[Management View]
PennyMac Financial Services, Inc. reported $136 million in GAAP net income for Q2 2025, with diluted earnings per share of $2.54. The company achieved an annualized ROE of 14%, with operating ROE at 13% excluding fair value changes and a nonrecurring tax benefit. Strategic priorities include expanding direct lending capacity and leveraging AI initiatives to enhance operational efficiency and customer experience.

[Outlook]
Management anticipates improved operating ROE in the coming quarters, driven by margin stabilization and strategic investments in technology. The company plans to increase production by approximately 50% from current levels without increasing fixed expenses, supported by an expanded broker network and focus on refinance opportunities.

[Financial Performance]
PennyMac's Q2 2025 financial performance showed a 31% increase in total origination volume compared to Q1 2025, with total locked volume up 26%. Correspondent acquisitions rose 30% sequentially, while broker direct originations increased nearly 60%. Servicing portfolio reached $700 billion in UPB, with servicing segment pretax income at $54 million.

[Q&A Highlights]
Question 1: First, just on the operating ROEs, they were 13% in the quarter, some of the lowest levels for several quarters. So curious if you can first discuss some of the puts and takes in the quarter, including margin trends and then your confidence of getting back to that mid to high teens level in the back half of the year as stated in your guidance?

Answer: With respect to the operating ROE dipping to 13%, it was driven by two factors: production side margins and cross-channel activities. Margins came down due to rate and spread volatility, but have been trending higher in the correspondent channel. Servicing side saw reduced pretax income due to increased MSR cash flows and nonoperating expenses. Management expects improvement in operating ROE in the coming quarters.

Question 2: Just a follow-up for me on hedging going forward. Dan, you commented on some changes you made that you expect greater consistency. Can you dig a little bit more into that? What are you changing? Are you still targeting an 80% to 90% hedge ratio? And then has the recent rate stability helped as well just on the hedging side?

Answer: Adjustments in hedging approach include greater recognition of recapture potential from production channels, particularly consumer direct. Staffing adjustments ensure quick pursuit of recapture opportunities, offsetting MSR portfolio value reductions. Targeting an 80%-90% hedge ratio, expecting lower costs and greater consistency in hedge performance.

Question 3: Just wanted to on the profitability questions. Just in terms of the servicing portfolio, you know, what's a good run rate for the profitability there just in looking at it to some basis points? I mean, it makes sense the amortization increased with the bigger MSR, but, conceptually, you might have thought that would be offset by a higher, you know, servicing fee.

Answer: Pretax income excluding valuation changes dipped due to specific quarter impacts. At current rate levels, expect basis points on servicing portfolio to move toward past few quarters' levels, around nine to 10 basis points. Lower amortization and normalization across payoff-related expenses and interest expense expected.

Question 4: Maybe following up on the profitability, looking at the servicing profitability on page 20. Is there a way to like sensitize the earnings on both the custodial balances and the interest expense line if the Fed delivers a rate cut? Like, for a 25 basis point cut, how much are each of those lines changing? And are they changing by a proportional amount, if you will?

Answer: MSR-related debt tied to SOFR, directly tied to Fed rate. Earnings on custodial balances similarly tied to Fed rate. Impact on earnings can be calculated based on outstanding balances provided.

Question 5: I wanted to see if you could dig into the loan origination line item. It was up a lot quarter over quarter. Was that driven by the broker direct volume? You know, what's happening over there?

Answer: Increase in origination expenses driven by broker direct volume. Broker fees included in origination expenses, impacting overall production expenses. Broker direct margin net of broker fee reflected in earnings deck.

Question 6: I don't think I've heard during the call, any update on the subservicing initiatives? I know you had some early agreements last quarter you mentioned and some negotiations still going on. Is there anything meaningful there?

Answer: Progress on subservicing initiatives, with a major leader brought in to lead efforts. Working with correspondents and expanding horizons for servicing opportunities. Expect good activity before year-end.

Question 7: As I look at Slide 23 on unleveraged, you talked that the nonfunding debt might sort of trend above your target. Can you just talk about, you know, how you're thinking about leverage and, you know, whether you view any constraints from your current leverage level?

Answer: No concerns from current leverage level. Elevated rates emphasize servicing side, driving nonfunding debt to equity levels higher. Overall debt to equity consistent with prior quarter, no concerns on leverage side.

Question 8: Most of mine have been answered. I was just hoping to give any color around delinquency rates. It looks like they picked up a bit in the quarter, but still below the year-ago period. So just any commentary or any specific end markets to call out there would be probably helpful.

Answer: Delinquency rates increased seasonally but decreased year-over-year. Stability attributed to judicious underwriting and lower exposure to lower credit portions. Recent vintage delinquencies lower than industry average.

Question 9: Follow-up question on the change in the hedging strategy. Understood correctly, you said it was mainly, you know, increasing the capacity at consumer direct to improve recapture. So looking at slide 18, there's a note that says part of the increase in production expenses was related to increased capacity in direct lending. Is that related to the change in hedging strategy, or should we be thinking about some incremental increase in production expenses in 3Q specifically related to that change in hedging strategy?

Answer: Increased capacity in direct lending related to hedging strategy change. Most expenses reflected in Q2, with potential $1 to $3 million increase in Q3. Capacity allows repositioning of hedge strategy.

[Sentiment Analysis]
Analysts expressed concern over lower operating ROE but acknowledged management's confidence in improvement. Management maintained a positive outlook, emphasizing strategic initiatives and operational adjustments to enhance performance.

[Quarterly Comparison]
| Metric | Q2 2025 | Q1 2025 | YoY Change |
|-------|--------|--------|------------|
| Net Income | $136 million | N/A | N/A |
| Origination Volume | $38 billion | N/A | N/A |
| Locked Volume | $43 billion | N/A | N/A |
| Servicing Portfolio | $700 billion | N/A | N/A |

[Risks and Concerns]
Risks include interest rate volatility impacting margins and hedging costs. Concerns over delinquency rates and leverage levels were addressed by management, emphasizing strategic adjustments and operational efficiency.

[Final Takeaway]
PennyMac's Q2 2025 performance highlights strategic growth in origination and servicing volumes, supported by AI initiatives and expanded broker networks. Despite challenges in operating ROE and hedging costs, management remains confident in future improvements through strategic investments and operational adjustments. The company's focus on technology and process innovation positions it for continued growth and strong performance in evolving market conditions.