Prepared remarks
Good afternoon, everyone, and welcome to PennyMac Mortgage Investment Trust Second Quarter 2025 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call, are available on 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 2 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 the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. Please go ahead.
Thank you, operator. For the second quarter, PMT produced a net loss to common shareholders of $3 million or a loss per share of $0.04, as solid levels of income, excluding market-driven value changes, were offset by fair value declines and a $14 million nonrecurring tax adjustment that Dan will discuss later on. PMT declared a second quarter common dividend of $0.40 per share and book value per share at June 30 was $15, down modestly from March 31. Interest rates were extremely volatile this quarter, with the 10-year treasury yield traversing a range of more than 70 basis points, including intraday moves in one week in April alone. This created a challenging environment for our investment strategies. However, our diversified investment portfolio, efficient cost structure, and strong risk management practices enable us to effectively manage through these challenging market conditions. Turning to Slide 5.
I want to touch on our synergistic partnership with PFSI and how that provides PMT with unique and proven competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations, and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment. Second, our structure allows PMT to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations, provides PMT with the opportunity to invest in unique organically-created investments at attractive risk-adjusted returns. As can be seen on Slide 6, the increasing volume of non-owner-occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment.
And this growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives. In the second quarter, we successfully completed three securitizations of Agency-eligible investor loans totaling $1.1 billion in UPB, retaining $71 million of new investments. And we also completed our first jumbo loan securitization since 2013, with a total UPB of $339 million and retained investments of $82 million. The graphic on the right of the slide highlights our rapid ascent to becoming a leading issuer of private label securitizations. In recent periods, we've been a top 3 issuer of prime non-Agency MBS. In fact, since the fourth quarter of 2024, we have successfully completed nine securitizations totaling $3.2 billion in UPB with new retained investments of $300 million. Targeted returns on equity for these investments are expected to be in the low to mid-teens.
Looking ahead, we expect to continue executing one securitization of Agency-eligible non-owner-occupied loans per month and one jumbo loan securitization per quarter. This consistent cadence of securitizations underscores our commitment to leveraging our organic investment creation abilities and remaining a leader in the private label securitization market. Turning to Slide 7, approximately two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk share transactions we invested in from 2015 to 2020. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 47% of our deployed equity, down from 56% at the high during the end of 2022. The majority of the mortgages underlying these MSRs remain far out of the money with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance.
As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time. Furthermore, MSR values continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short-term interest rates. Similarly, PMT's unique credit risk transfer investments, representing 16% of shareholders' equity, are backed by seasoned loans with strong fundamentals that were originated during periods of low interest rates. Delinquencies have remained low on this portfolio as well. This can be attributed to the overall credit strength of the consumer, combined with the substantial accumulation of home equity in recent years due to continued home price appreciation, as evidenced by the low weighted average current loan-to-value ratio below 50%. We continue to expect that realized losses will be limited and that these core investments will perform well over the foreseeable future.
As you can see on Slide 8, a significant portion of PMT's equity is allocated to investments that we have organically created through PennyMac's robust production volumes. This is a key differentiator for PMT. Because we are the producer and servicer of the loans, we have unparalleled insights into their quality and performance. Our position as the producer of the underlying loans is a competitive advantage, providing us with the ability to review and diligence the loans for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we are uniquely positioned to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender credit risk transfer. This deep understanding from origination through servicing allows us to directly influence the ultimate credit outcome, minimizing losses and maximizing returns for our shareholders.
In closing, our risk management capabilities and diversified investment strategies, which include seasoned MSR and CRT portfolios, combined with a growing securitization platform built on our unique origination capabilities, position us exceptionally well to deliver attractive risk-adjusted returns to our shareholders in 2025 and beyond. We remain confident in our ability to successfully navigate a volatile and evolving market by leveraging our competitive advantages. Now I'll turn it over to Dan, who will review the drivers of PMT's second quarter financial performance and PMT's run rate return potential.
Thank you, David. PMT reported a net loss to common shareholders of $3 million in the second quarter or negative $0.04 per diluted common share. The Credit Sensitive Strategies contributed $22 million to pretax income. Gains from organically created CRT investments were $17 million, including $9 million primarily consisting of realized gains and carry and $8 million of market-driven value changes from credit spread tightening. CAS and STACR bonds generated gains of $4 million and investments in PMT non-Agency subordinate MBS generated gains of $1 million. The Interest Rate Sensitive Strategies contributed a pretax loss of $5 million. Fair value increases on MSR investments were $23 million. These fair value increases were more than offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and related income tax benefits totaling $45 million. MBS fair value, which includes agency POs and securitized interest-only strips increased by $12 million.
Interest rate hedges decreased by $60 million. In the second quarter, PMT reported an income tax expense of $9 million, driven primarily by a $14 million nonrecurring repricing of deferred tax balances due to state apportionment changes driven by recent legislation. The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from March 31 as fair value increases and newly originated MSR investments were more than offset by runoff. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low and servicing advances outstanding decreased to $70 million from $84 million at March 31. No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $30 billion in the second quarter, up 30% from the prior quarter and consistent with the estimated increase in the size of the overall origination market. Correspondent loans acquired for PMT's account totaled $3 billion, up 11% from the prior quarter.
PMT retained 17% total conventional Correspondent Production in the second quarter, down from 21% in the first quarter. Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans are initially acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government Correspondent Production from PFSI. We expect this percentage to remain between 15% to 25% in the third quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market. PMT also acquired $1 billion in UPB of loans acquired or originated by PFSI for inclusion in private label securitizations, up from $637 million in the prior quarter. Income from PMT's Correspondent Production segment was $14 million, up from the prior quarter, primarily due to gains on non-owner-occupied and jumbo loans due to credit spread tightening.
The weighted average fulfillment fee rate was 19 basis points, unchanged from the prior quarter. In total, PMT reported $36 million of net income across its strategies, excluding market-driven value changes and the related impacts, down from $41 million in the prior quarter, driven primarily by increased realization of cash flows due to higher realized and projected prepayment activity. Slide 14 of our earnings presentation outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of $0.38 per share, up from $0.35 per share in the prior quarter. Overall, we expect increased investment activity in accretive non-Agency subordinate and senior bonds, primarily through organic securitization activity. Additionally, correspondent and aggregation activities have positive momentum, driving improved execution and an overall increase to our Correspondent Production segment's return potential.
If the yield curve steepens further, we expect PMT's overall run rate would increase further driven by higher overall yields in the Interest Rate Sensitive Strategies. Turning to capital. In June, we issued $105 million in unsecured senior notes due in 2030, and we currently expect that the $345 million in exchangeable senior notes due in 2026 will be retired closer to maturity by utilizing capacity from existing financing lines. I want to take a minute to comment on PMT's overall leverage ratio, which has increased in recent quarters. The increase is primarily a reflection of growth in nonrecourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as a financing of the loans rather than retain interest in the securitizations. The source of repayment for this nonrecourse debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT.
We believe that the best metric to measure the leverage of our balance sheet is debt to equity, excluding the nonrecourse debt related to securitizations, which we have shown on Page 15. This metric incorporates our exposure to the investments we are making in subordinate securities in a similar way to what we have seen in prior periods with our CRT investment, which has similar credit exposures to associated loan performance. We expect this divergence between total debt to equity and debt to equity, excluding nonrecourse debt to increase in future periods as we continue our retention of investments from our securitization program. Excluding nonrecourse debt, our debt-to-equity ratio at June 30 was 5.6x, within the range of our expected and historical levels.
Questions and answers
I would like to remind everyone we will only take questions related to PennyMac Mortgage Investment Trust, or PMT. We'll take the first question from Doug Harter, UBS.
Hoping you could talk a little bit more about the non-Agency securitization opportunity. Can you just talk about how the returns progressed over the course of the quarter given the volatility and how you are positioning the risk of those holdings going forward?
So overall, the non-Agency subordinate MBS, we obviously, during the quarter had a significant amount of both rate and spread volatility. The non-Agency subordinates are fixed-rate securities. And so overall, during the quarter, with respect to credit investments, we did see generally credit spread tightening. You can see the reflection of that on the GSE credit risk transfer. We also saw a fair amount of interest rate volatility. And so that led to a slight decline in terms of the fair value of the non-Agency subordinate MBS. On income, excluding market-driven value changes was in line with our expectations of mid-teens returns. As we continue to add our additional subordinate investments as well as non-Agency senior MBS, we expect those to continue to be in the low to mid-teens returns in terms of their returns over time. And those are very stable in terms of the returns with respect to reasonable shocks in terms of credit performance as well. And so we believe that those are very stable and accretive investments for us over time.
Great. And then just as a follow-up, it looks like the amount of retained interest on the jumbo was a much higher percentage relative to the non-owner-occupied. Can you just talk about how high up the stack that was? Was that opportunistic? Or is that something that you would expect to continue on the jumbo side?
We retained a senior mezzanine tranche on the jumbo securitization. As we evaluate deals, our decisions are influenced by the capital we have available to invest. The jumbo securitization took place after we raised additional unsecured debt. Looking ahead, we are likely to retain a larger share of the interest, including both the subordinate bonds and the senior mezzanine portion from many of these securitizations, but our choices will continue to be made on a deal-by-deal basis, depending on the capital we intend to deploy.
And look, I think, Doug, the important thing is that the team is dynamically managing the portfolio. So as you raise capital and you have capital to deploy, obviously, deploying it into the subordinate tranches is something that's more of a long-term investment in nature, but there are other tranches you can invest in at an appropriate return. But as we're doing more securitizations, if we need to recycle the capital, we can do so.
We'll take the next question from Jason Weaver, JonesTrading.
First of all, David, I think we've talked about this before, but maybe just an update if you have any insights under possible GSE privatization for the future of credit risk transfer.
Yes. Look, I think that right now, we're not hearing much out of the folks in D.C. on anything GSE reform related. The GSEs have been active in their credit risk transfer program using the reinsurance vehicles. And in terms of the return to lender CRT, like we were able to do from 2015 to 2020, I don't see that really on the horizon. And this is what’s so exciting about our non-Agency securitization program is the fact that we can create very comparable investments, albeit not as rapidly or luminously. We can create a similar type of investment by doing these securitizations. And that's what the team has done a really great job at is being able to issue the securitizations every three weeks on a relative basis. And I think that that's something that's really exciting. And so we're able to take the product that executes better outside the GSEs and be able to create comparable securitizations.
Now obviously, it allows us also to get expertise and real muscle memory if we need to do more. And so if we want to issue more or if there's other agency-eligible product that executes better outside the GSEs, that's where PMT is in a really advantageous state, so we really have this credit investment thesis that can continue to grow credit investments at mid-teen returns. And that's something that we want to continue to focus on. We have very good exposure to MSRs and the low-rate MSRs where the range of outcomes are much more limited than current low-rate MSRs. So if you combine those with the existing CRT that we have from 2015 to 2020, along with new credit investments, I think that you're going to continue to see us climb to consistent mid-teen returns.
Got you. Just to clarify, regarding the three securitizations completed this quarter, what execution levels did you achieve on your AAAs, and what were the advance rates?
I don’t want to speculate too much. The spreads are tight. We experienced significant volatility at the start of the quarter, but things quickly stabilized. I’ll follow up with more detailed information on the embedded leverage, but it’s clear that it outperforms Agency execution by a significant margin. The goal of FHFA and the GSEs was to move some of the non-owner-occupied and second homes into the private label markets, and they have successfully revitalized those markets. It’s a very active market with benefits not just for Agency-eligible production, but also evident in the jumbo loan securitization market, which has become much more active. Non-QM is on a trajectory of about $75 billion to $80 billion this year. This is the most active and robust private label securitization market I’ve witnessed in over 18 years with the company.
Next up is Bose George from KBW.
So on Slide 13, where you have the run rate ROE, it looks like the increase there is really mainly on the rate side. Can you just walk through the drivers of the increase over the last quarter?
Certainly. If you examine the factors impacting the bottom line, you'll notice a small uptick in net interest rate sensitivity. This is primarily due to increased allocations towards non-Agency senior and IO MBS, which we anticipate will help retain those interests from the securitization process over the coming year. This retention is expected to slightly enhance our net interest rate-sensitive strategies. Additionally, the return on equity from Correspondent Production has risen quarter-over-quarter, reflecting our positive outlook on volume and margin activity heading into the third quarter, which we believe will continue in the following quarters. Furthermore, our overall run rate is boosted by increased investments in the non-Agency subordinate segment, which also contributes positively to our overall forecast, due to greater allocation in that area.
Okay. So as you retain more sub-pieces from the securitizations, that NII from that is flowing through the Rate Sensitive line.
It's both. If we're retaining senior or senior mezzanine pieces, it would contribute to the net interest rate sensitivity. For every securitization, we are keeping non-Agency subordinate mortgage-backed securities, which impacts the credit sensitivity, and both of these areas are positively contributing to the run rate.
Our next question is from Crispin Love, Piper Sandler.
Can you just discuss your thoughts on the sustainability of the $0.40 dividend level here? The operating earnings run rate you discussed improved quarter-over-quarter but is still slightly below the dividend, and you did mention in some ways how you could see that level improve further in the coming quarters. But I'm curious about your and the Board's comfortability with the dividend today.
We remain confident in maintaining the $0.40 dividend level as we assess potential returns over the next four quarters, especially with the expected improvement from $0.35 to $0.38, and we believe it could further approach $0.40. Our history shows that we value dividend stability, particularly considering how closely the current run rate aligns with the expected dividend. We are satisfied with our current position at the $0.40 level. Additionally, our taxable income, which is generated from our strategies, is also trending towards that $0.40 level and supports it. We expect that taxable income will be sustained. Moreover, as we make more investments outside of our taxable REIT subsidiary, such as in non-Agency subordinate and senior MBS, this should further strengthen the underlying taxable income that supports the $0.40 dividend level.
Great. And then are you able to provide an update on book value in July to date?
Overall, book value in July to date is very stable with respect to where we ended the prior quarter.
We'll go next to Eric Hagen from BTIG.
It feels like a lot of attention, a lot more of a concerted effort around finally making reforms to title insurance. We got the new pilots and the GSEs. I mean, when we combine that with really strong HPA, do you see that potentially driving these low coupon borrowers to mobilize or do a cash-out refinance at some point?
I don't expect it to really accelerate the prepayment speeds on the low interest rate home loans. While it will certainly help on the purchase side, we're observing an increasing number of closed-end seconds from homeowners benefiting from low interest rates. Anything we can do to reduce costs is beneficial, and it should amount to about $400 per loan.
And everyone, at this time, there are no further questions. I would like to turn the conference back to David Spector for closing remarks.
Well, thank you, operator, and thank you, everyone, for joining us here today and asking thoughtful questions. We're obviously here for any follow-up that you may have, so reach out to Isaac and the team. Thanks again for the time, and I look forward to speaking to all of you in the future.
And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. We do encourage investors with additional questions to contact our Investor Relations team by e-mail or phone. Thank you.