PennyMac Mortgage Investment Trust's CEO Discusses Q2 2012 Results - Earnings Call Transcript

PennyMac Mortgage Investment Trust (PMT)

Q2 2012 Earnings Conference Call

August 2, 2012 08:30 AM ET


Stanford L. Kurland - Chairman and CEO

David A. Spector - President and COO

Anne D. McCallion - CFO

Doug Jones - Head of Correspondent Lending




Good morning and welcome to PennyMac Mortgage Investment Trust Second Quarter Earnings Conference Call. Before we begin, please take a moment to familiarize yourself with the forward-looking disclaimer on slide 2. Thank you.

I’d now like to turn it over to Stan Kurland, PMT’s Chairman and Chief Executive Officer. Stan?

Stanford L. Kurland

Thank you, Chris. The second quarter results demonstrated a significant earnings power of PMT’s and its potential for future growth. Both of the company’s business segments, Correspondent Lending and Investment Activities delivered strong results in the second quarter leveraging solid operational execution of our manager PNMAC Capital Management and fulfillment and servicing provider PennyMac loan services to drive double-digit pre-tax earnings growth.

The Company successfully raised $201 million in new equity capital immediately deploying the proceeds in accretive investments. PMT’s business model in relationship with PLS and PCM combined the expertise in infrastructure that enables the company to pursue the many opportunities present in today’s mortgage market.

Today I’d like to talk to you about our second quarter results. The self emerging market trend and touch on PMT’s position in the current competitive landscape. Then I will turn it over to Anne McCallion, PMT’s CFO, to discuss the quarterly financials in greater detail. Then, David Spector, PMT’s President and Chief Operating Officer, will take you through our investment activities and discuss how our business portfolio performed during the quarter. And finally I will ask Doug Jones, the Head of Correspondent Lending crew, to discuss the quarterly results for Correspondent as well as our future growth strategies for that business.

Before we get into details, let’s review PMT’s second quarter highlights. Net income was $29.6 million in the second quarter, up 55% from the first quarter on revenues with $64.4 million. Diluted earnings per share reach an all time high at $0.79, a 22% increase from the first quarter. Return on equity was 17% for the quarter.

We believe this is particular with multiple keeps (indiscernible) at least raised over $200 million in new equity in the quarter, roughly a third of our market capitalization at that time demonstrating our ability to quickly and efficiently deploy capital. The new capital allowed for the purchase of four distressed whole loan pools provided more continued growth in our Correspondent business and facilitated the pay down of our borrowings under the forward purchase agreements. All of these activities contributed to PMT’s strong quarterly results.

Our Correspondent business continues to perform exceptionally well. Correspondent purchase activity increased 88% during the quarter to $3.4 billion in total purchases, of which conventional purchases accounted for $1.8 billion. Our selective client-focused model drives growth in deeper relationships with our Correspondent business partners. This simply means that we keep to do business with Correspondent [partners] who view the relationship with PMT as the partnership that has mutually beneficial to the long-term success of both parties. Doug will expand on this later in the presentation.

Turning to our activity, we’re pleased with the performance of PMT’s distressed mortgage loan investments during the quarter, with pre-tax earnings increasing 82% from the first quarter driven by 144% increase in net investment income. These results were driven by a combination of increased valuation on note, [balance in] the portfolio and strong liquidation activity. Moreover, we purchased $402 million in UPB, distressed whole loans during the quarter.

The purchases were comprised of $224 million in UPB of non-performing whole loans and $178 million of UPB in re-performing whole loans, which is our largest purchase of re-performing loans thus far. As we’ve mentioned in the past, re-performing pools are likely to become more prevalent in the option classes and expand the amount of whole loans available to purchase.

David will go into additional details regarding our strategy of that investments in the performing whole loans that MSR will follow a response from this pool of (indiscernible) and we will continue to pursue additional re-performing whole loan investments going forward.

The second quarter results underscore the strength of PMT’s business model and our ability to capitalize on opportunities as they emerge. Our success is occurring at a time when the mortgage markets appear to be showing signs of stabilizer.

Let’s turn to slide 4, and examine a few of the potentially positive indicators. In the second quarter (indiscernible) signs of stabilization in home prices generally and specifically results in the country, in REO improvement. Indicators of stabilization were evident in the economic data of home side is released in the second quarter in addition to market feedback we received – own REO and third-party foreclosure liquidation process.

A general sense that housing is nearing the bottom seems to be applying the growing consensus among economist, which is (indiscernible) from the negative housing forecast we’ve seen over the last five years. Some of the recent improvement in housing initiatives can be attributed to similar factors that typically a company with strength and (indiscernible). But taken as a whole, it seems that home prices are nearing or have reached the bottom.

The chart on slide 4 shows the change into the index values from the trough in the post year-to-date class cycle from 2007 to present. And you can see that all of the changes in the index are above the trough. Many of these cities have only recently come back above their levels and some are still below year-ago level. However, most of the cities and the pace of our index had either experienced year-to-date increases, entirely separate home value index or have seen levels of price declines flow when compared to year-ago levels.

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