PennyMac Mortgage Investment Trust Q4 FY2023 earnings call

• PMT had strong fourth quarter results with net income of $42 million, and annual net income in 2023 was $158 million. • In 2023, PMT invested nearly $500 million into new MSR and opportunistic investments. • The balance sheet strength is a key differentiator, with $659 million in new long-term debt issued and $450 million in debt redeemed in 2023. • CRT investments have a favorable outlook with low underlying current weighted average loan-to-value ratio and low delinquency rate. • MSR fair value decreased due to lower mortgage rates, but was partially offset by Agency MBS fair value increases and interest rate hedges. • In the fourth quarter, $17 million was invested in floating rate GSE CRT bonds, and $56 million of such bonds were sold post-quarter end as credit spreads tightened.

In the fourth quarter, PennyMac Mortgage Investment Trust (PMT) had net income to common shareholders of $42 million, or $0.44 per diluted common share. Credit-sensitive strategies contributed $61 million in pre-tax income. Pre-tax income from organically created CRT investments in the fourth quarter totaled $42 million, including $29 million in market-driven fair value gains. Income from opportunistic investments in CAS and STACR bonds issued by the GSEs was $12.8 million in the quarter. The interest rate sensitive strategies contributed a pre-tax loss of $17 million due to fair value declines in MSRs. The correspondent production segment had $24 billion in loan acquisition volume in the fourth quarter.

• The current run rate reflects an average $0.31 per share over the next four quarters, modestly down from prior quarter due to interest rate changes. • Expected returns on investments could improve if short-term rates decline, driving an increase in the overall run rate. • Anticipate the first quarter of 2024 to remain seasonally low before moving into spring and summer home buying season.

• Interest rate volatility can impact the fair values of interest rate sensitive strategies. • Credit spread changes can affect the returns on CRT investments. • Potential impact of Fed rate cuts on earnings and the balance sheet, such as changes in the cost of debt for interest rate sensitive strategies.

Q: On Slide 8 where the run rate potential is discussed, talk about the returns expected this quarter versus last.

A: Dan Perotti explained that the run rate declined due to compression in short-term rates affecting interest rate sensitive strategies, but expected curve normalization could improve returns for these strategies.

Q: On the credit side, provide view on CRT spreads and update on securitization program.

A: David Spector mentioned buying $17 million of CRT in the fourth quarter, selling $56 million post-quarter end as spreads tightened, and monitoring securitization but GSEs need more production first for a restart of CRT.

Q: Discuss allocation of capital in correspondence, dividend, and buybacks.

A: David Spector talked about capital allocation between credit sensitive strategies and MSR, and Dan Perotti discussed the trade-off between dividend and buybacks, stating repurchases are more attractive when share price to book ratio drops.

Q: Talk about maturities in 2024 and their impact on returns.

A: David Spector discussed refinancing CRT maturities, potential for margin call reserves, and how Fed rate cuts could impact earnings by reducing the cost of debt for interest rate sensitive strategies.

Q: Inquire about liquidity buffer and allocation to MBS and hedges.

A: Dan Perotti said liquidity has been stable, and David Spector explained MSRs are the most capital-intensive asset in the interest rate sensitive strategies.

Q: Ask about spreads on new CRT and book value change.

A: David Spector mentioned spreads on new CRT are in high single to low double digits, and book value has been stable due to the hedging program over recent quarters