PennyMac Financial Services, Inc. Common Stock Barclays 24th Annual Global Financial Services Conference

Great to be here, and thank you all for joining us.

Yeah. Clearly, as we sit here today, we're seeing rates at a much higher level than we saw at the beginning of the quarter. Mortgage rates are up about 50 basis points, and so like you would expect in a rising rate environment, we're seeing production taper off as a result of that. That's leading to some, obviously, reductions in our forecast for originations in all three channels. In our consumer direct channel, we're seeing margins hold in, which is good news. Obviously, with the increase in rates, we'll see a higher percentage of closed-end seconds getting originated. So the weighted average margin at a consumer could go up in the second quarter, but with originations down, the overall revenues will be down.

Similarly, in our broker direct channel, we are seeing a little bit of margin pressure there with production going down, and we will be talking a little bit more about broker in a few minutes. In the correspondent channel, we are seeing, again, production down a bit there. Margins are holding in really nicely there. There is good news there. On the servicing side, look, we continue to see a great story out of servicing. Our servicing portfolio continues to run at very low delinquency levels. It is a portfolio that has close to $530 million of revenue or servicing fees every quarter, and we are seeing good results there. On the corporate side, we had some headwinds in Q2 from credits from Amazon Web Services and some revaluation of incentive compensation. We should run flat to a year ago.

It is a story that, given the increase in rates, we are again going to be at a, what I call a post-COVID trough level in operating ROE. Again, it will be in that single mid to high single digits, probably mid in Q3.

Yeah. As I mentioned earlier, with the higher rates, I think volumes are going to come in on the lower end of forecasts. From an internal point of view, I think there's tremendous opportunity within the company. We're seeing a lot of good results coming out of our consumer direct channel on the deployment of our new technology. More exciting about that is the fact that we're really beginning to see the benefit of having legacy-free technology and being able to build AI agents on top of it. On the mortgage fulfillment side, which is our processing group, we're seeing processing costs down approximately 50% on a marginal loan basis. On the loan origination side, we're seeing loan officer efficiencies up about 20%, and that's only going to grow.

Today, as we sit here at the higher rates, you have the benefit on what you're originating. In many ways, what's more exciting to me is the fact that we've been carrying a lot of excess capacity over the last few years to be able to really seize on an opportunity of lower rates. What we're seeing with the technology is the need to maintain the levels of excess capacity that we've been holding have been greatly diminished, if not eliminated. That's what led to our reduction of production expenses of $60 million that took place in July. We really reduced the capacity, and that should reduce the volatility of the earnings in our consumer direct channel.

In our broker direct channel, we're doing the work rather quickly to use the technology that we deployed in our consumer direct channel to deploy it in our broker direct channel. Now, there's a little bit more work on top of that that we need to do in the fact that when you run a broker direct business, there's a broker portal that has to go along with that that's being built. That's something that I think is going to be a real exciting opportunity for our brokers. The brokers that we deal with typically deal with the number 1 in the market or the number 2 in the market. I think as we continue to be competitive with price, while being able to offer a better product, that's going to lead to share growth within our broker direct channel.

In our correspondent channel, we've been the leading correspondent aggregator for many years. That lead has shrunk a bit, and we're going to get into the reasons why momentarily. But we're going to continue to be the leading correspondent aggregator. There, it's just a matter of when you're in the correspondent business, you're in it by servicing to really support the flywheel that we've created. As we see opportunities to participate in that market, and we like the servicing values that we're seeing in that market and how those are being constructed, we're going to continue to see growth on the correspondent side. On the servicing side, it's with great pride I say there's not a lower cost servicer than us. I think that's with our servicing portfolio, it's $700 billion, and the cost to service that we have for that.

With the technology that we have in place and the work we're doing with our technology called Plaisse, we're going to continue to drive down the cost to service. That's something that I'm really excited about. With the Senstar acquisition, look, we're going to add scale to our portfolio, and that's only going to help us drive down costs further, while equally as important, grow the capital-light part of our business model. That's something we're very focused on as we look out into the future. Finally, across what I call our shared services groups, technology, finance, and capital markets, the benefits we're getting from AI and AI tools like Claude and Cursor and others are meaningful.