PennyMac Financial Services, Inc.

Good afternoon and welcome to PennyMac Financial Services, Inc.' 's first quarter 2026 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information are available on PennyMac Financial's 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. Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.

Thank you, Operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. As shown on slide three, PennyMac Financial generated net income of $82 million in the first quarter for $1.53 in earnings per diluted share for an 8% annualized return on equity. Excluding the impact of valuation-related changes and transaction expenses related to our acquisition of similar subservicing business, Adjusted EPS was $2.19 per diluted share, or an 11% annualized adjusted return on equity. As Dan will expand upon, we continue to optimize our hedging strategies to converge GAAP and adjusted ROEs. While our adjusted return on equity this quarter remained below our longer-term expectations, we remain intensely focused on maximizing returns on invested capital over the near and long term. I'm also optimistic regarding the underlying trends in our business, particularly higher recapture rates in consumer direct channel coupled with increasing revenue per loan. In addition to these positive trends, I will also address initiatives we currently have underway later in this call. Our optimism is most evident in the production sector, where we are strategically growing in areas that will optimize returns on capital in what remains a dynamic and fragmented market. Specifically in the correspondent channel, we are leveraging our leadership position to exercise rigorous pricing discipline on the related MSRs, while driving an increase in margins across various products. This pricing discipline, combined with continued growth in our consumer and broker direct channels, led to production segments generating its highest level of pre-tax income in nearly five years. In addition, we have three distinct production channels, correspondent, broker direct, and consumer direct, all of which are operating at significant scale. This diversified platform provides us with multiple complimentary avenues for sustainable growth and a unique ability to shift our focus and resources to the channel that offers the most attractive risk-adjusted returns. Turning to slide four, let's review a few additional business updates. During the quarter, we repurchased 560,000 shares for 1% of our outstanding stock for $50 million at a weighted average price of $89.28 per share as we saw tremendous value in the stock at these price ups. I am also pleased to report that we remain on track to close the acquisition of Semlor's subservicing business in the second half of the year. Our teams are collaborating effectively, to ensure a seamless integration of similar subservicing businesses into our operations. As outlined in our investor update presentation in February, once fully integrated, we expect strong returns from this acquisition, and we are excited about the increase in scale and diversification that this transaction will provide. Turning to our consumer direct origination channel, the deployment of DEFSA has been complete for new loan originations and has begun to drive operating efficiency through the introduction of AI agents and the resulting reduction in previously manual tasks. On recapture, I am also pleased with the meaningful progress we have already achieved, with consumer direct origination volumes up meaningfully from recent periods, and conventional first-ingrease finance recapture rates of 5 percentage points from the prior quarter to 22%. This momentum has continued into the second quarter with conventional first-team refinance recapture rates running near 30% in the month of April. Turning to slide six, our mortgage banking operating pre-tax income was $190 million for the quarter, up from $173 million in the fourth quarter. As we look ahead, we expect adjusted ROEs to remain near current levels in the second quarter before increasing to the low to mid-teens in the second half of 2026 as we realize the benefits of technology and efficiency enhancements. As just mentioned, we have lowered our ROE guidance from the mid to high teens to low to mid-teens in the second half of the year due to two main factors. First, we've decided to meaningfully accelerate our technology investment to drive significant operational efficiency in both production and servicing. And second, we expect less origination demand with interest rates at current levels. Over the medium to long term, we continue to expect PFSI to achieve ROEs in the high teens to low 20% range, which we expect to achieve through the realization of these technology investments and increasing scale. On slide seven, we highlight the future opportunity within our consumer direct channel when rates do decline, as well as our first lean refinance recapture rates over the five most recent quarters. As of March 31st, we serviced a combined $320 billion in UPD of loans with no rates above 5%, of which more than half had no rates above 6%. As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the Consumer Direct channel are nearly double first quarter 2025 loans. And our first lean refinance recapture rates remain strong in the 50% range. We are seeing even more success in conventional loans, where volumes are up more than five-fold from levels reported in the first quarter of 2025. driven by the previously noted improvement in first lien recapture rates to 22% from 17% in the prior quarter. And as I mentioned earlier, in April, we achieved conventional first lien refinance recapture rates of nearly 30%. We also completed the transition to VESTA, our new consumer direct loan origination system during the first quarter. And we are in the process of working through the pipeline of loans originated on the old system which we expect to have completed in the second quarter. This new system has already substantially improved the customer experience. I am very pleased with these initial results and expect to realize material benefits of our new platform in the second half of this year. The early success we are seeing is a direct byproduct of our ability to reduce costs per loan and the days to close, as well as leverage real-time data to engage borrowers more effectively. We have also started the successful release of AI agents within our fulfillment process across multiple products. We are rapidly moving towards a model with exceptionally low manual intervention and, in some cases, will have removed human touchpoints entirely, thereby improving the customer experience, further increasing recapture rates, and driving higher operating margins. Furthermore, we are focused on the implementation of additional specific tech-enabled solutions, ranging from AI-driven lead prioritization to enhanced digital self-service. Turning to slide A, you can see how our state-of-the-art technology platform is driving significant operating leverage and superior unit economics across the entire enterprise. By combining our technology foundation with our scale advantages, we are driving unit costs to historic lows. As noted on the charts, our direct expenses within the consumer direct channel dropped 26% compared to 2022 lows. Similarly, in our servicing segment, our operating expenses as a percentage of total servicing UPV have dropped 24% to 4.5 basis points as we continue to enhance workforce productivity and automate complex tasks through the deployment of sophisticated technology. In our corporate and other segment, we are clearly achieving more results. By leaning into a unified technology foundation, we have reduced compensation as a percentage of adjusted revenue to 3.7% from 6.5% in 2022, a decrease of 44%. While these results are compelling, we are in a new stage of transformation in AI implementation, with significant runway ahead to further optimize our platform, reduce unit costs, and capture additional economies of scale. By combining our pricing and capital allocation disciplines with a best-in-class technology infrastructure that is already delivering record-low unit costs, we are building a more resilient and profitable enterprise. We have the team, the technology, and the scale necessary to drive toward our long-term target of high teams to low 20% ROEs. 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 $82 million in the first quarter, or $1.53 in earnings per share, for an annualized ROE of 8%. Adjusted net income was $118 million, or $2.19 in adjusted earnings per share for an annualized adjusted ROE of 11%. The $0.66 difference between our GAAP and adjusted EPS was driven by two items. First, $44 million of fair value declines on MSRs, net of hedges, and costs. This includes principal-only stripped MBS, valuation-related accretion changes, and provision for losses on active loans. And second, $3 million of expenses related to our acquisition of STEMAR. PFI Board of Directors declared a first quarter common share dividend of 30 cents per share. And as David mentioned, we repurchased 560,000 shares common stock for $50 million. On slides 10 and 11, beginning with our production segment, pre-tax income was $134 million, more than double from the same quarter a year ago and up 5% from the prior quarter. As David mentioned, the increase from the prior quarter was driven primarily by strong execution in consumer and broker direct, which combined represented 75% of PSSI's account revenues. Total acquisition and origination volumes were $37 billion in unpaid principal balance, down 12% from the prior quarter. Of this, $34 billion was for PSSI's own account, and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $44 billion in UPD, down 4% from the prior quarter. PennyMac maintained its leading position in correspondent lending. Correspondent acquisitions were $24 billion in the first quarter, down 20% from the prior quarter. While our platform continues to drive profitable and sustainable growth, we are refining our production mix to better withstand market volatility and maximize the long-term value of our service import program. Correspondent channel margins were 28 basis points, up from 25 basis points in the prior quarter due to a shift in mix towards higher margin government loans given the increased levels of competition from the GFC cash window, combined with a meaningful increase in average revenue for loans. Under the fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In the first quarter, PMT purchased 18% of total conventional conforming correspondent production. and 100% of non-conforming correspondent production. Those percentages essentially unchanged from the prior quarter. In broker direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 3% and locks were up 26% from the prior quarter. The number of brokers approved to do business with us continues to grow, up 12% from the same time a year ago, reflecting the growing number of brokers who are increasingly leveraging our distinct value properties. the revenue contribution from BrokerDirect was up from the prior quarter due to higher volumes. Though margins were down slightly, revenue per loan increased, flexing an increase in our average loan balance. Additionally, we've recently launched a non-QM product within our BrokerDirect channel and are already seeing strong initial take-up and positive traction from our broker partners as they leverage our expanded product suite. Locks of non-QM loans in our broker channel were $151 million in UPV during the first quarter, and momentum continued in April with $157 million in UPV of locks. In Consumer Direct, volumes were up, with originations up 15% and locks up 24% from the prior quarter, driving revenue contributions 30% higher than in the prior quarter. While margins were down slightly, revenue per loan increased sequentially across our conventional jumbo and closed-end second products, indicating higher average loan balances for those loan types. Post-lock activities across the channels contributed $13 million to pre-tax income, down from $34 million in the prior quarter, which benefited from strong secondary market execution relative to initial price. Production expenses net of loan origination expense increased 11% from the prior quarter due to higher volumes in direct lending. Turning to servicing, on slides 12 and 13, our total servicing portfolio UPV ended the quarter at $720 billion, down only 2% from the prior quarter end, despite runoff in MSR sales, which were largely mitigated by additions from new production. The servicing segment recorded pre-tax income of $13 million. Excluding valuation-related changes, pre-tax income was $57 million, or 3.1 basis points of average servicing portfolio UPV, up from $45 million for 2.5 basis points in the prior quarter. Earnings from custodial balances were down from the prior quarter, primarily due to lower short-term interest rates. Though realized prepayment speeds increased slightly from the prior quarter, realization of MSR cash flows was down 7% due to the expectation of lower prepayment speeds in future periods resulting from portfolio burnout. Operating expenses remained low at 4.5 basis points of average service average servicing portfolio UPD, or $81 million in the quarter. EBO revenue increased due to higher initiation of modifications and re-delivery margins as a result of lower rates in the beginning of the quarter. Including the provision for losses on active loans, the fair value of PFSI's MSR increased by $177 million. An increase of $201 million was due to changes in market interest rates and was partially offset by $24 million in declines from other model and performance-related impacts. Hedge fair value losses, including principal-only strip MBS valuation-related accretion changes and hedge costs, were $221 million. As we talked about last quarter, we increased our hedge ratio to near 100% to proactively manage prepayment costs. While agency MBS spread volatility and tightening of the primary-secondary spread drove a net fair value decline this quarter, our positioning reflects our disciplined approach to maintaining book value stability across a volatile interest rate environment. Corporate and other items recorded a pre-tax loss of $42 million, up from $30 million in the prior quarter, primarily driven by $9 million in marketing activations related to the Olympic and Paralympic Winter Games, which are not expected to recur in upcoming quarters, as well as $3 million of transaction expenses related to our acquisition of Sennlar subservient systems. The prior quarter also included reduced expenses related to technology improvements. PFSR recorded a provision for tax expense of $22 million, resulting in an effective tax rate of 21.4%. Total debt-to-equity at quarter-ends was four times, and non-funding debt-to-equity at the end of the quarter was 1.7 times. The increase in total leverage was driven by higher direct lending production, and the increase in non-funding leverage was driven by higher interest rates, which drove increased utilization for our MSR credit facilities, in addition to shared returns. We expect these leverage ratios to remain near these levels as interest rates remain at current levels. Finally, we ended the quarter with $4.2 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?