PennyMac Financial Services, Inc.

Good afternoon and welcome to PennyMac's Financial Services, Inc.' 's first quarter 2025 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on PennyMac's financial website at pfsi.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 two 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. I'd now like to introduce David Spector, Panamax Financials Chairman and Chief Executive Officer, and Dan Perotti, Panamax Financials Chief Financial Officer.

Thank you, Operator. Good afternoon and thank you to everyone for participating in our first quarter earnings call. For the first quarter, PFSI reported net income of $76 million for diluted earnings per share of $1.42 for an annualized return on equity of 8%. Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 15%, driven by continued strength in our servicing business and a solid contribution from our production segment despite elevated mortgage rates. In total, loan originations and acquisitions were $29 billion in unpaid principal balance, driving the continued growth of our servicing portfolio to $680 billion in unpaid principal balance with 2.7 million households. Before reviewing our quarterly results in greater detail, I would like to highlight our newly announced partnership with Team USA and the LA 28 Olympic and Paralympic Games. In recent periods, we have made significant investments in technology and capacity. And given our market position as the second largest producer of mortgage loans and the sixth largest servicer in the country, we are well positioned for sustained investment in our brand. This strategic four-year partnership is a powerful catalyst for our business. It will elevate our brand with our customers, business partners, and employees, while connecting PennyMac with the shared values of respect and excellence embodied by the U.S. Olympic and Paralympic movement. Team USA has a massive fan base, offering unparalleled reach, and brand association with the Olympic and Paralympic Games drives increased engagement, memorability, and ultimately greater customer consideration. This marks the first significant investment in our brand, building upon our established success in performance marketing. We expect the partnership to boost both portfolio recapture and non-portfolio customer acquisition with integrated campaigns and athlete partnerships that deliver the message of the importance of home and home ownership. Additionally, this partnership is a key driver in our strategy to expand our market share in broker direct. Our association with Team USA will also foster a stronger sense of pride and purpose among our employees. And as we look to grow our employee base, this partnership increases PennyMac's value proposition as an employer of choice. It is important to note that this partnership is a strategic four-year investment that we've structured to align with our financial discipline. The related expenses will be lower in the early years of the partnership gradually building into the culmination of the LA28 Games. This phased approach allows us to strategically build brand relevance, awareness, and engagement without significant upfront costs. We are incredibly enthusiastic about the opportunities this partnership presents and its potential to drive significant value across all facets of our business. Now, turning to the origination market. Current third-party estimates forecast total originations of $2 trillion in 2025, reflecting projections for growth and overall volumes with moderate contributions from both refinance and purchase. Despite broader economic volatility, industry consolidation, and regulatory change, we remain intensely focused on the organic growth of our servicing portfolio and the continued development of our balanced business model, and we are committed to successfully navigating this economic landscape without distraction. As we've highlighted on slide seven, our synergistic relationship with PennyMac Mortgage Investment Trust, or PMT, continues to provide us with a unique competitive advantage. Our deep and experienced management team has built a best-in-class operating platform that includes a large and agile multi-channel origination business and the scaled servicing operations, both supported by industry-leading technology and processes we've thoughtfully developed over our long history. As we have demonstrated, this strategically built platform provides us the ability to generate strong returns for our stockholders across different market environments. As a mortgage REIT, PMT provides a tax-advantaged balance sheet to hold and invest in long-term mortgage assets. This model enables PFSI to generate capital-light recurring revenue streams in the form of servicing fees, fulfillment fees, and management fees. PFSI's deep access to the origination market, combined with PMT's ability to execute private label securitizations and retain the related investments, provide both entities the opportunity to capitalize on the evolving landscape for secondary market execution should, the GSEs reduced their overall footprint. We have repeatedly demonstrated that our balanced and diversified business model with leadership in both production and servicing and our dynamic hedging program enables strong financial performance and a foundation for continued growth as an industry-leading mortgage company regardless of the direction of interest rates. As you can see on slide eight of our presentation, We have produced operating returns on equity in the mid-teens during periods of higher rates, with the potential for increased returns when mortgage rates decline, as evidenced by our performance in the third quarter of last year. Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment, and continues to provide the foundation for strong financial performance in the future. The unpaid principal balance of our servicing portfolio increased 2% from the prior quarter and 10% from March 31, 2024, as production volumes more than offset runoff from prepayments. Because we retain the servicing rights on nearly all mortgage loan production and have been one of the largest producers of mortgage loans in recent periods, we are uniquely positioned in the industry. Our large and growing portfolio of borrowers who recently entered into mortgages at higher rates stand to benefit from a refinance in the future when interest rates decline, positioning our consumer direct lending division for strong future growth. On slide nine of our earnings presentation, you can see that as of March 31st, $240 billion in unpaid principal balance, or 35% of the loans in our portfolio, at a note rate above 5%. Approximately $107 billion were government loans, and approximately $133 billion were conventional other loans. The opportunity for earnings growth is highlighted on this slide, along with our historic refinance recapture rate, which has 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 mentioned earlier, and use of targeted marketing strategies. Slide 10 illustrates the advantages of growing our servicing portfolio organically via our own production, a key differentiator for PennyMac Financial. We can consistently source loans through different channels, depending on the market environment and our servicing portfolio growth has been more consistent than others that grow primarily through bulk acquisitions. Loan-by-loan processing gives us the ability to perform diligence and compliance reviews for all of the loans we produce and ultimately service, leading to increased fraud detection and minimal defect rates versus bulk MSR purchases. This is evidenced by the strong historical performance of our MSR assets with lower delinquencies. especially in recently originated loan vintages relative to the broader industry, which validates the efficacy of our prudent credit strategy. 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 divisions. On slide 11, you can see the strong revenue contributions from our servicing portfolio in recent periods. With growth driven by our portfolio expansion and the higher proportion of owned servicing in recent periods, as well as increased placement fees due to elevated short-term interest rates. Throughout our history, we've been focused on deploying new and emerging technologies to drive efficiencies and lower costs, as evidenced by the chart on the right. which highlights the continued decline in our poor loan servicing expenses in 2019. We continue to demonstrate 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. Given our best-in-class proprietary technologies with advanced capabilities and our unmatched excellence in servicing, We are committed to expanding our subservicing business beyond PMT, and we deliver a compelling value proposition to MSR owners. This includes superior capabilities for both performing and non-performing loans, powered by our proprietary technology and extensive customer self-service capabilities. And MSR owners that utilize PennyMac as a subservicer can leverage our robust marketing and recapture tools to generate leads and best support their origination efforts. On slide 12, you can see we've signed our first three clients with one already onboarded, and we are actively engaged with 20 additional prospects that represent approximately $65 billion in UPB. Beyond that, we estimate our correspondent sellers collectively own approximately $465 billion in unpaid principal balance of services. and that the total addressable market for subservicing is approximately $4 trillion. Given consideration to changing market dynamics, we expect further market penetration, aiming to capture a broader share of MSR owners who are seeking a best-in-class, low-cost subservicer. This strategic focus on subservicing is a testament to our commitment to diversifying our revenue streams while maximizing the value of our servicing platform. It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this volatile environment no matter the direction of interest rates. I will now turn it over to Dan who will review the drivers of PFSI's first quarter financial performance.

Thank you, David. PFSI reported net income of $76 million in the first quarter. for $1.42 in earnings per share for an annualized ROE of 8%. These results included $99 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 $1.35. CFSI's Board of Directors declared a first quarter common share dividend of 30 cents per share. Beginning with our production segment, pre-tax income was $62 million, down from $78 million in the prior quarter. Total acquisition and origination volumes were $29 billion in unpaid principal balance, down 19% from the prior quarter, and consistent with a decline in the overall market. Of total acquisitions and origination volumes, $26 billion was for PSSI's own account, and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $34 billion in UPB, down just 6% from the prior quarter. PennyMac maintained its dominant position in correspondent lending in the first quarter, with total acquisitions of $23 billion, down from $28 billion in the prior quarter. Correspondent channel margins in the first quarter were 27 basis points, unchanged from the prior quarter. Fallout adjusted locks for PSSI's own account were down from the prior quarter, which drove a lower revenue contribution. PMT retained 21% of total conventional conforming correspondent production, up slightly from 19% in the prior quarter. In the second quarter, we expect PMT to retain approximately 15 to 25% of total conventional conforming correspondent production, consistent with first quarter levels. Of note, pursuant to our renewed mortgage banking agreement with PMT, beginning in the third quarter of 2025, all correspondent loans will initially be acquired by PFSI. However, PMC 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 down 21% from the prior quarter, as many of the loans locked when rates declined in the third quarter of 2024 funded in the prior quarter. Lock volumes in the first quarter were up 23% from the prior quarter as we continue growing our market position and as we enter the spring and summer home buying season. The number of brokers approved to do business with us at year end was up with over 4,850, up 19% 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 down slightly from the prior quarter, as lower industry volumes resulted in more competitive pricing. We saw similar volume trends in consumer direct, with origination volumes down 24% from the prior quarter, but loss volumes up 6%. Margins in the channel were up due to a larger mix of higher margin closed-end second liens during the quarter. Activity across our channels in April has been up, reflecting lower mortgage rates in the beginning of the month and typical seasonality. Production expenses, net of loan origination expense, increased 5% from the prior quarter, partially due to seasonal compensation impacts. 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 $76 million. Including valuation-related changes, pre-tax income was $172 million, or 10.2 basis points of average servicing portfolio UPB, down slightly from 10.3 basis points in the prior quarter. Loan servicing fees were up from the prior quarter primarily due to growth in PSSI's own portfolio. Custodial funds managed for PSSI's own portfolio averaged $6.2 billion in the first quarter. down from $7.3 billion in the fourth quarter due to seasonal impacts and lower prepayments. As a result, earnings on custodial balances and deposits and other income decreased. Realization of MSR cash flows increased from the prior quarter due to continued growth in the owned portfolio and expectations for higher prepayment activity in the future. Operating expenses were essentially unchanged from the prior quarter at $81 million, or 4.8 basis points of average servicing portfolio UPB, down from five basis points in the prior quarter and representing an all-time quarterly low level. We seek to moderate the impact of interest rate changes on the fair value of our MSR asset through a comprehensive hedging strategy that also considers production-related income. For example, when refinance volumes and production-related income are highly responsive to changes in interest rates, our targeted hedge ratio can decline to as low as 60 percent. And when refinance volumes and production-related income are less responsive to changes in interest rates, our targeted hedge ratio can increase to as high as 100%. The fair value of PSSI's MSR decreased by $205 million in the first quarter. Of that, $183 million was due to lower market interest rates, which drove expectations for higher prepayment activity in the future, and $23 million was due primarily to prepayments that were faster than modeled and other factors. Excluding costs, hedging gains were $131 million. Hedge costs were $24 million. Our targeted hedge ratio moved lower during the quarter as interest rates declined and other factors such as the change in the shape of the yield curve had a slightly negative impact. Each of these two factors decreased our hedge effectiveness during the quarter by about 10% versus the 90 to 100% range previously communicated. At current rate levels, our targeted hedge ratio is in the 80 to 90% range. Thus far in the second quarter, interest rates have been extremely volatile. As a result, our hedge target ratio has varied, and it may change throughout the quarter if this level of volatility continues. Additionally, hedge costs thus far in the second quarter have been elevated. Corporate and other items contributed a pre-tax loss of $34 million compared to $36 million in the prior quarter. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 26.8%. In February, we successfully issued $850 million of unsecured senior notes due in 2033 and used proceeds to reduce the outstanding balance of our secured revolving bank financing lines. Regarding the upcoming maturity of $650 million in unsecured senior notes due in October of 2025, we have ample liquidity to retire the notes with additional flexibility to draw on our available revolving bank financing lines. We ended the quarter with $4 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?