PennyMac Financial Services Q3 2025 Earnings Report

PennyMac Financial Services EPS Results

• Actual EPS: $3.37
• Consensus EPS: $2.98
• Beat/Miss: Beat by +$0.39
• One Year Ago EPS: $1.30

PennyMac Financial Services Revenue Results

• Actual Revenue: $632.90 million
• Expected Revenue: $573.46 million
• Beat/Miss: Beat by +$59.44 million
• YoY Revenue Growth: +53.70%

PennyMac Financial Services Announcement Details

• Quarter: Q3 2025
• Date: 10/21/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, October 21, 2025
• Conference Call Time: 5:00PM ET

PennyMac Financial Services (NYSE:PFSI) (NYSE: PFSI) is a leading mortgage banking company based in Westlake Village, California. The firm operates through two primary business segments: Production and Mortgage Servicing Rights (MSR). In its Production segment, PennyMac originates residential mortgage loans through retail, wholesale and correspondent channels, focusing on both purchase and refinance transactions. The MSR segment involves the acquisition and servicing of mortgage loans, whereby the company earns fees for managing loan portfolios on behalf of investors.

Since its founding in 2008, PennyMac has grown through a combination of organic origination and strategic acquisition of servicing rights, positioning itself as one of the largest residential mortgage loan servicers in the United States. The company completed its initial public offering in 2013 and has since expanded its capabilities to offer a full suite of mortgage products, including government-insured loans, conventional conforming loans and customized refinancing options. PennyMac’s platform integrates underwriting, closing, loan management and customer service functions to provide a streamlined borrower experience.

PennyMac serves homeowners and homebuyers in all 50 states, leveraging advanced technology and a nationwide network of fulfillment centers. The company’s leadership team is led by President and CEO David Spector, who brings extensive experience in mortgage finance and capital markets. Under his direction, PennyMac has strengthened its risk management practices, enhanced its digital origination platform and maintained a diversified servicing portfolio. Through its focus on operational efficiency and customer satisfaction, PennyMac continues to be a significant participant in the U.S. residential mortgage market.

PennyMac Financial Services Q3 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: PennyMac delivered strong quarterly results with net income of $182 million, $3.37 EPS and an 18% GAAP and operating ROE, and the Board declared a $0.30 quarterly dividend.
• Positive Sentiment: The company completed a strategic sale of $12 billion UPB of MSRs to Annaly while retaining subservicing, monetizing low‑coupon assets to free capital for higher‑return MSRs and capital‑light subservicing growth.
• Neutral Sentiment: MSR fair value fell by $102 million (mostly rate driven) but was largely offset by hedge gains; hedge costs declined to $4 million from $54 million, and management expects hedge costs to remain contained with a target hedge ratio of ~85–90%.
• Positive Sentiment: PennyMac reinforced production leadership — ~20% correspondent market share over the last 12 months, broker direct market share approaching 6% (target >10% by end‑2026), and rising consumer‑direct recapture and refinance activity as rates fall.
• Positive Sentiment: Active capital and funding moves included issuing $650M of unsecured 2034 notes and $300M Ginnie Mae MSR notes, modest share repurchases, ending the quarter with nearly $5 billion of liquidity and targeted leverage metrics (non‑funding debt / equity ~1.5x).

Presentation

[Operator]

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 2 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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Thank you, Operator. Good afternoon and thank you to everyone for participating in our third quarter earnings call. As shown on slide three, PFSI delivered outstanding financial and operational results in the third quarter, with an 18% return on equity on both a 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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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 have provided the majority of our mortgage banking operating pre-tax income over the last several quarters.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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 Annaly Capital Management, with subservicing retained, accelerating the growth of our capital-light subservicing business.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

As of September 30, $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 refinance 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.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

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 the 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% GAAP and 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 ensure 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 PFSI's third quarter financial performance.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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 MSRs, net of hedges and costs. The contribution from these items to diluted earnings per share was -$0.06. PFSI's Board of Directors declared a third quarter common share dividend of $0.30 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 P&T.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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. P&T retains the right to purchase up to 100% of non-government correspondent loan production from PFSI's correspondent production volumes. P&T purchased 17% of PFSI's total conventional conforming correspondent production, essentially unchanged from the percentage P&T retained in the prior quarter.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

In the fourth quarter, we expect P&T to purchase approximately 15%-25% of PFSI's total conventional conforming correspondent production, consistent with levels in recent quarters. In broker direct, we continue to see strong trends and 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 broker direct, we saw a revenue contribution $10 million higher than the prior quarter, driven by increased volumes and margins.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

As David mentioned, consumer direct saw positive trends, with origination volumes up 12% and lock volumes up 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 balanced first lien refinance loans versus smaller balanced second lien 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 spread improvement, which contributed $30 million in the third quarter compared to a loss of $10 million in the prior quarter.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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 and 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 pre-tax income of $158 million, nearly three times that of the prior quarter.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Excluding valuation-related changes, pre-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 UPB, up slightly from the prior quarter.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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%-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. PFSI recorded a tax expense of $55 million, resulting in an effective tax rate of 23.2%.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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 cost on the secured debt. Total debt to equity at the end of the quarter was 3.3x, and non-funding debt to equity at the end of the quarter was 1.5x, both down slightly from the end of last quarter as we consistently managed to our target leverage levels.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

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?

[Operator]

Thank you. I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, please raise your hand. If you have dialed into today's call, please press star, followed by the number nine to raise your hand, and star six to unmute. If you'd like to withdraw your question, it's star nine. Your first question comes from the line of Crispin Love with Piper Sandler. You may now go ahead.

[Crispin Love, Director and Senior Research Analyst at Piper Sandler]

Thank you. I appreciate you taking my question. First, on operating ROEs, definitely saw a nice bounce back in the quarter to 18%. I appreciate your high teens to low 20s ROE guide through 2026. Just given the mortgage rate rally late in the quarter, in the September timeframe and the lag in correspondent, would you expect the fourth quarter ROEs to be more towards that low 20s range, just given where rates stand today?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Overall, there are a couple of factors in the fourth quarter specifically. We have had a rally recently. We've obviously seen an uptick in volumes. If we stay here, that could well drive up our volumes and our ROEs to the higher end of, or operating ROEs to the higher end of that range. Offsetting that, typically in the fourth quarter with seasonality with respect to purchase, you can see a bit of a lag there, as well as with custodial balances on our servicing portfolio. With the fourth quarter, those tend to be a little bit lower from a seasonal perspective. Overall, if we stay at these rate levels, that probably pushes our operating ROE higher to the higher teens to, as you said, low 20s. We do expect some of those typical effects as we're here in the fourth quarter.

[Crispin Love, Director and Senior Research Analyst at Piper Sandler]

Absolutely. No, that makes sense. Then just with the government shutdown, can you discuss the implications and expected impact of PFSI to the FHA business, as well as other areas, just what that has meant for you in October, and then what you could expect in the fourth quarter if the shutdown continues?

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Yeah. We are always prepared for a range of outcomes in the company, and we've been through this drill a few times. It starts with how we think about having enough commitment authority with Ginnie Mae to be able to continue to issue Ginnie Mae securities. We always look out to make sure we have at least nine months of commitment authority. On the delinquency side, you could see this start to show up. We have a couple thousand borrowers in forbearance as a result of the government shutdown. We've received two to two and a half times that number of calls coming from the government shutdown. I'm not expecting anything substantive.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

I think it's suffice it to say that our technology and what we've built allows us to be able to adapt to something, whether it's a government shutdown or a natural disaster, which there haven't been really any this year, to something even as extreme as COVID. The team is always ready to be able to adapt to whatever comes its way.

[Crispin Love, Director and Senior Research Analyst at Piper Sandler]

Great. Thank you, David and Dan. I appreciate you taking my questions.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Thank you.

[Operator]

Your next question comes from the line of Bose George with KBW. Your line is unmuted. You may go ahead.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Bose?

[Bose George, Managing Director at KBW]

Hey, guys. Can you hear? Yeah, hey, guys. The first question, can you talk about the trend in rate hawks in the fourth quarter? I know it's only been a couple of weeks, but how does that compare to the end to the third quarter?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Sure. So far in the fourth quarter, we've seen an uptick in volumes, really across all of our channels. In particular, our direct lending and consumer direct lending, given the lower rates, we've seen a significant amount of refinanced volume coming in. Overall, as you mentioned, it's only a couple of weeks in and things can change, but the trajectory is very positive thus far.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

You know, to the earlier point.

[Crispin Love, Director and Senior Research Analyst at Piper Sandler]

Thanks, Dan.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Very good. To the earlier point, as you see some of the August and September locks in the industry fund out, you should see an increase in bulk production in correspondent. I think, to the point Dan raised, we're seeing a nice little uptick in consumer direct, and it's just really a function of rates, which have come down, even over the last week.

[Bose George, Managing Director at KBW]

Great, that makes sense. Thanks. In terms of the margins, can you talk about the margins, you know, just the different channels? The consumer direct was down. Was that really kind of a mix issue, or, yeah, just color on that? It was up in the other channel, so just some color on trends there as well. Thanks.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Exactly. As you mentioned, as I talked about a bit in my remarks, in consumer direct, it's really the mix of products. On a basis point basis, the second lien loans tend to be higher and refinances tend to be lower, but first lien refinances are higher loan sizes generally. On a revenue per loan basis, we actually see higher revenues per loan despite lower basis points per UPB for those loans. We've seen those fluctuations in the past, but really, as rates declined, it's indicative of greater refinances, which generally is more profitable activity in the consumer direct channel on a per loan basis. As you mentioned, in both correspondent and broker direct channel, margins went up. With respect to correspondent, it's really around margin discipline.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

You can see that our margins increased and volumes declined a bit, but we had slightly greater revenues in the correspondent channel than in the prior quarter. That's really indicative of our margin discipline in that channel. With broker direct channel, it continues to be a positive environment. We continue to gain share and gain momentum in that channel.

[Bose George, Managing Director at KBW]

Okay, great. Thanks.

[Operator]

Your next question comes from the line of Douglas Harter with UBS. Douglas, your line is now open. You may go ahead.

[Douglas Harter, Equity Research Analyst at UBS]

Okay. Thanks. You guys repurchased some shares in the quarter. Can you just talk about your appetite to continue to do that, you know, and how the, you know, the MSR sale to Annaly might factor into that?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Sure. With respect to all of our capital deployments, both of those items are indicative of our more active stance towards allocation of capital in PFSI. With respect to the share repurchases, we really look at that as the opportunity for doing that versus what we see as other opportunities for deployment of capital. As shares got down, in terms of the pricing of our shares got down to a level where we saw that return as being attractive as compared to our other opportunities, we did enter into the market. Obviously, prices have changed somewhat since then. We do believe that, as we have in the past, we have very attractive opportunities in terms of deploying capital into higher rate MSRs with really excellent recapture potential, which is evidencing itself as we're going in lower in rates currently.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

When we see that opportunity, we've shown our willingness and ability in the past to be in the market repurchasing shares, and that will continue to be on our menu of capital allocation items to the extent that we see those opportunities. With respect to the Annaly transaction, really there, looking more toward allocating the capital that we raised from that more toward, again, the opportunities to bring on additional high note rate servicing with opportunities for recapture, and believe that the returns from the go-forward returns from that Annaly transaction were at the lower end of our targeted range, being able to deploy into higher note rate servicing with much greater recapture potential, and reallocate that capital as a positive benefit for PFSI.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

You know, Doug, the two other things I'd add to that is that as we see the growth in broker, the capital needs to support that growth are going to grow, and we can put on higher rate MSRs and continue to support that initiative. At the same time, we saw a slight tick down in our non-funding debt to equity. It was down slightly from 1.6x to 1.5x. Keeping it at that 1.5x is important to us, and especially as we're talking to key constituents like the rating agencies, I think that's something that we're keeping in mind as well. All in all, a great quarter in terms of recycling out of lower returning investments to set ourselves up to redeploy into higher returning investments.

[Douglas Harter, Equity Research Analyst at UBS]

Dan, you mentioned the tax rate, you know, it was down a couple hundred basis points this quarter. Anything to call out there and how sustainable is that this quarter's level?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

This quarter is a little bit lower than what we would expect on a go-forward basis. Some of that was driven by option executions during the quarter, which has the effect of creating a permanent tax difference, which reduces the tax rate in the quarter. Our overall tax rate, we expect to be, over time, as you mentioned, slightly higher, a couple hundred basis points higher. It was a benefit that we did see in the quarter.

[Douglas Harter, Equity Research Analyst at UBS]

Great. Appreciate it. Thank you.

[Operator]

Your next question comes from the line of Trevor Cranston with Citizens JMP. Trevor, your line is now open. Please go ahead.

[Trevor Cranston, Managing Director at Citizens JMP]

All right. Thanks. Can you hear me?

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Yes.

[Trevor Cranston, Managing Director at Citizens JMP]

Okay. I'm curious about what you guys are seeing within the servicing portfolio as we get rate rallies. I was curious if you guys are seeing any difference in the responsiveness of borrowers, sort of jumping on refi opportunities today versus what your experience has been like in the past or what your models have projected. The second part of that, I was curious, I don't think I saw a recapture rate specifically for the third quarter. I was wondering if you could also just comment specifically on the third quarter recapture performance.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Yeah, look, I'll let Dan go over the recapture rates. I will tell you that my observation is, one, they were up for the quarter, and that is a byproduct of the work and effort done by Doug and Abby and Scott and the team in really honing in on perfecting recapture. That's a byproduct of technology. We're already seeing really good results from the deployment of our new loan origination system, upwards of a 50% reduction in time to complete a locked application. That's allowing us to meet the demands driven into the call center by our marketing initiatives. Those marketing initiatives are really key to driving in leads to the call center. It's really, in and of itself, its own set of initiatives. I'm really happy with where the recapture rates came in.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Yeah, with respect to the responsiveness, I think generally we've seen some folks come to the table a little bit quicker than we have historically. Just folks that have purchased homes at higher rates are excited to get into slightly lower rates. That's probably the responsiveness has been slightly higher than what we have seen historically. With respect to the recapture rates, they continue to improve in the third quarter, as David mentioned. I think that as we get into the fourth quarter, that's really where you're going to, and some of the loans that we locked in the third quarter and they'll come to sort of fruition with payoffs in the fourth quarter is where you really see the benefits of the improved focus on recapture.

[Trevor Cranston, Managing Director at Citizens JMP]

Got it. Okay, that's helpful. Thank you.

[Operator]

Your next question comes from the line of Eric Hagen with BTIG. Eric, your line is open. You may now go ahead.

[Eric Hagen, Managing Director at BTIG]

Thanks. Hopefully, I'm coming in. Thanks, guys. Lots of renewed attention here on community banks and speculation on whether some of the credit risk that we're talking about is systemic or if it's more contained. How do you think just generally that changes their appetite for originating mortgages and their relationship back to you? When there's consolidation in the banking space, how do you think that generally impacts the flow of credit and the opportunity that you guys have to encroach on market share?

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

I think that it's a little early. I'll tell you that there's been consolidation going on for quite some time now in the industry. Our job is to continue to do the work that we do to make sure that our correspondent counterparties have the right risks, the risks under control. The capital is reviewed on a regular basis. We have a robust underwriting and review process to really understand the manufacturing that goes into the loans that we buy. I think that that's something that gives us comfort. We just have to stay diligent, and our risk management practices are well honed. I believe that while you'll see consolidation, that consolidation will benefit us in the long run. This is why it's really important that we're in all three channels, because whether it benefits us in correspondent or broker or our call center, we will be able to participate.

[Eric Hagen, Managing Director at BTIG]

That's a good color. I appreciate that. Are there any opportunities you guys feel like to reduce servicing expenses from this point forward, or reduce them kind of meaningfully over the near term? I mean, is there a target rate that you have in mind for servicing expenses, and does the ROE guidance that you've given include any reductions in servicing costs?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

We do expect servicing costs or unit servicing costs to continue to decline, both through the use of our technology and implementation of some of our artificial intelligence initiatives. We think that there are places and parts of the operations where we can gain significant additional operational leverage and reduce costs to a greater degree. As we're moving into 2026, the guidance that was reflected or the guidance that was put out did reflect additional cost savings in terms of servicing on a unit basis. As the portfolio grows, to the extent that we can move as quickly as we want to with our technology initiatives, there could be potential additional upside there. We do think that there's continued opportunity to be able to reduce costs in a meaningful way in the servicing sector.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

We had a slight uptick in our corporate expenses because of the investments in technology to enhance our servicing system. A lot of these initiatives are AI-related to help beat up the decline in expenses as well as, you know, look at other ways that we can use our technology in the marketplace.

[Eric Hagen, Managing Director at BTIG]

Great color. I appreciate it, guys. Thanks.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Thanks, Eric.

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Thanks, Eric.

[Operator]

If you would like to ask a question during this time, as a reminder, please raise your hand. If you have dialed into today's call, please press star followed by the number nine to raise your hand and star six to unmute. We will now take a moment to compile any further questions in the Q&A. Your next question comes from the line of Ryan Shelley with Bank of America. Ryan, your line is unmuted. Please go ahead.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Good afternoon, Ryan.

[Operator]

Ryan, as a reminder, it is star six to unmute.

[Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America]

Hey, guys. Can you hear me?

[Dan Perotti, CFO at PennyMac Financial Services, Inc]

Now we can.

[Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America]

Okay. Thank you. Sorry, getting used to the new system here. Thanks for the question. I just wanted to zone in a bit on the broker direct channel, especially after recent consolidation in this space. Have you guys seen any changes to competitive behavior, whether by the player involved in that consolidation or, you know, players not in the top two and not you guys? Any changes to call out there?

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

No, look, I think our rapid ascent in broker direct is, to me, the result of the hard work and effort that the team has gone through in building technology to meet the demands and needs of the broker, as well as to be able to provide a clear alternative to the top two brokers. I think that that's resonating with our broker partners. I think that we are the only, I know we're the only mortgage bank out there that's not distracted. It's those distractions that the other participants are having that's allowing us to focus on meeting the needs of our broker partners, as well as to grow share. That's why I'm very confident that we're going to get to the 10% market share number by the end of 2026. I think that you're going to continue to see growth.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

The nice part about the growth this quarter is you had growth in share and growth in margin. I think that that's really important to keep in mind. It's something that we're seeing, the broker market really having a nice increase in that margin. It's something that is starting to have good meaningful impact on the results of the company. As I said earlier, being able to participate in all three parts of the production ecosystem allows us to not focus on just one part of the origination lead system. For example, whether it's correspondent, we're just focusing on bulk, or consumer direct is focusing on recapture of our own portfolio. By being in broker as well, we continue to have a presence in the purchase market, as well as the refinance market. It's something that I'm really bullish about and really happy to see.

[Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America]

Got it. Thanks. Yeah, definitely. One more quick one. I think there's this narrative out there that you'll see further consolidation in this industry. Do you guys buy into that narrative, and how do you think you would fit into that? Thank you very much for the questions.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Yeah, look, I think that there's certain parts of the market where perhaps you'll see more consolidation than others. We're at the end of this year, we'll finish our 18th year. Most of just about everything we've done has been done organically. We're an organic management team. We've built our three production divisions organically. We built our servicing platform organically. I don't foresee anything that would change that. It's something that we are going to continue to operate. We're going to continue to grow. While others may be focused on consolidation or other corporate activities, that allows us to continue to grow faster, and it allows us to do it profitably.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

That's something that's really one of the great highlights of this quarter for me, just the focus on capital allocation and focusing on really deploying capital in the higher returning assets and finding assets that perhaps aren't meeting our return targets and being able to find alternatives. That's what this management team is great at. That's something that I want to continue to focus on.

[Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America]

Appreciate the responses. Have a good one.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Thank you.

[Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America]

Thanks.

[Operator]

We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.

[David Spector, Chairman and CEO at PennyMac Financial Services, Inc]

Thank you, Operator. Thank you all for joining us this afternoon. We really appreciate the time and the opportunity to present the quarter and answer any questions. I encourage all of you, if you have any additional questions, to contact our investor relations team by email or phone. I look forward to speaking to all of you in the future. Thanks again.

[Operator]

This now concludes today's call. Thank you for attending. You may now disconnect.

Participants

Executives

• Dan Perotti, CFO

Analysts

• David Spector, Chairman and CEO at PennyMac Financial Services, Inc
• Ryan Shelley, VP of High Grade and High Yield Credit Research at Bank of America
• Trevor Cranston, Managing Director at Citizens JMP
• Crispin Love, Director and Senior Research Analyst at Piper Sandler
• Bose George, Managing Director at KBW
• Eric Hagen, Managing Director at BTIG
• Douglas Harter, Equity Research Analyst at UBS