PennyMac Q1 earnings: Strong mortgage production offsets weaker servicing results

PennyMac Financial Services reported first-quarter net income of $82.3 million, or $1.53 per diluted share, as stronger mortgage production helped offset weaker servicing results tied to mortgage servicing rights valuation changes and hedging losses.

The Westlake Village, California-based mortgage lender and servicer posted adjusted net income of $117.7 million, or $2.19 per diluted share, for the quarter ended March 31. Annualized adjusted return on equity (ROE) was 11%. Book value per share rose to $83.31 from $82.77 at the end of 2025.

Chairman and CEO David Spector said the company repurchased 560,000 shares during the quarter for $50 million at an average price of $89.28 per share because management saw “tremendous value in the stock at these price levels.”

PennyMac also said it remains on track to close its acquisition of Cenlar’s subservicing business in the second half of the year.

“Our teams are collaborating effectively to ensure a seamless integration,” Spector said on the company’s earnings call, adding that the company expects “strong returns from this acquisition” and benefits from added scale and diversification.

Pretax income totaled $104.7 million, down from $134.4 million in the prior quarter but roughly unchanged from a year earlier.

The company’s production segment generated pretax income of $133.6 million, up 5% from the fourth quarter and more than double from a year earlier. Total loan acquisitions and originations reached $37 billion in unpaid principal balance, down 12% from the prior quarter.

Consumer and broker direct channels represented 75% of acquisition revenue during the quarter, Chief Financial Officer Dan Perotti said.

Broker direct originations rose 3% from the prior quarter, while lock volumes increased 26%. Consumer direct originations climbed 15% sequentially, with lock volumes up 24%.

Utilizing AI

Spector said PennyMac completed the deployment of its Vesta loan origination platform in the consumer direct channel during the quarter and has begun using AI agents to reduce manual tasks.

“We are rapidly moving towards a model with exceptionally low manual intervention, and in some cases, will remove human touch points entirely,” Spector said, alluding PennyMac’s move beyond workflow assistance.

Spector added that the platform is already reducing costs per loan and shortening closing times while improving refinance recapture rates.

Conventional first-lien refinance recapture rates rose to 22% in the first quarter from 17% in the prior quarter and approached 30% in April, according to the earnings release.

“We have also started the successful release of AI agents within our fulfillment process across multiple products,” Spector said. “This new system has already substantially improved the customer experience.”

PennyMac said direct expenses in the consumer direct channel have fallen 26% from 2022 levels, while servicing operating expenses as a percentage of servicing unpaid principal balance declined 24% to 4.5 basis points.

Servicing segment

The servicing segment reported pretax income of $12.7 million, down from $37.3 million in the fourth quarter and $76 million a year earlier.

The decline was largely tied to mortgage servicing rights valuation-related losses and hedge costs. PennyMac recorded a $177 million increase in mortgage servicing rights fair value, driven primarily by changes in market interest rates, but this was offset by $221 million in hedge-related fair value losses and costs.

Perotti said the company increased its hedge ratio to near 100% during the quarter to manage agency mortgage-backed securities spread volatility and preserve book value stability.

The servicing portfolio totaled $720.3 billion in unpaid principal balance at quarter-end, down 2% from Dec. 31.

Corporate and other operations posted a pretax loss of $41.5 million, compared with a $30.2 million loss in the previous quarter. The increase was partly driven by $9 million in marketing expenses tied to the Olympic and Paralympic Winter Games and $3 million in transaction costs related to the Cenlar acquisition.

Looking ahead, PennyMac said it now expects adjusted returns on equity in the low- to mid-teens during the second half of 2026, down from prior guidance for mid- to high-teen returns.

Spector attributed the revised outlook to accelerated technology investments and expectations for lower mortgage origination demand if interest rates remain elevated.

“We continue to expect PFSI to achieve ROEs in the high teens to low 20% range” over the long term through technology investments and greater scale, he said.

The company ended the quarter with $4.2 billion in total liquidity, including cash and available borrowing capacity.