PennyMac Financial Services, Inc.

Good afternoon and welcome to PennyMac Financial Services, Inc.' 's second quarter 2025 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, 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 Financials Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financials Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our second quarter earnings call. For the second quarter, as shown on slide three, PFSI reported net income of $136 million, or diluted earnings per share of $2.54. This reflects an annualized return on equity of 14%. Excluding the impact of fair value changes and a non-recurring tax benefit, which Dan will talk about later, PFSI produced an annualized operating ROE of 13%. These results highlight the resilience of our balanced business model and our continued ability to produce solid financial results even during periods of extreme volatility, such as earlier in the second quarter. As you can see on slide five, our consistent performance over recent periods of elevated mortgage rates demonstrates the strength of our organically built comprehensive mortgage banking platform. The stability provided by our balanced business model especially in this higher for longer rate environment, is a real strategic advantage. We expect that if interest rates stay in the range of 6.5% to 7.5%, our operating returns on equity will continue to range in the mid to high teens throughout the remainder of this year. You can further see the strategic advantage of our comprehensive mortgage banking platform on slide six, as our business model functions has a very powerful flywheel. Because we are the second largest producer of mortgage loans and the sixth largest servicer, we operate with a significant scale advantage in both businesses. Large volumes of loan production consistently exceed our portfolio runoff, resulting in the continued growth of our loan servicing portfolio. At the end of the second quarter, our portfolio totaled $700 billion in unpaid principal balance, representing 2.7 million households. This large and growing customer base drives efficient, cost-effective leads to our consumer direct group as we leverage our proprietary servicing platform to effectively service our customers' needs. Whether it's a refinance when interest rates decline, or if they're in the market for a new home purchase, or a closed-end second mortgage to access their home equity while retaining their low-rate first lien mortgage. And because we have instilled in our team a culture of continued process improvement and technology innovation, we believe we can continue to drive further scale and operational efficiencies into our platform. Our strategy also allows us to excel on capturing growth in the expanding purchase market. The chart on the bottom of slide seven illustrates the projected growth in overall volumes, which is primarily driven by the more consistent purchase market compared to the refinance market. This trend underscores why our strategic emphasis on our relationship businesses with strong ties in their local markets is so vital. Our strong access to this growing market is achieved through our robust presence in correspondent lending, and our rapidly increasing market share in broker direct. Our market leadership is supported by our unmatched excellence and support for our business partnerships illustrated on slide eight. This foundation provides a significant strategic alignment with our business partners that is difficult to replicate and has been organically and carefully built over time. We offer cutting edge technology, a continued presence in markets with reliable execution and rapid closing and turn times. Additionally, we have longstanding relationships with key partners and one of the lowest cost structures in the industry driven by our highly efficient fulfillment operation. Turning to slide nine, we proudly showcase our position as the outright leader in correspondent lending. Over the last 12 months, We have generated approximately $100 billion in UPVF correspondent production, achieving an estimated market share of approximately 20% in the first half of 2025. This significant volume is a direct result of our more than 15 years of operational excellence, technology innovation, and our deep partnerships with many of our nearly 800 active sellers across the country. A key aspect of our leadership in this channel is our exceptional operational leverage and scale. In fact, we have the ability to increase production by approximately 50% from our current levels with no increase to our fixed expenses. This capability underscores our fundamental strength as a highly efficient, low-cost provider in this channel, solidifying our truly dominant position and creating a substantial competitive advantage. Similarly, you can see on slide 10 that we are increasingly becoming more relevant in the broker direct channel. From our entry to this business in 2018, our broker direct market share has expanded significantly, currently standing at approximately 5%. We have clearly established ourselves as a trusted partner for brokers, and though we already the third largest in the channel, we see tremendous momentum to continue our growth to more than 10% market share by the end of 2026. This remarkable growth and our position as a trusted alternative are driven by our tech-forward platform with unmatched support throughout the origination process. This advanced infrastructure and dedicated assistance assures brokers that their customers will experience a seamless and efficient origination process, empowering brokers and reinforcing their trust in us as a reliable long term partner. On slide 11, we highlight the significant opportunity for our direct for our consumer direct business and why we are intensely focused on building on our successes in this channel. We have a large network of more than 5 million current and former homeowners who know and trust Penny. And we are leveraging our industry-leading team and data analytics to identify refinance and other opportunities so we are best positioned to help meet our customers' home finance needs. Our refinance recapture rates are already twice the industry average, which effectively protects from the lower impact, from the impacts of lower MSR values as rates decline. And we will continue to leverage our strategic partnership with Team USA and the LA 28 Olympic and Paralympic Games, along with targeted model-driven campaigns to increase our visibility and recognition, while driving growth in recapture and new customer acquisition. Turning to slide 12, you can see the significant recapture opportunity for our consumer direct division when interest rates do decline. As of June 30th, $267 billion in UPB or 38% of the loans in our servicing portfolio have a note rate above 5%. And $181 billion in UPB, or 26% of the loans in our portfolio, have a note rate above 6%. This large and growing portfolio of borrowers who recently entered into mortgages at higher rates and stand to benefit from a refinance in the future when interest rates do decline, positions our consumer direct lending division for strong future growth. Our multi-year investments in technology and process innovation have already driven meaningful improvements in recapture rates, and we expect these to continue improving. Now let's turn to an area that is not just critical, but truly transformative for our entire balanced business model, our unwavering, intense focus on artificial intelligence. On slide 13, you'll see we're not just building momentum, we are accelerating with breakthrough speed in the development of AI. We are aggressively advancing our AI capabilities, making targeted and strategic investments. This strategic commitment is a natural evolution of our history of investing in leading-edge technology, and it is designed to enhance the customer experience, unlock new revenue streams, and crucially, drive unprecedented levels of efficiency to dramatically reduce expenses. Our dedicated AI accelerator team is at the forefront. We're relentlessly focused on delivering and adopting AI applications and productivity tools faster than ever before. Our cloud-based and flexible proprietary platforms have positioned us extraordinarily well to integrate AI, profoundly enhancing our capabilities and efficiency across our entire technology landscape. In production, we're seeing game-changing advancements. Our proprietary chatbots aren't just tools. They're extensions of our loan officers and underwriters, providing instant, compliant answers sourced directly from our deep well of comprehensive policies and procedures. This empowers our team members with unparalleled accuracy and allows them to focus squarely on what they do best. driving sales and closing more loans. And with our AI call summarization, we're automating critical after-call work, bringing up valuable time and insights for our sales teams, contributing directly to increased conversion. In servicing, our AI initiatives are equally impactful, enhancing both efficiency and the client experience. Behind the scenes, our servicing AI processing solution is automating critical document workflows and streamlining operations. And for our clients, our advanced servicing automated assistant, available instantly on web and mobile, provides immediate access to loan-specific information and answers to their questions. This empowers our clients with self-service convenience and speed, elevating their overall experience and allowing our team members to focus on more complex high-value interactions. To date, We've already launched or are actively developing more than 35 AI tools and applications, with the projected annual economic benefit of approximately $25 million. While this is far more than a strong start, this is just the beginning of what's possible, and we are incredibly excited about what the future holds. This brings me to slide 14, which illustrates PennyMac's ambitious groundbreaking vision for artificial intelligence. We have already achieved significant milestones, from advanced coding productivity tools to sophisticated workplace tools and intelligent chatbots that are reshaping daily operations. But our roadmap is truly visionary. It includes sophisticated agent automation of complex loan processing activities, robust and intuitive self-service capabilities that empowers our customers and advanced lead generation processes that will redefine our outreach. Our ultimate vision is a fully automated loan process, including a seamless self-service origination and servicing experience. This is not just technology. This is the future of mortgage banking, and PennyMac is leading the way. In conclusion, our balanced and diversified business model continues to deliver strong financial performance. We maintain our leadership position in the purchase market through our strong correspondent franchise and growing broker direct lending presence, which provides consistent business volumes. These volumes directly grow our servicing portfolio, creating a significant future opportunity in our consumer direct channel, further enhanced by our strategic brand investments. And throughout all of our operations, our intense focus on AI and technology is effectively driving down costs, contributing to our overall financial strength. Our strategic foundation solidly positions PennyMac for continued growth and strong performance in any market environment, and I'm incredibly excited about what our future holds. I will now turn it over to Dan, who will review the drivers of PFSI's second quarter financial performance.

Thank you, David. PSSI reported net income of $136 million in the second quarter, for $2.54 in earnings per share, for an annualized ROE of 14%. These results included $93 million of fair value declines on MSRs, net of hedges and costs, and a non-recurring net tax benefit of $82 million. The contribution from these items to diluted earnings per share was 19 cents. PSSI's board of directors declared a second quarter common share dividend of 30 cents per share. Beginning with our production segment, pre-tax income was $58 million, down from $62 million in the prior quarter. Total acquisition and origination volumes were $38 billion in unpaid principal balance, up 31% from the prior quarter. Of this, $35 billion was for PSSI's own account, and $3 billion was fee-based fulfillment activity for P&T. Total loss volumes were $43 billion in UPV, up 26% from the prior quarter. PennyMac maintained its dominant position in correspondent lending in the second quarter, with total acquisitions of $30 billion, up 30% from the prior quarter. Correspondent channel margins in the second quarter were 25 basis points, down slightly from the first quarter. While followed adjusted locks for PFSI's own account were up from the prior quarter, PFSI account revenues were impacted by a negative contribution from timing of revenue and loan origination expense recognition, hedging and pricing execution, and other items, as well as a higher proportion of volume in the correspondent and broker direct lending channels relative to last quarter. PMC retained 17% of total conventional conforming correspondent production, down from 21% in the prior quarter. Of note, Pursuant to our renewed mortgage banking agreement with PMT, effective July 1st, 2025, all correspondent loans are initially acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent loan production. In the third quarter, we expect PMT to acquire approximately 15 to 25% of total conventional conforming correspondent production, consistent with levels in recent quarters. In BrokerDirect, we continue to see strong trends and continued growth in market share as we position PennyMax as a strong alternative to channel leaders. Originations in the channel were up almost 60% and locks were up more than 30% from the prior quarter, driven by a growing number of approved brokers who are increasingly recognizing and leveraging our distinct value proposition. The number of brokers approved to do business with us at quarter end was nearly 5,100, up 19% from the same time 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. Trends were mixed in consumer direct with origination volumes up 6% and locked volumes down 2% from the prior quarter. Margins in the channel were up due to a larger mix of higher margin closed and second liens during the quarter. Activity across our channels in July has been mixed, with increased activity across correspondent and broker direct, and volumes in consumer direct similar to levels reported in the second quarter. Production expenses, net of loan origination expense, increased 8% from the prior quarter, partially due to increased capacity in direct lending, which is expected to drive our ability to rapidly address opportunities presented by lower mortgage rates. Turning to servicing. As David mentioned, our servicing portfolio continues to grow, ending the quarter at $700 billion in unpaid principal balance. The servicing segment recorded pre-tax income of $54 million. Excluding valuation-related changes, pre-tax income was $144 million, or 8.3 basis points of average servicing portfolio UPB. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's MSR portfolio. Custodial funds managed for PFSI's own portfolio averaged $7.5 billion in the second quarter, up from $6.2 billion in the first quarter due to seasonal impacts and higher prepayments. As a result, earnings on custodial balances and deposits and other income increased. Realization of MSR cash flows increased from the prior quarter due to continued growth of the MSR asset and higher realized and projected prepayment activity. Operating expenses were $80 million for the quarter, for 4.6 basis points of average servicing portfolio UPV down from the prior quarter. You can see on slide 21 in our servicing segment, our per loan servicing expenses are among the lowest in the industry, reflecting unit costs that have been on a consistent decline since 2019. Our operating expenses measured as basis points of average servicing portfolio UPV have come down from almost eight basis points in 2020 to less than five basis points in the last 12 months. This is a direct result of our proprietary technology, continuous process improvement, and platform scale. 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. During the second quarter, the fair value of PFSI's MSR increased by $16 million. $26 million was due to changes in market interest rates. which was partially offset by $10 million of other assumption changes and performance-related impacts. Excluding costs, hedge fair value declines were $55 million. Hedge costs were $54 million, the majority of which were incurred in April due to extreme interest rate volatility. As we moved into the third quarter, we strategically adjusted our hedging practices to align with our increased direct lending capacity, and we currently expect lower hedge costs and greater consistency of hedge performance with respect to the direction of rate movements in future periods. Corporate and other items contributed a pre-tax loss of $35 million compared to $34 million in the prior quarter. PFSI recorded a tax benefit of $60 million in the quarter, driven by a non-recurring tax benefit of $82 million, which primarily consisted of a repricing of deferred tax liabilities due to state apportionment changes driven by recent legislation. The emphasized tax provision rate in future periods is expected to be 25.2% down from 26.7% in recent quarters. We were also active in the management of our financing in the second quarter. In May, we successfully issued $850 million of unsecured senior notes due in 2032 and utilized a portion of the proceeds to redeem our initial unsecured debt offering of $650 million that was due later this year in October. Additionally, we redeemed $500 million of Ginnie Mae MSR term notes due in May of 2027 and replaced that debt with MSR financing from one of our lenders at a more attractive spread to optimize our costs. 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?