David Spector; Chairman of the Board, Chief Executive Officer; PennyMac Mortgage Investment Trust
Daniel Perotti; Chief Financial Officer, Senior Managing Director; PennyMac Mortgage Investment Trust
Isaac Garden; Senior Vice President, Investor Relations; PennyMac Mortgage Investment Trust
Bose George; Analyst; Keefe, Bruyette & Woods, Inc.
Jason Weaver; Analyst; JonesTrading
Doug Harter; Analyst; UBS Securities LLC
Trevor Cranston; Analyst; CitizensJMP Securities, LLC
Eric Hagen; Analyst; BTIG, LLC
Operator
Good afternoon, and welcome to Pennymac Mortgage Investment Trust first quarter 2025 earnings call. (Operator Instructions) Additional earnings materials, including the presentation slides that will be referred to in the call are available on PennyMac Mortgage Investment Trust 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.
David Spector
Thank you, operator. For the first quarter, PMT produced a net loss to common shareholders of $1 million or diluted earnings per share of negative $0.01. Strong levels of income, excluding market-driven value changes were offset by net fair value declines due to interest rate volatility and credit spread widening. PMT declared a first quarter common dividend of $0.40 per share. Book value per share at March 31 was $15.43, down modestly from December 31.
Current third-party estimates for industry originations averaged $2 trillion in 2025, reflecting projections for growth in overall volumes with moderate contributions from both refinance and purchase. Interest rates have been extremely volatile in recent periods, creating a challenging environment for most mortgage REITs. However, our diversified investment portfolio, efficient cost structure, and strong risk management practices enabled us to effectively manage through these challenging market conditions.
These risk management practices include our well-established interest rate hedging program and the establishment of unique non-mark-to-market financing arrangements for the vast majority of our credit risk transfer investments which enable us to effectively manage through volatile markets.
Turning to slide 5. Our synergistic relationship with PFSI 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 and retain the related investments positions PMT to capitalize on the evolving landscape for secondary market execution should the GSEs reduce their footprint. This provides us with access to unique investment opportunities that we believe will generate attractive risk-adjusted returns over time.
Slide 6 highlights our ability to organically create investments from our own private label securitization activity and importantly, the significant opportunity presented by the broader loan pipeline. The increased volume of nonowner-occupied and jumbo loans underscores the potential for future investment. And this growing pipeline of loans provides us with flexibility and optionality to allowing us to strategically invest in assets that align with our long-term return objectives.
In recent periods, PMT has been among the largest issuers of private label securitization, demonstrating our expertise and leadership in this space. In the first quarter, we successfully completed three securitizations of investor loans totaling $1 billion of unpaid principal balance, retaining $94 million in new investments with returns on equity expected to be in the mid-teens.
We believe that 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 investments. Additionally, our position is the servicer of the underlying loans uniquely positions us 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.
Looking ahead, we expect to continue closing approximately one securitization of nonowner-occupied loans per month, and we anticipate closing approximately one jumbo loan securitization per quarter beginning in the second quarter. This consistent cadence of securitizations underscores our commitment to leveraging our origination capabilities and actively participating in the private label securitization market.
Turning to slide 5. Approximately two-thirds of PMT shareholders' equity is currently invested in the seasoned portfolio of MSR and the unique GSE lender risk share transactions we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future as low expected prepayments have extended the expected lives of these assets.
While credit spreads have widened the current economic environment, delinquencies remain low. 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. Mortgages underlying PMT's large investment in lender originated risk share have a low weighted average current loan-to-value ratio below 50%. As a result, we continue to expect that realized losses will be limited.
MSR investments account for approximately half of PMT's deployed equity. The majority of the underlying mortgages of these MSRs remains far out of the money, and we expect the MSR asset to continue producing stable cash flows over an extended period of time. MSR values also continued 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, these characteristics are expected to support the performance of these assets over the long term. In closing, our risk management capabilities and diversified investment strategies, which include a seasoned MSR and CRT portfolio, combined with the growing securitization platform, position us very well to continue delivering attractive risk-adjusted returns to our shareholders in 2025 and beyond. And we remain confident in our ability to successfully navigate a volatile and evolving market.
Now I'll turn it over to Dan, who will review the drivers of PMT's first quarter financial performance and PMT's run rate return potential.
Daniel Perotti
Thank you, David. PMT reported a net loss to common shareholders of $1 million in the first quarter or negative $0.01 per diluted common share. The credit-sensitive strategies contributed $1 million to pretax income. Losses from organically created CRT investments were $5 million. Investments in non-Agency subordinate MBS generated gains of $4 million and investments in CAS and STACR bonds, generated gains of $2 million. Other credit-sensitive strategies contributed losses of $0.2 million.
The interest rate sensitive strategies contributed a pretax loss of $5 million. Fair value declines on MSR investments were $56 million as the decrease in mortgage rates drove an increase in future copayment projections. These fair value declines were partially offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and related income tax benefits.
MBS fair value increased by $65 million due to the decline in market interest rates. Interest rate hedges decreased by $40 million. Declines on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $16 million tax benefit. The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from December 31, as fair value declines and runoff were partially offset by newly originated MSR investments.
Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding decreased to $84 million from $105 million at December 31. No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $23 billion in the first quarter, down 18% from the prior quarter and consistent with the overall decline in the size of the origination market.
Correspondent loans acquired for PMT's account totaled $3 billion, down 20% from the prior quarter. PMT retained 21% of total conventional correspondent production in the first quarter up from 19% in the fourth quarter. We expect this percentage to remain between 15% to 25% in the second quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market.
PMT also acquired $637 million in UPB of loans acquired or originated by PFSI for inclusion in private label securitizations, up from $437 million in the prior quarter. Income from PMT's correspondent production segment was $10 million, down from the prior quarter, which included gains on nonowner-occupied loans due to credit spread tightening. The weighted average fulfillment fee rate was 19 basis points, up from 18 basis points in the prior quarter.
Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of nongovernment correspondent production from PFSI. In total, PMT reported $41 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, down from $51 million in the prior quarter driven primarily by decreased income from correspondent production and seasonally low placement fees on custodial balances and deposits.
Slide 8 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 $0.35 per share down from $0.37 per share in the prior quarter. The return potential for credit-sensitive strategies increased due to higher expected yields as credit spreads have widened.
The return potential for interest rate-sensitive strategies declined due to compression between longer-dated asset yields and short-term financing rates since the beginning of the year. If the yield curve steepens further, we expect PMC's overall run rate would increase driven by higher overall yields in the interest rate-sensitive strategy.
Turning to capital. In February, we issued $173 million in unsecured senior notes due in 2030. And we also retired $45 million of CRT term notes where the remaining assets were financed via repurchase agreements due to the size of the position. Through 2025, we will continue to seek opportunities to raise additional debt capital as we approach the maturity of our exchangeable note in 2026 as well as to provide additional funding for the potential expansion of our securitization efforts.
I'll now open it up for questions. Operator?
Operator
(Operator Instructions)
Bose George, KBW.
Bose George
Just given the movement in rates since quarter end, can you just talk about any changes in your book value and also changes in the expected ROE since quarter end?
Daniel Perotti
So overall, there's been significant interest rate volatility since the end of the quarter as well as additional credit spread widening since the end of the first quarter. And we've had impacts on -- from both of those during the quarter thus far.
Overall, we're very pleased with the installation that we've had from our hedging program on the -- with respect to the interest rate volatility. But the combination of the higher hedge costs, some of the interest rate volatility and the spread widening has decreased our book value by about 2% to 3% since the end of the quarter. But that remains fairly contained.
And obviously, there's a significant amount of the quarter left to run. With respect to the ongoing ROE other than those fair value impacts during the -- with respect to Q2, the ongoing ROE, our run rate return potential reflects really where we've landed since the -- through the quarter to date and what our expectations are going forward with respect to that.
David Spector
I would add to that, Bose, that given the nature of our debt, especially in CRT, where we don't have mark-to-market and not subject to margin call provisions. It's at times like this where it's really critical when spreads wide and we don't have assets that in the worst case, we'd have to sell. And so I think it's an important asset to look at the liability structure we have in place that the underlying fundamentals for the loans remains the same.
In our CRT portfolio, [we have a lot of ballers] or lot of equity, high credit quality, and I don't -- they're so seasoned that at this point, it would take something really serious for them to be affected. And so I think -- and the same thing holds true for the MSRs where we have so much low rate servicing with active likewise equity in the underlying properties. The fundamentals stay the same.
And so I think at times like this, it's the fact we hedge it is important, and it's the fact that we've termed out our debt without the mark-to-market for the assets that we can hedge, cannot hedge that's just as important.
Bose George
Yeah. Okay. Great. I definitely appreciate the strength of the capital structure. Actually, just one more just on the mortgage banking, just given the change in the -- or the update in the mortgage banking agreement between PennyMac and PFSI, is there an expectation that PMT could acquire a larger percentage of loans from PFSI in the back half of the year?
Daniel Perotti
PMT's acquisition amounts really goes to where we see it as most advantageous to deploy capital. So currently, we've been more focused on increasing our investment in the credit-sensitive strategies. And overall, in terms of the interest rate sensitive strategies with the amount that's going through the correspondent channel and the MSR that's retained there. That has been roughly holding constant in terms of the interest rate-sensitive strategies.
And so in terms of what our outlook is currently, we wouldn't necessarily expect an increase in the proportion of loans that PMT is retaining or keeping in the back half of the year, since we are more focused on building up the credit-sensitive strategies as opposed to creating more MSR that would go into the interest rate-sensitive strategies.
Bose George
Okay. Great. Makes sense. Thank you.
Operator
Jason Weaver, JonesTrading.
Jason Weaver
So just a bridge onto the end of Bose's question there. Last quarter, we were obviously discussing moving more towards credit focused investments and less interest rate-sensitive strategies. It seems we've incrementally shifted somewhat of that way during the first quarter. Can you update a little bit on your thinking given the current dislocation into 2Q right now about where you want to commit capital and what looks most attractive right now?
David Spector
Look, I don't know. I would say that -- I don't know if I -- I'm not seeing a dislocation in the mortgage market. What I would say to you is that we're generally pleased with the capital allocation as we have it today. The -- it's important, as you point out, that PMT continues to grow it's credit sensor strategy position and being a serial issuer is very important.
We're seeing the benefits of that and our securitizations and the spread tightening that's taking place with the senior bonds that get issued. I want to continue to explore during a jumbo securitization every quarter. We're going to do our first one this quarter. And so I think that if the origination market growth or normalizes, the GSEs reduced their footprint through increasing loan level price adjustments, we could do more securitizations.
Having said that, I'd like to see PMT also continue to benefit from the correspondent activity. I don't -- I think that there's natural runoff that takes place in the interest rate sensitive strategies position and so I don't want to put that position in a runoff mode, so there is some replenishment that I would like to see in that position.
And of course, it's all comes into two issues. It's the amount of capital we have to invest and the best execution for that capital. And that's probably the biggest kind of change in how we think about PMT versus two years ago and that -- we want to focus on continuing to increase the returns in PMT and really focus on it from an investment manager -- an investment management point of view by looking at the best execution for all the investments.
Jason Weaver
Thank you. That's helpful. And then on correspondent specifically, just given the decline in mortgage rates that was apparent during the second half of the first quarter, what kind of visibility do you have coming into 2Q about volumes just from those loans closing?
Daniel Perotti
I think to your point, correspondent, we -- I expect to see increased corresponding activity starting at the end of this month and running into May as the loans that were locked into our correspondence Pipelines fund. But I think, look, the market is right now centered on a $2 trillion origination market. Obviously, with -- rate dependent.
I do think we're in a more traditional mortgage banking environment where you have greater volatility and you're going to be short periods refinance activity followed by longer periods or perhaps short periods of higher rates. And so with this volatility, the total originations can move as well. But I think we're all still convicted that we're in a $2 trillion market, but we're only in April as we speak.
Jason Weaver
Agreed. Well, thank you for that color and helpful as always.
Operator
(Operator Instructions)
Doug Harter, UBS.
Doug Harter
Can you talk about your outlook for the dividend given that you lowered run rate earnings? And kind of the -- and wanting the ability to kind of retain as much capital for future growth and therefore, kind of how the dividend fits into the total return strategy?
Daniel Perotti
So consistent with our -- what we've seen previously as the run rate has moved around a little bit, we do expect the dividend to remain stable. We do think there's a value in the dividend stability, but also we do -- the primary reason for the decline in the run rate quarter-over-quarter really has to do with the shape of the yield curve and its impact on the interest rate sensitive strategies as longer-term yields decline, but overall short-term financing rates have not moved further, the Fed is on pause. That really puts some pressure on the interest rate-sensitive strategies and the net returns generated there.
We do expect the yield curve to normalize over time and drive up the expected returns on that interest rate sensitive strategy. And so this decline in terms of the run rate is within the range that we've seen previously. It doesn't really change our view currently in terms of the dividend and maintaining it at the level that we've had at $0.40.
Isaac Garden
Great. And Dan, just a follow-up on the yield curve, it seems like so far in April, while volatile, the yield curve has steepened somewhat -- and I guess if you look at the forward curve, it would imply kind of even steeper. I just want to make sure I understand kind of when you think about run rate, how -- what pieces of that either April or the forward curve are kind of baked into that run rate expectation? Or is that kind of currently what you're seeing?
Daniel Perotti
Well, it's a little bit of a moving target, but consistent -- we still think that we're in that range once we see either yields move up a bit further or maintain their level at the somewhat higher rates or short-term rates decline a bit. Either of those would sort of lock in an increase in terms of our expectations with respect to the run rate return potential of the interest rate-sensitive strategies.
Isaac Garden
Okay. I appreciate that. Dan, thank you.
Operator
Trevor Cranston, CitizensJMP.
Trevor Cranston
Can you guys talk about the return expectations you're seeing on new loan securitizations and if there's been any material change there with the spread widening we've seen so far in April kind of versus where you were seeing expected returns in the first quarter?
David Spector
Look, I mean, obviously, with the credit spread widening, I would say that the return targets on the sub bonds that we have in our position that have increased as one would expect. And I would say right now, this -- the return targets on sub-bonds are, call it, mid-teens, call it, 15%-ish. And I think that, that's something that intrigued us about the -- that's one of the reasons why we're doing the securitization activity that we're doing.
And I think for us to get that returns being in the organic creation of the security is really important. We're not seeing a lot of secondary flows in the market right now. And so to meaningfully deploy the capital into these returns, having the structure that we have and having the ability to have the loans to create the securitization, something that's really unique for PMT.
Got it. Okay. Appreciate the comments. Thank you.
Operator
Eric Hagen, BTIG.
Eric Hagen
A follow-up on the interest rate strategies. I mean you typically manage an Agency MBS portfolio alongside the MSR portfolio sort of as a pairing or kind of a hedge, if you will. I mean, would you say that the jumbo and the investor property loans are somewhat of a substitute for the Agency MBS portfolio since the risk profile is kind of similar? Or is that really not the way you guys are thinking about it?
Daniel Perotti
The -- so it depends on the portions of the capital structure that we retain, and we identify that in terms of the expected contribution from each of those and the expected equity in the run rate return potential. So to date, in terms of our securitizations, we've retained on a few of the securitizations, some of the senior mezz portion, which really has, as you know, interest rate sensitivity that's similar to the TBA position with a little bit generally wider spread.
And so those we do view as a substitute effectively for some of the Agency MBS position, but primarily -- and we noted the investments that we've made in credit sensitive versus the interest rate sensitive in some of the earnings release. So in the last quarter, we retained $66 million in credit-sensitive or subordinate bonds, which we don't view as a substitute, which are really more first loss piece and credit sensitive about $29 million of the somewhat more senior bonds that are more effectively substitutes for TBA.
So a portion of it is a TBA substitute, but most of what we're investing in from the securitizations is really not comparable and more of a credit investment similar to the CRT.
Eric Hagen
Okay.
Operator
We have no further questions at this time. And I'll turn it back to David Spector for closing remarks.
David Spector
Thank you, operator. I'd like to thank everyone for joining us today. Please don't hesitate to reach out to our Investor Relations team if you have any follow-up questions. And again, thank you all very much.
