Good afternoon, and welcome to the first quarter earnings discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available from PennyMac Financial's website at www.ir.pennymacfinancial.com. Before we begin, please take a few moments to read the disclaimer on Slide 2 of the presentation. Thank you.

Now I'd like to turn the discussion over to Stan Kurland, PennyMac Financial's Executive Chairman..

a variable funding note, which is designed to address fluctuations in collateral value and term notes. This structure significantly increases the amount of Ginnie Mae MSR financing available to PennyMac Financial. We borrowed under the variable funding notes in the fourth quarter of last year, replacing existing bank financing in the same amount.

In the first quarter, we successfully issued $400 million in secured term notes with an interest rate of one month LIBOR plus 475 basis points.

The deal was met with strong demand from a diverse group of institutional investors, showing that appetite exists for financing MSRs that are serviced by a counterparty with strong financial and operational performance.

As a result of the successful issuance, the effective advance rate on our Ginnie Mae MSR asset increased to 52% from approximately 26% without the term notes. The term notes have a three year term, which can be further extended by one year at our option. This term financing better aligns with the expected life of the MSR asset.

Our structure also gives us the ability to issue additional term notes as the collateral base grows. The diversification of our financing to include institutional investors, along with the extension of the duration, considerably improves the financial structure of the company.

Now let's turn to Slide 8, and discuss the impact of PennyMac Financial's hedge approach on our first quarter results. PennyMac Financial seeks to moderate the impact of interest rate changes through a comprehensive hedge strategy that also considers production-related income.

During the first quarter of 2017, while interest rates were volatile, the fair value of PennyMac Financial's MSRs increased modestly. MSR fair value gains resulted from lower expected prepayment activity and improvements in the delinquency profile. Offsetting the gains from MSRs were hedge expenses, net of the small gain on the ESS liability.

The ESS gain primarily resulted from prepayment activity during the quarter that was higher than projected. Financial markets during the first quarter experienced considerable volatility and inconsistent movement of the swaps, treasury and mortgage markets.

These factors led to increased hedge costs and mismatches between our MSR and ESS asset valuation changes and hedge performance. Now let's go to Slide 9, and discuss the profitability of our Servicing segment.

As I mentioned earlier, the Servicing segment contributed pretax income of $13.4 million in the first quarter, down from $35.1 million in the prior quarter and up from a loss of $39.5 million in the first quarter of 2016.

As a percentage of the average servicing portfolio UPB, pretax income, excluding valuation-related changes, was 4.5 basis points in the first quarter, down from 5.2 basis points for the fourth quarter and up from 4 basis points in the first quarter of 2016.

Excluding valuation-related changes, servicing segment pretax income was $22.3 million compared to $24.6 million in the prior quarter. The 8% decrease was primarily due to higher operating and EBO transaction-related expenses, partially offset by higher EBO-related and operating revenue, in addition to lower amortization expense.

During the quarter, EBO activity nearly doubled from the prior quarter, totaling $690 million in UPB. This increase was made possible by the proceeds provided by the term note issuance under our Ginnie Mae financing structure. The significant increase in activity generated higher current period expense.

However, we expect this to translate into higher EBO-related revenues in the future. Additionally, interest paid to third parties increased as a result of the term note issuance and additional financing. We remain focused on improving the profitability of servicing.

As we continue to grow the servicing asset, we look for greater economies of scale to improve our expense management and drive down our unit costs. As importantly, we are focused on the value enhancements provided by increased EBO activities. This concludes my overview of PennyMac Financial's first quarter performance.

Now I'd like to turn the discussion over to David Spector, PennyMac Financial's President and Chief Executive Officer, to review the operational results in each of our businesses..

Thank you, Stan. On Slide 10, I would like to begin my remarks by reviewing market share and volume trends across PennyMac Financial's businesses.

PennyMac Financial was the fourth largest producer of mortgage loans in The United States during the first quarter according to Inside Mortgage Finance, and we estimate that we remained the 11th largest servicer. Correspondent production market share grew to 11.3% in the first quarter, up from almost 10.8% in the prior quarter.

In our Consumer Direct business, the rapid onset of a higher interest rate environment in November and heightened competition drove a reduction in market share to levels in line with the second and third quarters of 2016.

We estimate that the market share of our loan servicing portfolio grew to almost 2% of all mortgage debt outstanding in The United States. And lastly, assets under management by our Investment Management segment were $1.56 billion, up modestly from $1.55 billion in the prior quarter, driven by a preferred share issuance by PMT this quarter.

Now let's turn to Slide 11, and discuss correspondent production. Correspondent acquisitions by PMT in the first quarter totaled $13.9 billion in UPB, a 31% decrease from the fourth quarter and up 44% year-over-year.

Government loan acquisitions accounted for 67% of total correspondent acquisitions were $9.3 billion in the first quarter, down 26% from the prior quarter and up 44% from the first quarter of 2016.

Conventional conforming acquisitions, whereby PennyMac Financial performed fulfillment services for PMT, totaled $4.6 billion in the first quarter, down 38% from the prior quarter and up 42% from the first quarter of 2016. Total lock volumes $14.5 billion, down 25% from the prior quarter and up 39% from the first quarter of 2016.

The decline in our acquisition volumes this quarter primarily resulted from the sharp rise in mortgage rates last November, which drove a significant reduction in total refinance market activity. The increase in mortgage rates occurred at the same time mortgage activity typically begins to slow in the winter months.

Combined, these two factors contributed to a 34% quarter-over-quarter decrease in total mortgage market production, according to Inside Mortgage Finance. PennyMac's Correspondent channel fared a little better than the market overall, and we believe gained market share as a result.

Looking at April volumes, correspondent loan acquisitions totaled $4.4 billion in UPB, while interest rate lock commitments totaled $4.8 billion in UPB. The modest decline in mortgage rates after quarter end has helped boost mortgage refinance activity from first quarter levels, and we see increased purchase money activity as well.

Purchase money loans accounted for 73% of our correspondent production during the quarter, up from 62% in the fourth quarter. The purchase money orientation of our correspondent production volume is an important differentiating factor and one, which positions us well for the anticipated origination mix in 2017.

We continue to grow our seller relationships during the quarter, driven by success in expanding our non-delegated correspondent program and smaller seller relationships, which utilizes more of our platform's extensive capabilities. At the end of the first quarter, we had 557 seller relationships, up from 522 in the prior quarter.

Now let's turn to Slide 12, and discuss Consumer Direct production. Consumer Direct production volume totaled $1 billion in UPB in the first quarter, down 49% from the fourth quarter and down 14% year-over-year. The committed pipeline at the end of the first quarter was $741 million.

The magnitude and speed of the rise in interest rates, along with heightened competition in a smaller mortgage market significantly impacted our refinance focus, Consumer Direct volumes and margins this quarter. We are seeing a pickup in volume from the recent rate decline.

In April, Consumer Direct originations totaled $324 million in UPB, and interest rate lock commitments were $713 million in UPB. The committed pipeline was $780 million in UPB as of April 28, 2017.

We are implementing a variety of technology enhancements and workflow efficiencies in Consumer Direct to drive down origination costs and improve the speed and precision of the loan application decisioning processes.

These enhancements will allow us to respond to applicants within hours rather than days, and drive improved lead conversion as a result. We are also enhancing our portfolio of lead generation strategies to better capture the potential opportunities in our Servicing portfolio.

A key strategic focus going forward is growing our non-portfolio business by developing affinity relationships, with the goal of having non-portfolio volumes comprise a meaningful percentage of our overall origination volume. We've increased the number of agreements with Affinity Partners to help deliver on this objective.

The success we've achieved thus far leads us to believe that we can grow the non-port volume to 10% of total volume by the second half of this year. To help facilitate these initiatives and position consumer direct for the next phase in its evolution, we have opened up a new processing center in St. Louis, Missouri.

We remain optimistic regarding our strategic direction and our ability to meaningfully grow our Retail business in the coming years. Now let's turn to Slide 13 and discuss our loan servicing business. In the first quarter, our loan servicing portfolio grew to $202.9 billion in UPB, an increase of 4% from the fourth quarter and up 23% year-over-year.

During the first quarter, our servicing portfolio reached a significant milestone when we surpassed 1 million customers. Penny MAC is unique among large nonbank mortgage servicers and our proven ability to deliver consistent portfolio growth, driven by the volumes added by our leading production activities.

Prepayment activity slowed considerably during the quarter as a result of higher rates. The CPR on the MSR portfolio slowed to 12.7% from 20.7% in the fourth quarter. After quarter end, we acquired a bulk portfolio of Ginnie Mae MSRs, totaling $4.3 billion in UPB.

PennyMac Financial acquired the portfolio with funding provided by proceeds from our new Ginnie Mae MSR facility. We continue to seek additional opportunities to supplement the organic growth of our servicing portfolio through additional MSR acquisitions. As Stan discussed earlier, our EBO transaction volume increased significantly in the quarter.

Our expertise in loss mitigation enables us to rehabilitate a significant portion of these loans, allowing customers to remain in their homes. Now let's turn to Slide 14 and discuss the Investment Management segment. As we mentioned earlier, net assets under management were $1.56 billion compared with $1.55 billion at December 31, 2016.

The growth in net assets was driven by PMT's preferred equity raise, which was partially offset by investment fund distributions to investors. In March, PMT issued 4.6 million shares of 8-1/8 Series A fixed-to-floating-rate preferred shares for gross proceeds of $115 million.

This was PMT's first preferred share issuance and its first capital raise since August 2015. Proceeds from the issuance are being used to fund PMT's business and investment activities, repayment of indebtedness and potential common share repurchases.

PMT also continues transition of capital towards newer investment opportunities such as MSRs and CRT on its correspondent production. During the quarter, PMT delivered $1.8 billion in UPB of loans to Fannie Mae, which will result in approximately $64 million of new CRT investments once the aggregation period is completed.

With that, I'd now like to turn it over to Andy Chang, PennyMac's Chief Financial Officer, to discuss the first quarter's financial results..

Thank you, David. Slide 15 is an overview of PennyMac Financial's results by operating segment. Stan reviewed these figures for the first quarter earlier, and the table shows trends for the last 5 quarters. Let's turn to Slide 16 and take a closer look at the results of our Production segment.

Production segment revenues were $110 million for the first quarter, down 37% from the prior quarter. The decrease was primarily the result of a 39% decrease in net gains on mortgage loans held-for-sale, reflecting lower total lock volumes and margins in both the correspondent and Consumer Direct production channels.

Gross margins, which represent the revenue per lock commitment, were 84 basis points in the first quarter, down from 101 basis points in the prior quarter. Revenue per consumer direct lock decreased to 218 basis points from 292 in the prior quarter, while revenue per correspondent lock decreased to 53 basis points from 61 in the prior quarter.

These margins are at the low end of the ranges that we've seen over the past several quarters. Fulfillment fee revenue was $16.6 million in the first quarter, down 39% from the prior quarter, driven by a 38% quarter-over-quarter decrease in acquisition volumes by PMT.

The weighted average fulfillment fee rate during the quarter was 36 basis points, unchanged from the prior quarter. Production segment expenses were $62.5 million, a 23% decrease from the prior quarter, driven by the lower volumes of activity. Let's turn to Slide 17 and review the financial performance of the Servicing segment.

Servicing segment revenues were $89 million in the first quarter, a decrease of 18% from the prior quarter. Net loan servicing fees totaled $74.2 million for the first quarter compared with $95.5 million in the prior quarter.

Net loan servicing fees included $129.3 million in loan servicing fees reduced by $48.5 million of amortization and realization of MSR cash flows. Amortization and realization of cash flows decreased 3% from the prior quarter.

Net loan servicing fees also included $12.7 million in MSR fair value gains and impairment recovery, primarily reflecting expectations for lower prepayment activity in the future.

In addition, net loan servicing fees included $22.2 million in hedging losses and a gain of $2.8 million due to the change in fair value of the ESS liability, resulting from higher-than-projected prepayment activity during the quarter. The net loss in MSR value after hedge losses and gains due to ESS fair value changes was $6.7 million.

The securitization of reperforming government-insured and guaranteed loans resulted in $24.1 million of revenue in net gains on mortgage loans held-for-sale at fair value in the first quarter versus $24.5 million in the prior quarter.

These loans were previously purchased out of Ginnie Mae securitizations, known as early buyouts or EBOs, and brought back to performing status through PennyMac Financial's successful servicing efforts, primarily with the use of loan modifications.

Additionally, net interest expense was reduced by approximately $4 million of interest income from EBO loans held on our balance sheet.

Servicing segment expenses for the quarter were $75.6 million, a 4% increase from the prior quarter driven by growth of the portfolio, increased allocation of compensation expense to the segment and higher technology-related costs. Now let's turn to Slide 18, and discuss the valuation of PennyMac Financial's MSR asset.

MSRs are a significant portion of PennyMac Financial's assets, and their fair value generally increases when interest rates rise and decreases when interest rates fall. We account for originated MSRs at the lower of amortized cost or fair value or LOCOM when the underlying note rate on the loans is less than or equal to 4.5%.

MSRs related to loans with note rates above 4.5% and all purchased MSRs are accounted for at fair value. PennyMac Financial accounted for $93.2 billion in UPB of its originated MSRs under LOCOM at March 31. The fair value of these MSRs was $8.9 million greater than their carrying value on our balance sheet.

The remaining $42.1 billion in UPB of MSRs are accounted for at fair value. Most of our purchased MSRs are subject to an ESS liability. The UPB related to the loans underlying those MSRs totaled $30.5 billion at March 31. The outstanding ESS liability at March 31 relates only to Ginnie Mae MSRs.

Now let's turn to Slide 19, and look at the financial performance of the Investment Management segment. Investment Management revenues were $5.4 million, down 6% from the fourth quarter of 2016.

Segment revenues include management fees, comprised of base management fees from PMT and the private investment funds, any earned incentive fees from PMT, any carried interest from the funds and other revenue.

The quarter-over-quarter decline in revenue was primarily driven by a carried interest loss of $128,000 due to the performance of the investment funds. No incentive fees were received from PMT in the first quarter.

Segment expenses were $4.3 million, a 19% decrease from the fourth quarter of 2016 driven by a refinement in the expense allocation methodology across segments. And with that, I would like to turn it back over to Stan for some closing remarks..

Thank you, Andy. PennyMac Financial's first quarter results reflect a mortgage market that is transitioning from a period of historically elevated margins to a period of more normal margins.

We have consistently demonstrated an ability to operate through market volatility of various kinds and continue to invest in initiatives that we believe will drive our company forward.

These include our consumer direct production channel, non-delegated correspondent initiatives, the future launch of our wholesale mortgage origination platform and the completion of our structure to expand financing for our largest asset, our Ginnie Mae mortgage servicing rights.

We are confident that such investments and innovations will help ensure our company's long-term financial and operational success. Lastly, we encourage investors with any questions to reach out to our Investor Relations team by e-mail or phone. Thank you..

This concludes PennyMac Financial Services, Inc.'s first quarter earnings discussion. For any questions, please visit our website at www.ir.pennymacfinancial.com, or call our Investor Relations Department at (818) 264-4907. Thank you..