PennyMac Mortgage Investment Trust Q2 2026 Earnings Call

Good afternoon, welcome to PennyMac Mortgage Investment Trust's second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Additional earnings materials, including the presentation slides that will be referred to in the call, as well as an Excel file with supplemental information, are available on the PennyMac Mortgage Investment Trust's website at pmt.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in their earnings materials.

I'd like to introduce David Spector, PennyMac Mortgage Investment Trust chairman and chief executive officer, and Dan Perotti, PennyMac Mortgage Investment Trust chief financial officer. Please go ahead. Thank you, operator.

Good afternoon, thank you to everyone for participating in our second quarter 2026 earnings call. Starting on slide three, PMT's second quarter net income was $20 million, or $0.23 per diluted common share, representing a 6% annualized return on common equity. These results were impacted by a lower contribution from our credit-sensitive strategies, driven primarily by market-driven value declines, as well as lower contributions from our aggregation and securitization strategies, primarily due to lower volumes. These impacts were partially offset by improved results in our interest rate sensitive strategies. PMT paid a quarterly dividend of $0.40 per share, and book value per share at June 30th was $14.83, down 1% from the end of the prior quarter.

Turning to slide four, during the second quarter, PMT acquired $2.6 billion in UPB of loans through correspondent production activities for which PMT pays fulfillment fees to PFSI. This number was down 8% from the prior quarter and 17% from the second quarter of 2025. PMT also acquired $2.2 billion in UPB of loans from PFSI production for inclusion in private label securitizations, up 44% from the prior quarter and 123% from the second quarter of 2025. In total, during the second quarter, PMT acquired $4.8 billion in UPB of loans. Beginning in June, PMT elected to stop acquiring agency-eligible conventional conforming loans through correspondent production but will continue acquiring 100% of all non-agency loan volume.

This strategic decision allows us to optimize our capital allocation by pivoting away from MSR investments, which have faced return headwinds in recent periods, and accelerating the redeployment of our capital into higher-yielding credit-sensitive investments created from our private label securitization program. Consistent with this objective, I am pleased to announce that after quarter end, we entered into agreement to sell $13 billion in UPB of low coupon agency MSRs with a close expected at the end of August. Slide five highlights the continued success of our organic investment creation engine. During the quarter, we completed six private label securitizations totaling $2.2 billion in UPB. This activity resulted in the retention of $120 million of new subordinate bond investments in the credit-sensitive strategies. We also generated $31 million of new MSR investments.

Our momentum has continued after quarter end with two additional securitizations completed totaling $692 million in UPB. We remain on pace to complete approximately 30 securitizations in 2026. In total, through 2026, we expect we will have added more than $600 million of retained investments, building a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On slide six, we provided a snapshot of high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of retained bonds from this program totaled $936 million. 63% of this portfolio is comprised of bonds from non-owner-occupied loan securitizations. 21% is comprised of bonds from jumbo loan securitizations, with the remainder from agency-eligible owner-occupied loan securitizations.

As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO at origination of 774, a weighted average LTV at origination of 72, and negligible delinquencies. The credit quality of these organically created assets underscores our ability to produce attractive, high-yielding investments in the current market. On slide seven, approximately half of PMT shareholders' equity remains deployed to longstanding investments in MSRs, and 13% is comprised of our unique GSE credit risk transfer investments. Mortgage servicing rights provide stable cash flows from a portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments consist of seasoned loans with a weighted average current loan-to-value of 45%. Turning to slide eight, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings excluding market-driven value changes have been below our dividend levels for the past several quarters.

As you can see, we are showing an average run rate return of $0.33 per quarter for the next year, up from the $0.31 projection in the prior quarter. In the credit-sensitive strategies, return dynamics are similar to the prior quarter. The improvement of the overall run rate versus the prior quarter is driven by reallocation of equity to subordinate bond investments and higher expected returns of our MSR assets in a higher rate environment. As is our standard practice, we continue to monitor our portfolio mix and allocate capital towards investments with the most attractive return potential. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market.

Given the success of our securitization program, we are shifting our equity allocation towards creative credit-sensitive strategies, and I am confident this realignment of our balance sheet will bolster PMT's return profile to deliver attractive total returns over the long term. Now, I'll turn it over to Dan to review the second quarter financial performance.

Thank you, David. Net income to common shareholders was $20 million or $0.23 per diluted common share in the second quarter, or a 6% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $11 million to pre-tax income, generating an annualized return on equity of 11%. The contribution to pre-tax income from organically created CRT investments was $6 million, which included $7 million of realized gains in carry and $1 million of market-driven value declines. Investments in subordinate MBS from our private label securitizations generated gains of $5 million, down from $6 million in the prior quarter, primarily due to lower valuation-related gains. The interest-rate sensitive strategies contributed pre-tax income of $9 million for an annualized ROE of 3%.

Income excluding market-driven value changes for this segment was $20 million, up from $11 million in the prior quarter, as decreased prepayment speeds during the quarter, particularly on higher note rate MSRs, drove slower runoff of our MSR asset. During the quarter, we purchased $486 million of agency floating-rate MBS, and the fair value of our MBS portfolio increased to $4.1 billion at June 30th, up from $3.8 billion at March 31st. Regarding market-driven fair value changes, our hedging activities during the quarter effectively mitigated our interest rate risk exposure as the $18 million MSR fair value increase was offset by $18 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefits. The aggregation and securitization segment reported pre-tax income of $11 million, down from $16 million in the prior quarter.

Net gains on loans acquired for sale declined by approximately $8 million from the prior quarter, primarily due to lower volumes. In total, PMT reported $32 million of net income across its strategies, excluding market-driven value changes, up from $28 million in the prior quarter, primarily due to an increased contribution from the interest rate-sensitive strategies. I want to address our dividend in the context of our current results and the updated run rate return potential. While projections for income excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend at $0.40 per share. This is supported by our taxable income, which we expect to be sufficient to fully cover the dividend at its current level in coming periods.

Turning to slide 12, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. Finally, on slide 13, we continue to believe that debt to equity, excluding non-recourse debt, is the best metric for measuring our core leverage. That ratio increased to 6.2 times at quarter end from 5.6 times at the prior quarter end due to growth in loans held for sale and remains in line with our expected levels. PMT's total debt to equity increased to approximately 12:1 from 11:1 at March 31st as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in non-recourse debt associated with these transactions where all securitized loans are required to be consolidated on our balance sheet for accounting purposes.

As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We expect the divergence between these two metrics to continue increasing as our securitization program continues to grow. We'll now open it up for questions. Operator? We will now begin the question and answer session.

Please limit yourself to one question and one follow-up. If you'd like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Bose George from KBW. Your line is now open. Please go ahead. Hi, guys.

Just in terms of the move we've had in rates since quarter end, can you just talk about the impact of that on the run rate earnings? Does that help with the MSR returns? Just color on that would be great.

Yeah. Thanks for the question, Bose. Overall, as interest rates move higher and in particular long rates, and we talked about this a little bit before, it's beneficial to the expected earnings in run rate, especially with the MSR. We mentioned it in terms of the context of the run rate that as interest rates have moved higher, it's driven up our expectation for the returns of the MSR portfolio. As or if rates continue to move higher, longer rates and mortgage rates, that further dampens the prepayment speeds on the MSR and could drive additional increases in the MSR returns which would help to further bolster the MSR returns.

I would say a little bit of an offset to that is that to the extent that short rates increase meaningfully or the Fed increases short rates meaningfully, that has a bit of a dampening effect on the overall returns as that would drive up our financing costs for any of our longer-dated fixed rate assets, in particular in the interest rate sensitive strategies and with respect to our subordinate bonds. With some of our investments in recent periods, we've invested those in assets that are less sensitive to that, in particular CMO floaters. Those are the two sort of offsetting potential impacts from interest rates increasing.

Okay. Net net could we be a couple of pennies higher than the- Yeah $0.33, which you code?

Given our concentration in mortgage servicing rights and the fact that we've generally seen the long rates, I'd say, move up a bit faster than we expect short rates to, it would generally be beneficial to the run rate.

Okay, great. Then just on the MSR sales, could we see more MSR sales? It seems like the market for low coupon MSRs at least is very strong. Would it make sense to potentially do that, maybe park some in agency MBS as this pivot happens?

Look, as you know, Bose, we've become much more active in terms of managing the portfolio. I think as we look at the opportunities and we see the returns in securitizations combined with the fact that there is a very robust bid for MSRs with low note rates, that's something that we're clearly looking at.

Okay, great. Thank you. The next question is from Marissa Lobo of UBS.

Your line is open. Please go ahead.

Okay, thank you. Just on the shift and the relationship to PFSI on the shift to 100% non-agency acquisition, how does that alter the economic relationship or the management agreement with PFSI?

It doesn't alter the management agreement really. Overall, the impacts that that would have is that there are less loans flowing through the correspondent arrangement or the fulfillment agreement. PMT does pay a fulfillment fee to PFSI for all of the loans that come through that correspondent loan arrangement or correspondent loan channel directly to PMT. To the extent that there's a lower number of loans, none of the agency eligible conventional loans flowing through that correspondent arrangement, that would be a bit lower gain on sale being generated at PMT from those loans. Lower fulfillment fees flowing back to PFSI.

Just to emphasize the reason or rationale for that change is really to getting back to the allocation of equity to reduce the amount of capital that continues to be invested in MSRs, in particular higher rate MSRs, where we believe PMT has a better allocation of equity into the subordinate bonds that it's generating from its private label securitizations. That we expect to drive more beneficial and increased run rate over time through the reallocation of that equity.

Okay, got it. On rate sensitivity, following the sale of the MSR and your capital redeployment, how should we think about PMT's interest rate sensitivity and book value volatility versus today?

Overall should be very similar. Our hedging practices remain the same as they have been, our overall strategy in PMT has generally been to insulate it from significant book value changes due to interest rate movements. As you can see from this quarter's hedge results in particular, have been successful in accomplishing that, we expect that to continue as we reallocate equity away from MSRs and into the private label securitizations. Those holdings from the private label securitizations, those are also included in our global interest rate hedging and management, are considered in terms of our hedging positions.

Appreciate the answers. Our next question is from Trevor Cranston of Citizens JMP.

Your line is open. Please go ahead.

Hey, thanks. As we think about the pace of capital transition going forward, it seems like, broadly speaking, kind of non-agency securitization activity has been fairly robust recently. Are you guys finding any opportunities to potentially deploy capital into third-party securitizations? Or should the expectation be more so that you guys will continue to focus on- Yeah your own organically created investments going forward?

Yeah. We look at a lot of bonds being offered by street desks. We buy smaller pieces here and there, not because we have any bias necessarily to wanting to do the organic creation, but we believe in the economic value of it. I think given the fact that our manager is servicing the loans, and we have the investment in the loans, and our manager has done the diligence on the loans, we feel very, very comfortable with the underlying assets in the securitization versus buying in the secondary market from other originators for loans that are being serviced by others. It's not a policy we won't do it.

For what we believe an appropriate return, we have bought in the past, and we will buy in the future, it's just from a best execution standpoint, the best path to redeploying the capital is to redeploy it into the securitizations that we have been doing.

Okay. Thank you. Our next question is from Doug Harter of BTIG.

Your line is open. Please go ahead.

Thanks. Good afternoon. Can you talk about the pacing of securitization activity? To the extent that you're able to free up more capital through MSR sales, do you think that could accelerate? Or is the pace that you've been operating at kind of the pace that the market, that you see the opportunity as today?

Look, this is the advantage that PMT has given its synergistic relationship with PFSI. Look, I think that as we have capital to deploy, I can see us doing larger securitizations to create larger investments. We've been redeploying some of the capital into the floaters. I think that we have. Look, PFSI is the leading correspondent aggregator. There's securitization activity around call it 25%-30% of the owner-occupied loans that go to the GSEs. There's securitization activity around the investor and second homes that go to the GSEs. We at PMT could do jumbo securitizations.

Given the pace of activity of non-QM that we're doing in PMT, combined with the fact that PFSI is doing a robust amount out of its broker division and is selling in the secondary market for which PMT could buy, we could do a non-QM securitization, which I'm hopeful we can get one done in the second half of the year. There is a lot of opportunity for us to deploy capital into the securitization market. It's not necessarily a function of redeployment as we sell assets. It's understanding that if we're going to sell servicing, what the servicing landscape looks like, and identifying that are we maximizing the capital upon the sale in addition to maximizing the return upon the redeployment.

I appreciate that, David. Can you just briefly talk what impact, if any, do you think the move higher in rates that we've seen will have on securitization execution?

Look, any time you move higher in rates, it does have an effect on production. I will tell you, we've been running at, I would say, slower levels over the past call it two months, and I think that you're going to continue to see things slow down. There's still a lot of activity on the origination side in the non-QM space. There's a lot of activity on the investor and second home space, and there's a good amount of activity in cash out refinances. There's no escaping the fact that mortgage is a cyclical endeavor, and as rates go up, activity does slow down.

With respect to the execution, a bit of the offset to that, too, though, when we're talking about execution, is that to the extent that there's less supply flowing into the market, that can help in terms of investor demand for the securitization. Just because there's less overall supply. To the extent that there's still a good amount of loans, as David was talking about, sort of raw material to generate the securitizations coming through from PMT's partnership with PFSI, that does give us that advantage and potentially a little bit of tailwinds with respect to the securitization execution.

Great. Appreciate it. Thank you.

There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.

Thank you, operator, and thank you all for joining us. If you have any additional questions, please don't hesitate to reach out to our investor relations team. Thank you so much. This concludes today's call.

Thank you for attending. You may now disconnect.