PennyMac Financial Services, Inc.

Good afternoon, and welcome to Panamac Financial Services Inc. Fourth Quarter 2024 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on Panamac Financial's website at pfsi.panamac.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 stand gap measures that have been reconciled to their gap equivalent in the earnings materials. Now I'd like to introduce David Spector, Panama Financial's Chairman and Chief Executive Officer, and Dan Perotti, Panama Financial's Chief Financial Officer. You may begin.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter earnings call. For the fourth quarter, PFSI reported net income of $104 million, or diluted earnings per share of $1.95 for an annualized return on equity of 11%. Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 16%, driven by continued strength in our servicing business and a solid contribution from our production segment despite higher mortgage rates. In total, loan originations and acquisitions were $36 billion in unpaid principal balance, up 13% from the prior quarter and driving the continued growth of our servicing portfolio to $666 billion in unpaid principal balance with 2.6 million customers. Before I continue on, I would like to talk about a change that we are reporting our financial results and reporting segments. We took the opportunity to address our financial reporting for the evolution of our businesses and the way we manage them. As a result, we have modified our segment definitions. The principal change we made was to remove the corporate overhead allocations from our business segments to better evaluate the performance of our operating businesses. We also determined that our investment management business was not an operational segment, and as such, the related results are now consolidated into corporate and other items. Our two operating segments are now production and servicing, and we have included non-segment activities and activities related to our investment management business in corporate and other. Prior period amounts have been recast to conform these periods of presentation to the current period of presentation. And I encourage investors to view the Excel supplement posted on pfsi.pennymac.com for more detailed information. Now back to our results. The fourth quarter marked the end of a very successful year for PFSI, as you can see on slide four of our earnings presentation. We highlighted some of our key achievements in 2024. which demonstrates the earnings power of our balanced business model and the significant gains in operating leverage we achieved. In the production segment, total acquisition and origination volumes were $116 billion in UPB, up 17% from 2023, driven by a nearly 70% increase in originations from the direct lending channel. Production segment revenues were up 47% from 2023, and despite the large mix shift, expenses remain contained, up only 13% from 2023. Production segment pre-tax income in 2024 was $311 million, up from $116 million in 2023. including a significantly higher contribution in the third quarter when rates decline, highlighting our ability to rapidly address recapture opportunities and increase demand for refinances when mortgage rates decline. Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment and continues to provide the foundation for our strong financial performance. The unpaid principal balance of our servicing portfolio increased 10% from the prior year end, as production volumes more than offset runoff from prepayments. Servicing segment operating revenues were $1.5 billion, a 19% increase from the prior year, driven primarily by increased servicing fees and earnings on custodial balances due to growth in the owned portfolio. operating expenses increased by only 3%, demonstrating the ability of our servicing workflows and technology to scale efficiently with our growth, while also providing our servicing associates with the tools they need to best serve our customers. In 2024, servicing segment operating pre-tax income was $643 million, or 10.1 basis points of average servicing portfolio UPB, up from $535 million from 9.3 basis points in 2023. In total, we delivered an operating return on equity of 17%. Gap ROE was 9%. Growth in book value per share was 6%, and we also increased our dividend to 30 cents per quarter. an increase of 50% from the previous dividend. These strong yearly results demonstrate our commitment to operational excellence and our focus on delivering sustainable earnings through varying interest rate cycles by leveraging our balanced business model. Turning to the origination market, current third-party estimates for total originations in 2025 averaged $2 trillion. reflecting growth in overall volume. Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time. As you can see on slide six, our balanced and diversified business model with leadership positions in both production and servicing enables strong financial performance and a foundation for continued growth. as an industry-leading mortgage company across different interest rate environments. We achieved a mid-teens operating ROE in quarters characterized by higher mortgage rates and a 20% operating ROE in the third quarter when mortgage rates declined. Because we retained the servicing rights on our loan production and have been one of the largest producer of mortgage loans in recent periods, We are uniquely positioned with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates and who stand to benefit from a refinance in the future when interest rates decline. On slide seven of our earnings presentation, you can see that as of year end, $220 billion in unpaid principal balance, or approximately one-third of the loans in our portfolio, had a note rate above 5%. Approximately $100 billion were government loans, and approximately $120 billion were conventional and other loans. The potential opportunity for earnings growth is highlighted on this slide, as well as our historical refinance recapture rates, which have improved significantly from five years ago as a result of our ongoing technology enhancements and process improvements. We expect these recapture rates to continue improving given our multi-year investments combined with the increased investment in our brand as use of targeted marketing strategies. As I briefly discussed, our large and growing servicing portfolio is a key asset, anchoring our core operational results in this higher interest rate environment and driving low-cost leads to our consumer direct division. Throughout our history, we have been focused on deploying new and emerging technologies to drive efficiencies and lower costs, as evidenced by the chart on the right side of slide eight, which highlights a decline in our per loan servicing expenses of more than 35% since 2019. We have a platform in the mortgage industry that I believe is unmatched. And further, our best-in-class management team remains committed to unlocking additional efficiencies through continued investments in workflow and technologies. It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this higher rate environment bolstered by increases in the origination market in periods when mortgage rates decline. 2025 will be an exciting year for us. I will now turn it over to Dan who will review the drivers of PSSI's fourth quarter financial performance.

Thank you, David. PSSI reported net income of $104 million in the fourth quarter, or $1.95 in earnings per share, for an annualized ROE of 11%. These results included $68 million of fair value declines on MSRs, net of hedges and costs. And the impact of these items on diluted earnings per share was negative 93 cents. PFSI's Board of Directors declared a fourth quarter common share dividend of 30 cents per share. Beginning with our production segment, pre-tax income was $78 million, down from $129 million in the prior quarter. Total acquisition and origination volumes were $36 billion in unpaid principal balance, up 13% from the prior quarter, as many loans originally locked in the third quarter were funded in the fourth quarter. Total locked volumes were $36 billion in UPV, down 7% from the prior quarter due to higher mortgage rates. Of total acquisition and origination volumes, $32 billion was for PSSI's own account, and $4 billion was fee-based fulfillment activity for PMT. PennyMac maintained its dominant position in correspondent lending in the fourth quarter, with total acquisitions of $28 billion, up from $26 billion in the prior quarter. Correspondent channel margins in the fourth quarter were 27 basis points. down from 33 basis points in the prior quarter. However, the revenue contribution was essentially unchanged as increased volumes offset the lower margins. Increased volume in the quarter was primarily due to PMT retaining 19% of total conventional correspondent production in the fourth quarter, a decline from 42% in the third quarter. In the first quarter of 2025, we expect PMT to retain approximately 15 to 25% of total conventional correspondent production, consistent with the fourth quarter. Of note, pursuant to a renewed mortgage banking agreement with PMT, beginning in the third quarter of 2025, all correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent loan production. In broker direct, we continue to see strong trends and continued growth in market share as we position PennyMac as a strong alternative to channel leaders. Originations in the channel were up 22%, as many loans locked in the third quarter were funded in the fourth, while lock volume was down 17% given the reversal in mortgage rates. The number of brokers approved to do business with us at year end was over 4,600, up 21% from the end of last year, and we expect this number to continue growing as top brokers increasingly look for strength and diversification in their business partners. Broker channel margins were up slightly from the prior quarter, near normalized levels. Consumer direct was similar, with originations up 40% from the third quarter and loss volumes down 30%. Margins in the channel were up, given a higher mix of refinanced loans in the third quarter at lower margins. Activity in January was down due to higher mortgage rates and typical seasonality. Production expenses, net of loan origination expense, increased 12% from the prior quarter, due to higher funded volumes and increased capacity in the direct lending channels. It is our preference to hold a level of excess origination capacity in the current market environment, given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time and that we will need to be quick to react. Turning to servicing, the servicing segment recorded pre-tax income of $87 million. Excluding valuation-related changes, Pre-tax income was $168 million, or 10.3 basis points, of average servicing portfolio UPV. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's owned portfolio, and earnings on custodial balances and deposits and other income decreased due to lower short-term rates. Custodial funds managed for PFSI's own portfolio averaged $7.3 billion in the fourth quarter, up from $6.9 billion in the third quarter, primarily due to increased prepayments. Realization of MSR cash flows decreased $10 million from the prior quarter due to lower prepayment expectations as a result of higher mortgage rates. Operating expenses were down $2 million from the prior quarter at $81 million, or five basis points of average servicing portfolio UPB. The fair value of PFSI's MSR increased by $540 million, driven by higher market interest rates. Pension losses and costs were $608 million, more than offsetting MSR fair value gains. As David mentioned, results from our investment management business are now included within corporate and other. Corporate and other items contributed a pre-tax loss of $36 million, compared to $39 million in the prior quarter. PFSI recorded a provision for tax expense of $25 million, resulting in an effective tax rate of 19.2%. The reduction in the effective tax rate from the prior quarter was primarily due to a decline in the provision rate from 26.85% to 26.7% and the resulting repricing of expected taxes on deferred income. We ended the quarter with $3.3 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged. We'll now open it up for questions. Operator?