Prepared remarks
Good afternoon, and 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 *1 to raise your hand. To withdraw your question, press *1 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 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 would like to introduce David A. Spector, PennyMac Mortgage Investment Trust chairman and chief executive officer, and Daniel Stanley Perotti, PennyMac Mortgage Investment Trust chief financial officer. Please go ahead.
Thank you, operator. Good afternoon, and thank you to everyone for participating in our second quarter 2026 earnings call. Starting on slide 3, 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 30 was $14.83, down 1% from the end of the prior quarter. Turning to slide 4, during the second quarter, PMT acquired $2 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 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 to 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 an agreement to sell $13 billion in UPB of low-coupon agency MSRs, with a close expected at the end of August. Slide 5 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, and 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 bonds, building a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On slide 6, 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. Sixty-three percent 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 7, approximately half of PMT shareholders' equity remains deployed to long-standing investments in MSRs and 13% is comprised of our unique GSE credit risk transfer investment. Mortgage servicing rights provide stable cash flow 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 8, 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 level 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 toward investments with the most attractive return protection 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 toward 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 will turn it over to Daniel 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, representing a 6% annualized return on equity to common shareholders. Our credit sensitive strategies contributed $11 million to pretax income, generating an annualized return on equity of 11%. The contribution to pretax 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 securitization 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 pretax 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 30, up from $3.8 billion at March 31. 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 pretax 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. And finally, on slide 13, we continue to believe that debt-to-equity, excluding nonrecourse debt, is the best metric for measuring our core leverage. That ratio increased to 6.2x at quarter end from 5.6x 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 31, as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse 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 will now open it up for questions. Operator?
Questions and answers
We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are 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.
Hey, guys. Just in terms of the move in rates since quarter end, can you talk about the impact of that on run-rate earnings? Does that help MSR returns? Some color on that would be great.
Overall, thanks for the question, Bose. As interest rates move higher, particularly long rates, it is generally beneficial to the expected earnings and run rate, especially for MSRs. We noted in the run-rate context that as interest rates have moved higher, our expectation for the returns of the MSR portfolio has increased. If long rates and mortgage rates continue to rise, that further dampens prepayment speeds on MSRs and could drive additional gains in MSR returns, which would help to further bolster the run rate. A partial offset is that if short rates increase meaningfully, as the Fed raises short rates, that would have a dampening effect on overall returns because it would drive up our financing costs for longer-dated fixed-rate assets in the interest rate sensitive strategies. With respect to our subordinate bonds, we have invested in assets in recent periods that are less sensitive to short-rate increases, in particular CMO floaters. Those are the two offsetting potential impacts from rising interest rates.
Okay. But net, could we be a couple of pennies higher than the $0.33 that you have shown?
Given our concentration in mortgage servicing rights, and the fact that we have generally seen long rates move up faster than short rates, it would generally be beneficial to the run rate. That could translate to a modest increase versus the $0.33 run-rate projection, depending on the path of rates and financing costs.
Okay. Great. And 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 and maybe park something in agency MBSs, for instance, if it happens?
Look, Bose, we have become much more active in managing the portfolio. As we look at opportunities and see the returns in securitizations combined with the very robust bid for MSRs with low note rates, that is something we are clearly evaluating. We are actively managing the portfolio and will consider MSR sales where it optimizes capital allocation and redeployment into higher-return opportunities like our securitization program.
Great. Thank you.
The next question is from Marisa Lobo of UBS. Your line is open. Please go ahead.
Alright. Thank you. Just on the shift to 100% non-agency acquisition in the correspondent channel, does that alter the economic relationship or the management agreement with PFSI?
It does not alter the management agreement. The primary impact is that fewer loans will flow through the correspondent arrangement or the fulfillment agreement. PMT pays a fulfillment fee to PFSI for loans that come through that correspondent channel directly to PMT. To the extent fewer agency-eligible conventional loans flow through that correspondent arrangement, PMT would generate a bit lower gain on sale from those loans, and there would be lower fulfillment fees flowing back to PFSI. To emphasize the rationale for the change, we are reallocating equity to reduce the amount of capital invested in MSRs, particularly higher-rate MSRs, where we believe PMT can achieve better allocation of equity into subordinate bonds generated from our private label securitizations. We expect that reallocation to be beneficial and increase the run rate over time.
Okay, got it. And on rate sensitivity — following the sale of the MSRs and your capital redeployment, should we think about PMT's interest rate sensitivity and book value volatility versus today?
Overall, it should be very similar. Our hedging practices remain unchanged, and our strategy has generally been to insulate PMT from significant book value changes due to interest rate movements. As you saw from this quarter's hedge results, our hedges were successful in accomplishing that, and we expect the approach to continue as we reallocate equity away from MSRs and into private label securitizations. Holdings from the private label securitizations are also included in our global interest rate hedging and management process and are considered in 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, nonagency securitization activity has been fairly robust recently. Are you finding opportunities to deploy capital into third-party securitizations, or should the expectation be you will continue to focus on your own organically created investment plan?
We look at a lot of bonds being offered by street desks and buy smaller pieces here and there. It's not that we have any bias against buying in the secondary market, but we believe in the economic value of our organic creation. Given that our manager is servicing the loans, we have done the diligence on them and we feel very comfortable with the underlying assets in our securitizations versus buying in the secondary market from other originators whose loans are serviced by others. That said, it is not a policy that we will never buy third-party securities; we have bought in the past and will buy in the future if we believe the economics are appropriate. From a best-execution standpoint, the most efficient path to redeploying capital today is into the securitizations we have been originating.
Okay, thank you.
Our next question is from Douglas Harter of BTIG. Your line is open. Please go ahead.
Thanks, and good afternoon. Can you talk about the pacing of securitization activity to the extent that you are able to free up more capital through MSR sales? Do you think that could accelerate, or is the pace you have been operating at the pace you see as the opportunity today?
This is an advantage PMT has given its synergistic relationship with PFSI. As we have capital to deploy, I can see us doing larger securitizations to create larger investments. We have been redeploying some capital into floaters, but with PFSI as the leading correspondent aggregator, there is securitization activity across owner-occupied loans that go to the GSEs, activity around investor and second-home loans, and we could do jumbo securitizations. Given the pace of non-QM activity that we are handling at PMT, and the robust amount coming from PFSI's broker division that is being sold in the secondary market for which PMT could buy, we could also do a non-QM securitization. I am hopeful we can complete one 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 solely a function of redeployment as we sell assets; it's also about understanding the servicing landscape and identifying how to maximize capital on sale in addition to maximizing return on redeployment.
Appreciate that, David. Can you briefly talk about what impact, if any, the move higher in rates we've seen will have on securitization execution?
Any move higher in rates does have an effect on production. We've been running at slower levels over the past couple of months, and I expect things to continue to slow down. There is still a lot of activity in origination in the non-QM space, activity on investor and second-home loans, and activity in cash-out refinances. But mortgage activity is cyclical, and as rates go up, activity does slow down.
A bit of an offset on execution is that if there's less supply flowing into the market, that can help investor demand for securitizations because there's less overall supply. To the extent there is still good loan volume coming through from PMT's partnership with PFSI, that gives us an advantage and potentially some tailwinds with respect to securitization execution.
Great. Appreciate it. Thank you.
There are no further questions at this time. I will now turn the call back to David A. Spector for closing remarks.
Thank you, operator, and thank you all for joining us. If you have any additional questions, please do not 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.