PennyMac Financial Services, Inc.

and welcome to Pennymont Financial Services, Inc.'s second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Additional earnings materials including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information, 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 Thank you, Operator.

Good afternoon and thank you to everyone for participating in our second quarter 2026 earnings call. As shown on slide three, PennyMac Financial generated net income of $22 million in the second quarter, or 41 cents in earnings per diluted share, representing a 2% annualized return on equity. While interest rate volatility during the quarter created non-cash MSR valuation headwinds that impacted our gap results. Our underlying adjusted earnings per share came in at $1.39, or 7% annualized adjusted return on equity. Although our operational execution remained solid, these results fell short of our expectations as interest rates increased and origination demand declined. To address these rate headwinds, we have already taken proactive steps to align our cost structure with current market conditions. and the operational capabilities provided by recent enhancements to our technology platform. Our results were also impacted by our current funding of major technology initiatives in AI and automation that will structurally lower our cost to produce and cost to service while enhancing the customer experience and expanding our origination servicing capacity. At the same time, I'm particularly encouraged by the strong underlying operational momentum across our platform. highlighted by the meaningful increase in our recapture rates. Turning to slide four, let's review several key business updates. First, the transition to our new consumer direct loan origination system has helped to facilitate our rapid deployment and development of process automating AI agents. Another example of our technology transformation is the recent launch of our proprietary natural language virtual agent, or NLVA, which handles 24-7 conversational voice interactions across both inbound and outbound customer calls. This technology deployment is already directly benefiting customer engagement and retention. Conventional first lien refinance recapture rates increased 7 percentage points from the prior quarter to 29% of government first lien refinance recapture rates increased 9 percentage points to 59%. Third, we continue to make excellent progress toward onboarding similar subservicing portfolios, with the transaction on track to close in the fourth quarter. And finally, we expand our strategic partnership with Amazon Web Services to further bolster our transformation as an AI-driven mortgage technology leader. Turning to slide five, I want to address our financial outlook and the steps we are taking to right-size our cost structure. With a smaller projected origination market due to higher interest rates, we expect adjusted ROEs to remain in the high single digits through 2026 as we reduce our expense base. Earlier this month, we took targeted actions to reduce our production footprint and adjust staffing levels to better align with the smaller market. and because of our investments in technology, we are able to execute these expense reductions while preserving operational capacity when mortgage demand increases. With exciting new technology fully deployed in our consumer direct channel and our AI agents expanding rapidly, we are laying the foundation for unprecedented operational capacity and long-term ROE expansion. Turning to slide six, While our near-term outlook reflects high single-digit adjusted ROEs to the back half of this year, we see a well-defined and visible path back to mid-teens ROEs. The cost realignments we executed this month are expected to generate approximately $60 million of annualized cost savings, which will begin to be realized in the third quarter. We believe expansion in our ROEs will be driven by the structural operating leverage we are creating across the enterprise. Our proprietary AI agents and workflow automation are permanently lowering both our cost to produce and cost to service, expanding our operating margins without adding fixed overhead. Our trajectory towards higher returns is also based on the operational momentum we are building today. with continued growth in broker direct and in consumer direct with a meaningful increase in our recapture rates positions us to capture upside as the origination market normalizes. And while we are currently running at a higher expense base to fund our tech transformation, these technology expenses have begun to decline and we expect they will continue trending lower. As we pair this technology foundation With the capital-like scale of Sendlar's subservicing portfolio in the coming months, we expect to realize significant operating leverage. Slide 7 highlights the opportunity in our consumer direct channel if interest rates decline, as well as our first lean refinance recapture rates over the five most recent quarters. As of June 30th, we serviced a combined $343 billion in UPP of loans with note rates above 5%, of which more than half had note rates above 6%. As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the Consumer Direct channel have more than doubled from the second quarter of 2025 as our refinance recapture rates have grown to 59% from 44%. We are seeing even more success in conventional law. where volumes are up nearly three-fold from levels reported in the second quarter of 2025, driven by a significant improvement in recapture rates to 29% from 17%. Given the size of our servicing portfolio, our technology foundation, and our accelerating recapture trends, we feel a high level of conviction in our ability to execute on this opportunity as refinance demand grows. Turning to slide eight, Our servicing segment continues to demonstrate the power of scale combined with our advanced technology, otherwise known as PLINTS. According to the latest MBA study, PennyMac's direct servicing expense per loan was $89 in 2025, down 8% from 2024, and far below both the large IMB average of $133 and the overall industry average of $185. and we've achieved these low costs despite our higher concentration of government loans, which are inherently more complex and costly to service. As you can see, our operating expenses remain extremely low at 4.5 basis points of average servicing UPV. The combination of our proven low cost of service and AI capabilities gives me confidence that we will continue to drive down unit costs and expand platform efficiencies as we prepare to onboard Sendlar's subservicing portfolio. Slide 9 details the transformative operational gains we are realizing in production. Consumer Direct has facilitated a rapid implementation of process-automated and AI agents, and we are now beginning the transition of VESA into our broker direct channel to deliver these same structural efficiencies and automation gains to our broker partners. Across our production workflows, we have mapped and standardized 150 discrete origination tasks. Today, approximately 25% of these tasks are being completed by an automated logic or AI agent, and we are targeting 80% by year-end 2027. This technology is delivering immediate measurable benefits. We have already seen a significant reduction in our processing costs to produce alone, and we are targeting an additional 20% or more by the end of the third quarter. Similarly, we've seen dramatic cycle time reductions of 40 to 80% across major loan programs, specifically from application to conditional approval on files where our autonomous AI agents are deployed. Speed is a direct cost saver and closing loans faster allows us to price more profitably through shorter lock windows, drastically reduce its fallout while delivering a best-in-class experience for our borrowers. And I believe we are still in the early stages of this transformation. As we scale AI automation, onboard Sendlar's Capital Light subservicing portfolio, and capitalize on our consumer-direct recapture momentum, we are establishing a permanent structural advantage that will compound across our platform for years to come. We have the right strategy, the scale, and the technology to navigate current market headwinds while driving a clear return to mid-teens ROEs and delivering compelling long-term value for our stockholders. I will now turn it over to Dan who will review the drivers of PSSI's second quarter financial performance. Thank you, David.

PSSI reported net income of $22 million in the second quarter, or 41 cents in earnings per share. for an annualized ROE of 2%. Adjusted net income was $74 million, or $1.39 in adjusted earnings per share, for an annualized adjusted ROE of 7%. The $0.98 difference between our GAAP and adjusted ETS was driven by $77 million of fair value declines on MSRs, net of edges and costs, a $9 million valuation gain related to our minority interest in VESTA, and $1 million of expenses related to our acquisition of San Marcos Subservices Business. Bufordside Board of Directors declared a second quarter common share dividend of $0.30 per share. On slides 11 and 12, beginning with our production segment, pre-tax income was $38 million, down from $134 million in the prior quarter and $58 million in the second quarter of 2025. Total acquisition and origination volumes were $35 billion in unpaid principal balance. Down 6% from the prior quarter and 8% from the second quarter of last year. Of this, $32 billion was for PFSI's own account, and $3 billion was fee-based fulfillment activity for P&T. PennyMac maintained its leading position in correspondent lending. The revenue contribution from the channel was down $9 million from the prior quarter. Fallout-adjusted lock volumes were down compared to previous periods due to higher rates and a highly competitive environment, which includes the GSA. Correspondent margins were 29 basis points, up from 28 basis points in the prior quarter due to a shifted mix towards higher margin government loans. Under its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from TFSF. However, in June, PMT elected to stop acquiring agency-eligible conventional loans through correspondent production but will continue acquiring 100% of all non-agency loans. In July, were down versus second quarter levels, reflecting our pricing discipline in a competitive environment and our continued focus on allocating capital to drive optimal returns. In BrokerDirect, we continue to see strong momentum despite increasing levels of competition, and the number of brokers approved to do business with us continues to grow, reflecting brokers who are increasingly leveraging our distinct value propositions. BrokerDirect's revenue contribution was down $3 million from the prior quarter. Follette adjusted lock volumes were down 8%, but were up 21% from the second quarter of 2025, driven by market share gains and a larger origination market. Margins increased to 104 basis points from 99 basis points in the prior quarter. Non-QM locks in our broker channel more than tripled from the prior quarter, to $515 million in UPV. underscoring the positive reception and rapid market adoption of our expanding product menu. The revenue contribution from our Consumer Direct channel declined $36 million from the prior quarter as higher interest rates resulted in lower refinance demand. Follette adjusted lock volumes were down 32% from the prior quarter. And margins were up to 317 basis points from 267 basis points in the prior quarter, reflecting an increase in closed-end second lien production as refinance volumes declined. Post-lock impacts across the channels resulted in a $23 million pre-tax loss compared to $13 million of pre-tax income in the prior quarter. This $36 million shift was driven by adverse market price changes on specialized pools and other cross-channel impacts. Production expenses net of loan origination expense increased 60% from the prior quarter due to increased capacity and funded unit volume in the consumer direct lending channel. As David mentioned, the cost realignments we executed in July are expected to be reflected in our third quarter results. Turning to the servicing segment, on slides 13 and 14, our total servicing portfolio UPV ended the quarter at $731 billion, up 1% from the end of the prior quarter and 4% from June 30, 2025, as production volumes more than offset runoff due to prepayments. The servicing segment recorded free tax income of $22 million. including valuation-related changes, pre-tax income was $99 million, or 5.5 basis points of average servicing portfolio UPV, up from $57 million, or 3.1 basis points in the prior quarter. Average custodial deposit balances increased 7% from seasonal lows in the prior quarter, driving a $14 million increase in earnings on custodial balances and deposits. Realized prepayment speeds were 11.6%, down from 13.7% in the prior quarter. Realization of cash flows declined 9% as repayment fees declined. Operating expenses in the quarter were 4.2 basis points of average servicing portfolio UPD, or $76 million, both lower than prior quarters. Income from EBO activities was higher as buyout and redelivery volumes increased from the prior quarter. Including the provision for losses on active loans, the fair value of TFSI's MSR increased by $110 million. An increase of $96 million was due to changes in market interest rates, and another $13 million was due to other model and performance-related impacts. Edge fair value losses, including principal-only bond accretion changes, were $135 million. Edge costs were $52 million, up from $14 million last quarter, reflecting elevated option pricing due to heightened interest rate volatility. While rate movements created some adverse impacts in May, our hedging strategy was highly effective for the remainder of the quarter. Our hedge ratio remains near 100% to proactively manage prepayment risk. Coming out of the quarter, hedge costs have moderated significantly, trending in the mid-single-digit millions of dollars. Maintaining a disciplined, continuous hedge is central to how we manage risk. Rather than leaving our balance sheet exposed to directional rate impacts, we prioritize book value preservation and many others. Corporate and other items recorded a pre-tax loss of $29 million, down from $42 million in the prior quarter, as the prior quarter's expenses included elevated marketing expense related to the Olympic and Paralympic Winter Games. GFSI recorded a provision for tax expense of $10 million, resulting in an effective tax rate of 31%. Total debt to equity at quarter end was 3.6 times, down from 4 times at the end of the prior quarter, and non-funding debt to equity was 1.8 times, up slightly from the end of the prior quarter. The decrease in total leverage from the prior quarter was driven by a decline in funding debt, reflecting lower overall production. The increase in non-funding leverage from the prior quarter was driven by higher interest rates, which drove increased utilization of our MSR credit facilities. We expect these leverage ratios to remain near these levels as interest rates remain high. Finally, 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?