PennyMac Financial Services, Inc.

Good afternoon, and welcome to PennyMac Financial Services, Inc.' 's third quarter 2025 earnings call. Additional earnings materials, including presentation slides that will be referred to on 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 Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer. You may go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our third quarter earnings call. As shown on slide three, CFSI delivered outstanding financial and operational results in the third quarter, with an 18% return on equity on both the GAAP and operating basis. These results highlight the strategic advantage of our balanced business model, our ability to rapidly address refinance opportunities as they arise, and the success of our dynamic hedging program, which offset MSR fair value declines, thereby demonstrating the financial stability that is central to our operating model. As you can see on slide five, our consistent performance demonstrates the strength of our organic and comprehensive mortgage banking platform. The chart on the left shows our annualized operating ROEs in recent quarters. The 20% operating return on equity we earned in the third quarter of 2024 was achieved when mortgage rates declined to approximately 6%. Similarly, this quarter we achieved an 18% operating return on equity as mortgage rates moved closer to that level. These two quarters illustrate the earnings power of our business. A key benefit of our balanced business model has been the consistent strength of our servicing business. As you can see from the chart on the right, Servicing pre-tax net evaluation related changes has provided the majority of our mortgage banking operating pre-tax income over the last several quarters. While there can be some fluctuations in our results due to typical seasonality, if mortgage rates remain between 6% and 6.5% while delinquency rates remain stable, we expect annualized operating returns on equity to average in the high teens to low 20s through 2026, with potential for additional upside if origination market volumes grow further. I would like to bring your attention to the recently announced strategic transaction we completed this quarter that highlights our active capital management. As you can see on slide six, we successfully completed a sale of MSRs with an unpaid principal balance of $12 billion to Analy Capital Management with subservicing retained, accelerating the growth of our capital-wide subservicing business. This transaction allowed us to monetize a mature asset with a weighted average coupon of 3.1% and projected go-forward returns at the lower end of our target range. freeing up capital to deploy into new, higher-coupon MSRs with greater recapture and return potential. Importantly, we retain the core elements that drive the growth of our mortgage flywheel, the subservicing, recapture, and marketing rights for closed-end seconds and other products, preserving our customers' ongoing relationship with PennyMac. This transaction is a testament to our ongoing drive to grow Capital Light revenue streams that leverage our servicing expertise, operational scale, and proprietary technology. It also reinforces our best-in-class servicing capabilities and signals our intent to be a dominant subservicer in the market. We view this transaction as a part of our disciplined effort to optimize our balance sheet and enhance long-term value for both our customers and stockholders, a win for all parties. Turning to production, our results this quarter reflect the strength of our unique multi-channel production platform. On slide seven, we proudly showcase our position as the outright leader in correspondent lending. Over the last 12 months, we have generated more than $100 billion in UPB of correspondent production, achieving an estimated market share of approximately 20% in the first nine months of 2025. This significant volume is a direct result of our operational excellence, technology innovation, and deep partnerships with many of our nearly 800 active correspondent sellers across the country. A key aspect of our leadership in this channel is our exceptional operational leverage and scale, which underscores our fundamental strength as a highly efficient, low-cost provider with a significant competitive advantage. Similarly, you can see on slide eight that our broker direct business was a key contributor this quarter and represents a significant ongoing opportunity. From our entry into this business in 2018, our broker direct market share has expanded significantly, currently standing at just under 6%. We have clearly established ourselves as a trusted partner for brokers. And though we are 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. Our strength in this channel is driven by our tech enabled 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 nine, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As a reminder, our operating ROE this quarter was 18%, and a substantial portion of the increase versus the prior quarter can be directly attributed to the success of our recapture activities. Our performance this quarter is a powerful real-time indicator that our current investments and strategy are working, and it highlights the opportunity for us in future periods as market rates decline. As of September 30th, $291 billion in UPB, or 41% of the loans in our servicing portfolio, have a note rate above 5%. And $201 billion in UPB, or 28% 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 stands to significantly benefit by refinancing their loan when interest rates decline. As this refinancial potential positions our consumer direct lending divisions for stronger future growth. Our multi-year investments in technology and process innovation including the introduction of our new loan origination system, have already driven meaningful improvements in both our overall efficiency and recapture. We expect our recapture rates to continue improving, translating directly into higher earnings potential as refinance opportunities materialize. In conclusion, our strong quarterly results reflect our ability to rapidly address refinance demand when rates decline and the increase in sophistication introduced into the hedging of our MSRs, which demonstrate a robust financial stability and risk management that underpins our system. I am extraordinarily proud of the work and effort provided by the management team in producing these strong quarterly results defined by outstanding execution in both production and servicing, and of course, an 18% gap in operating return on equity. Looking ahead, as we continue deploying AI throughout the organization, I am confident that our strategic positioning and our relentless focus on efficiency ensures we are well equipped to drive substantial growth, superior returns, and a continued upward trajectory for PennyMac. I will now turn it over to Dan, who will review the drivers of PFSIs third quarter financial performance.

Thank you, David. PFSI reported net income of $182 million in the third quarter, or $3.37 in earnings per share, for an annualized ROE of 18%. These results included $4 million of fair value declines on MSR's net of hedges and costs. The contribution from these items to diluted earnings per share was negative 6 cents. PFSI's board of directors declared a third quarter common share dividend of 30 cents per share. On slides 12 and 13, beginning with our production segment, pre-tax income was $123 million, more than twice the $58 million reported in the prior quarter. Total acquisition and origination volumes were $36 billion in unpaid principal balance, down 4% from the prior quarter. Of this, $33 billion was for PFSI's own account, and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $43 billion in UPB, essentially unchanged from the prior quarter, but with a greater mix of volume coming from our direct lending channels. PennyMac maintained its dominant position in correspondent lending in the third quarter, with total acquisitions of $28 billion, down 7% from the prior quarter. Correspondent channel margins in the third quarter were 30 basis points, up from 25 basis points in the second quarter, with a revenue contribution unchanged from the prior quarter. and displaying our margin discipline driving slightly higher revenue on reduced volume. PMT retains the right to purchase up to 100% of non-government correspondent loan production from PFSI's correspondent production volumes. PMT purchased 17% of PFSI's total conventional conforming correspondent production, essentially unchanged from the percentage PMT retained in the prior quarter. In the fourth quarter, we expect PMT to purchase approximately 15 to 25% of PFSI's total conventional conforming correspondent production, consistent with levels in recent quarters. In broker direct, we continue to see strong trends in growth in market share as we position PennyMac as a strong alternative to channel leaders. Originations in the channel were up 6% and locks were up 11% 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 5,200, up 17% from the same time last year. In BrokerDirect, we saw a revenue contribution $10 million higher than the prior quarter, driven by increased volumes and margins. As David mentioned, Consumer Direct saw positive trends, with origination volumes of 12% and lock volumes of 57% from the prior quarter, as rates declined late in the third quarter. Revenue contribution from the channel increased by $29 million from the prior quarter, primarily driven by increased refinance volume. Margins were down, driven by a higher proportion of higher-balance first-lean refinance loans versus smaller-balance second-lean loans. Although the refinances have lower margins on a basis point basis, revenue per loan is typically greater. PFSI account revenues benefited from a positive contribution from post-lock items such as non-agency and specified pool spreads, spread improvement, which contributed $30 million in the third quarter compared to a loss of $10 million in the prior quarter. Activity across our channels in October has been strong. with increased activity across all three channels compared to what we reported for the third quarter, with the most substantial increase in the consumer direct channel. Production expenses net of loan origination expense increased 11% from the prior quarter. The increase from the prior quarter was due to both higher volumes and additional capacity in our direct lending channels, which is expected to drive our ability to rapidly address opportunities presented by lower mortgage rates. Turning to servicing on slides 14 and 15, as David mentioned, our servicing portfolio continues to grow, ending the quarter at $717 billion in unpaid principal balance. The servicing segment recorded free tax income of $158 million, nearly three times that of the prior quarter. Excluding valuation-related changes, free tax income was $162 million, or 9.1 basis points of average servicing portfolio UPB, up from $144 million, or 8.3 basis points in the prior quarter. 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 $8.5 billion in the third quarter, up from $7.5 billion in the second 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 due to lower mortgage rates. Operating expenses were $85 million for the quarter, or 4.8 basis points of average servicing portfolio UPV, up slightly from the prior quarter. As David mentioned, we saw the operating ROE and GAAP ROE converge this quarter with strong hedge results that offset the vast majority of MSR fair value declines. These results were a direct result of adjustments made to our hedging practices at the beginning of the quarter, more directly incorporating recapture expectations into our hedge management and thereby reducing our reliance on more expensive option positions. This, in turn, allows us to be more measured in our approach to rebalancing our hedge positions. In addition, the environment for hedging has also improved, with volatility declining, improving option pricing, and short-term interest rates expected to decline in comparison to longer-term interest rates improving the carry of our hedge positions. As a result of our hedging practice adjustments and these improving market factors, going forward, we expect hedge costs to remain contained, and we expect to realize results closer to our targeted hedge ratio, which is currently around 85% to 90%. During the third quarter, the fair value of PFSI's MSR decreased by $102 million. $94 million was due to changes in market interest rates, and $9 million was due to other assumption and performance-related impacts. Excluding costs, hedge fair value gains were $102 million. Hedge costs were $4 million, down significantly from $54 million in the second quarter. Corporate and other items contributed a pre-tax loss of $44 million, up from $35 million in the prior quarter, primarily driven by expenses related to technology initiatives and increased performance-based incentive compensation. BFSI recorded a tax expense of $55 million, resulting in an effective tax rate of 23.2%. We were also active in the management of our financing in the third quarter. In August, we successfully issued $650 million of unsecured senior notes due in 2034, furthering our objective of increasing the proportion of long-term unsecured financing in our non-funding debt. Additionally, we issued $300 million of Ginnie Mae MSR term notes due in August 2030, and paid off $200 million of the $680 million notes due in February, 2028, meaningfully improving our financing costs on the secured debt. Total debt to equity at the end of the quarter was 3.3 times and non-funding debt to equity at the end of the quarter was 1.5 times, both down slightly from the end of last quarter as we consistently managed to our target leverage levels. We ended the quarter with nearly $5 billion of total liquidity which includes cash and amounts available to draw on facilities where we have collateral pledged, giving us significant liquidity resources to be able to deploy opportunistically or in adverse market circumstances. We'll now open it up for questions. Operator?