thank reach by to encourage phone.

End of Q&A

Trust’s PennyMac Investment concludes quarter This Mortgage earnings third discussion.

questions, For website www.pennymac-reit.com, Thank call at Relations or our Investor visit our please you. any at department XXX-XXX-XXXX.

PennyMac Mortgage Investment Trust (PMT) 2 Nov 172017 Q3 Earnings call transcript