PennyMac Financial Services, Inc.

Good afternoon, and welcome to PennyMac Financial Services, Inc.' 's fourth quarter and full year 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 Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.

Thank you, Operator. Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. As shown on slide three, PFSI finished the year with a solid fourth quarter. generating net income of $107 million, or $1.97 per share. To refresh, in the third quarter, we capitalized on higher lock volumes driven by an initial decline in interest rates to generate an 18% annualized return on equity. While our previous guidance was for annualized operating ROEs in the high teens to low 20s, the sustained rally continued into the fourth quarter and drove market prepayment speeds significantly higher than what both we and the market expected. This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset. While we generally expect production income to act as a natural hedge to this runoff, the benefit in the fourth quarter was impacted by competitive dynamics. Many industry participants have also added significant capacity in anticipation of lower rates, and this excess capacity has created a more competitive origination market, limiting expected production margin increases and revenues typically associated with an interest rate rally. As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio, leading us to generate a 10% annualized return on equity in the fourth quarter. I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning to slide four, you can see that for the full year 2025, our results were very strong. Pre-tax income was up 38%, and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%. These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments, which you can see on the right side of the slide. In our production segment, total volumes increased 25%, driving a 19% increase in pre-tax income. Similarly, in our servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results, helped drive a 58% increase in pre-tax income from the prior year. Turning to slide 6, you can see the financial impacts of the dynamics I described earlier. While production segment income was approximately double the levels reported in the first two quarters of this year, the growth from the third quarter to the fourth quarter did not offset the run-up of the portfolio's prepayment speeds increase. However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies, such as Vesta, quickly ramping our capacity and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates. and further increased production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in the fourth quarter, but with a mixed shift towards the higher margin direct lending channels. This is driving our expectations for production segment income in the first quarter to be higher. Channel margins remain at similar levels. On slide 7, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As of year end, we serviced a combined $312 billion in UPV of loans with note rates above 5%, of which $209 billion in UPV of loans had a note rate above 6%. As rates decline, these borrowers stand to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels. To that end, we are making targeted investments in AI and other technologies to drive these recapture rates higher and ensure we capture the value embedded in our portfolio. The cornerstone of our technological investment is shown on slide 8. We previously discussed the early stages of our transition to Vesta. the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations. We are on track to have Vesta fully implemented across our consumer direct channel in the fourth quarter. And completing this migration on time, excuse me, in the first quarter. And completing this migration on time is a key driver of our 2020 success outlook. ensuring that for the bulk of the year we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect. We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers. Locking a loan with a borrower on the phone, which took over an hour in our legacy system, has been cut to just 30 minutes with Vesta. The impact also extends to our fulfillment operations, where intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%. When multiplying these sales and fulfillment time savings across the number of loans originated on our Consumer Direct channel in 2025, it represents approximately 240,000 hours of time saved. This operational velocity has a direct financial impact with a corresponding 25% decrease in our operational costs to originate, creating another lever in our pricing strategy and giving us the flexibility to be even more competitive in the market. It represents a transformative shift in our unit economics, increases our capacity without substantially increasing operational costs, and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in an interest rate rally. If we see a continuation of the rate decline and volume increase, this AI-forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume. Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience while unlocking significantly more efficiency gains throughout 2026 and beyond. Finally, on slide nine, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are driving strategies to retain those customers for life. A faster and more efficient origination and processing workflow is just a part of our synchronized efforts. We are beginning to utilize artificial intelligence to drive greater customer service and using deeper servicing integrations to anticipate borrower needs with real-time data. By combining this technology with our growing brand presence, we are transforming single transactions into lifetime partnerships. We believe these investments will allow us to achieve greater efficiencies and drive reCAPTURE to new heights. and we expect PFSI's operating return on equity to move into the mid to high teens later in the year. As we look ahead, PennyMac is uniquely positioned to continue leading the mortgage industry. Our balanced business model and cutting-edge technology provide a powerful foundation for our continued growth, and we remain focused on the continued advancement of our strategies to drive sustained long-term value for our stockholders. I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.

Thank you, David. PFSI reported net income of $107 million in the fourth quarter, or $1.97 in earnings per share, for an annualized ROE of 10%. These results included $1 million of fair value gains on MSRs, net of hedges and costs, and the contribution from these items to diluted earnings per share was $0.01. PFSI's Board of Directors declared a fourth quarter common share dividend of 30 cents per share. On slides 11 through 13, beginning with our production segment, pre-tax income was $127 million, up slightly from $123 million in the prior quarter. Total acquisition and origination volumes were $42 billion in unpaid principal balance, up 16% from the prior quarter. Of this, $38 billion was for PFSI's own account, and $4 billion was fee-based fulfillment activity for PMT. Total lock volumes were $47 billion in UPV, up 8% from the prior quarter. PennyMac maintained its dominant position in correspondent lending, with total acquisitions of over $30 billion in the fourth quarter, up 10% from the prior quarter. Correspondent channel margins were 25 basis points, down from 30 basis points in the third quarter due to increased levels of competition. Under its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In the fourth quarter, PMT purchased 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both percentages unchanged from the prior quarter. In the first quarter of 2026, we expect PMT to purchase 15% to 25% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, consistent with levels in the recent quarters. In broker direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 16% from the prior quarter. However, locks were down 5% as we maintained our pricing discipline in highly competitive segments of the channel. The number of brokers approved to do business with us continues to grow, reaching nearly 5,300 at year-end, up 17% from year-end 2024, reflecting the growing number of brokers who are increasingly recognizing and leveraging our distinct value propositions. The revenue contribution from broker direct was essentially unchanged from the prior quarter, as the impact from lower fallout adjusted lock volume was offset by higher markets. Consumer direct volumes were up, with originations up 68% and locks up 25% from the prior quarter. However, the contribution from higher volumes in the channel was largely offset by lower margins from increased competition, as well as a higher percentage of first lien versus closed-end second lien loans, and a more focused effort on recapture of higher-balance, lower-margin conventional loans. We also benefited from a strong secondary market execution relative to initial pricing, which contributed $34 million to PFSI's account revenues during the quarter. Production expenses net of loan origination expense increased 3% from the prior quarter due to higher volumes. Turning to servicing, on slides 14 and 15, our servicing portfolio continued to grow, ending the quarter at $734 billion in unpaid principal balance. $470 billion was owned servicing, $227 billion was subservice for PMT, and $12 billion was subservice for other non-affiliates. $24 billion was interim subservicing related to an MSR sale, which has since been transferred to a third party. The servicing segment recorded pre-tax income of $37 million. Excluding valuation-related changes, pre-tax income was $48 million, or 2.6 basis points of average servicing portfolio UPD, down from $162 million, or 9.1 basis points in the prior quarter. Loan servicing fees were roughly flat to the prior quarter due to MSR sales, which offset owned portfolio growth from production. Earnings from custodial balances were unchanged from the prior quarter, as lower earnings rates offset the benefit of higher average balances. Custodial funds managed for PFSI's owned portfolio averaged $9.1 billion in the fourth quarter, up from $8.5 billion in the third quarter. Realization of MSR cash flows was up 32% from the prior quarter, consistent with the increase in prepayment speeds for our owned portfolio as lower mortgage rates drove higher prepayment activity. Operating expenses were $82 million for the quarter, or 4.5 basis points of average servicing portfolio UPV, down from the prior quarter. EBO revenue decreased as a reintroduction of FHA's trial payment plans, extended modification timelines, and delayed re-deliveries into future quarters. Similar to the prior quarter, we saw the operating and GAAP ROEs converge as gains from changes in fair value inputs on MSRs were offset by hedging declines in costs. The fair value of PFSI's MSR increased by $40 million. $35 million was due to changes in market interest rates and $5 million was due to other assumption and performance-related impacts. Excluding costs, hedge fair value losses were $38 million and hedge costs were $2 million. As previously stated, we expect hedge costs to remain contained and that we will more consistently realize results in line with our targeted hedge ratio going forward. Our hedge ratio is currently near 100%. up from 85 to 90% last quarter. Corporate and other items contributed a pre-tax loss of $30 million, down from $44 million in the prior quarter, primarily driven by reduced expenses related to technology initiatives and performance-based incentive compensation. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 20.5%. Provision for tax expense included a $4 million tax benefit consisting of a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual. The emphasized tax provision rate in future periods is expected to be 25.1%, down slightly from 25.2% in recent quarters. As noted earlier, we sold approximately $24 billion in UPV of low note rate government MSRs to a third party on a servicing release basis. This sale represented an opportunistic rotation of capital. By monetizing these lower yielding assets at a strong valuation, we are unlocking capital to strategically reinvest into the continued growth of our servicing portfolio with new originations at current market rates and significantly higher recapture potential while maintaining prudent levels of leverage on our balance sheet. Total debt to equity at year end was 3.6 times, and non-funding debt to equity at the end of the quarter was 1.5 times, both within our targeted levels. Finally, we ended the quarter with $4.6 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?