PennyMac Financial Services, Inc.

Good afternoon, and welcome to the fourth quarter and full year 2022 earnings discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to risks identified on slide 2 that could cause our actual results to differ materially, as well as non-gap measures that have been reconciled to their gap equivalent in our earnings presentation. Now I'd like to begin by introducing David Spector, PennyMac Financial's Chairman and Chief Executive Officer, who will review the company's fourth quarter and full year 2022 results.

Thank you, Isaac. In the fourth quarter, PennyMac Financial delivered net income of $38 million, or 71 cents in earnings per share. These results include a non-recurring tax rate change, which negatively impacted earnings per share by 22 cents. Dan Perotti, PFSI Senior Managing Director and Chief Financial Officer, will provide greater detail later on in this discussion. For the full year, PFSI achieved a return on equity of 14%, driving continued growth in book value per share, which ended 2022 at $69.44. Our servicing portfolio ended the year at $552 billion in unpaid principal balance as additions from loan production continued to exceed prepayment activity. The growth of our servicing portfolio continues to differentiate PFSI from its competition, serving as an increasingly important asset, which I will discuss later on. We remained active in stock buybacks, and in the fourth quarter we repurchased 1.1 million shares of PFSI common stock at an average price of $46.99 for an approximate cost of $51 million. Repurchase levels were down meaningfully from the third quarter as we prefer to maintain flexibility to address potential risks and opportunities in the evolving market environment. In PFSI's investment management segment, net assets under management were $2 billion a quarter end, down slightly from the prior quarter due to PMT's financial performance. PFSI's board of directors also declared a fourth-quarter cash dividend of $0.20 per share. Thank you for joining us. Thank you for joining us today. To that end, for the full year 2022, we returned over $460 million to stockholders through stock repurchases and dividends and opportunistically raised $500 million in five-year term notes secured by Jenny Mae MSRs at attractive rates. Total production, including acquisitions made by PMT, was $109 billion in UPB. This led to servicing portfolio growth of 8% for the year to more than $550 billion in UPB with nearly 2.3 million customers. With mortgage interest rates currently still above 6%, the most recent third-party forecasts for 2023 originations range from $1.6 to $1.9 trillion, down meaningfully from 2022. While many industry participants have taken the appropriate steps to reduce capacity, it has been happening slowly and we believe overcapacity still remains. As we've demonstrated with our 2022 performance, we believe mortgage banking companies with large servicing portfolios and diversified business models like PennyMac Financial are better positioned to offset the decline in origination profitability that has resulted from lower volumes. As a key part of our balanced business model, our large and growing servicing portfolio provides significant value to the company. Servicing and subservicing revenues, the majority of which are cash, total more than $1.2 billion in 2022. Additionally, higher short-term rates have driven strong earnings on custodial balances. Our proprietary servicing technology provides us with significant operational scale and workflow efficiencies that enable us to adapt quickly to forthcoming market conditions and regulations while also providing quality service to our customers. Finally, given the scale we have achieved, we have begun offering our customers homeowners and title insurance through joint ventures which we expect will provide recurring fee income over time as the businesses grow. As I briefly mentioned earlier, our servicing portfolio growth can be attributed to the large volume of loans we produce every quarter as we retain the MSRs on nearly all of our mortgage loan production. On slide 7 of our earnings presentation, you can see PennyMac's total production over the most recent three quarters against average mortgage rates. Even as interest rates increased, the UPB of our production volume on a quarterly basis consistently represented 4-5% of the total servicing portfolio balance. Thank you for joining us today. Quarterly operating expenses in the fourth quarter were down 44% from average 2021 levels. While we believe the majority of expense management activities have been completed, we remain disciplined, continuing to rapidly adjust capacity levels relative to the size of the origination market, whether growing or contracting. Thank you for joining us today. Thank you for joining us. Finally, I believe this management team is the best in the industry, and I'd like to thank them all for their various contribution to PFSI's strong performance in 2022. More than 15 years ago, we founded PennyMac with an unwavering focus on enterprise risk management and doing the right thing for our customers. Since then, we've become one of the largest mortgage producers and servicers in the country, while also providing strong returns to our stakeholders. So while PFSI's ROE is projected to trend towards its pre-COVID range during 2023, I remain confident in our ability to continue delivering strong financial performance as the market returns to more normalized conditions over time. Now I'll turn it over to Doug Jones, PennyMac's President and Chief Mortgage Banking Officer, who will review our market share trends and fourth quarter mortgage banking results.

Thanks, David. We estimate that over the past 12 months we represented approximately 15% of the channel overall. The total correspondent loan acquisition volume in the fourth quarter was $20.8 billion. 51% were conventional loans and 49% were government-insured or guaranteed loans. Purchased loans accounted for 93% of total correspondent acquisitions during the quarter. Acquisitions for PFSI's own account totaled $14 billion, up 15% from the prior quarter due to the acquisition of certain conventional loans from PMT in addition to government loans during the quarter. Conventional acquisitions for PMT totaled $6.8 billion, down from $10.2 billion in the prior quarter as a result of the previously mentioned sales to PFSI. Similarly, correspondent lock volume for PFSI's own account was up 25% from the prior quarter. Revenue per fallout-adjusted lock in the fourth quarter was 21 basis points, down from 24 basis points in the prior quarter, driven primarily by PFSI's purchase of lower-margin conventional loans from PMT. While we respected Wells Fargo as a competitor in the correspondent channel, we believe their exit from the channel creates additional opportunities for PennyMac, particularly in the community bank and credit union sector of the market where they had previously had a strong presence. The scale we have achieved in our correspondent business combined with our low cost structure and operational excellence in the channel allow us to operate efficiently through the volatile market environment, even as other participants have exited or retreated from the channel. We stand ready and able to absorb volumes left by Wells Fargo's exit and remain committed to being a strong capital partner for independent mortgage companies throughout the country. In January, we estimated correspondent acquisitions totaled $6.8 billion and locks totaled $6.1 billion. Turning to Consumer Direct, we estimate we accounted for approximately 1.2% of total originations in the channel over the last 12 months. Origination volumes for the fourth quarter were $1.1 billion and interest rate lock commitments were $1.7 billion, down meaningfully from last quarter due to seasonal impacts and declining refinance volumes. Purchased lock volume for the quarter of $681 million was 40% of total locks, compared to $1.37 billion, or 36%, in the prior quarter. Margins in this channel were down slightly, with revenue per fallout adjusted lock of 358 basis points versus 366 basis points in the third quarter. Thank you for joining us. Purchase loans were 85% of total originations. Revenue per fallout adjusted lock was 56 basis points, down from 70 basis points in the prior quarter, although we have seen margins in this channel improve this far in the first quarter. We estimate that in 2022 we represented approximately 2% of the origination volume in the channel. Thank you very much. Thank you for watching. David Spector, Douglas Edward Jones, Prepayment speeds have slowed meaningfully given higher mortgage rates. PennyMac Financial's own servicing portfolio reported a prepayment speed of 5.4% in the fourth quarter, down from 9% in the prior quarter. Similarly, prepayment speeds in PennyMac Financial's subservice portfolio, which includes mostly Fannie Mae and Freddie Mac mortgage servicing rights owned by PMT, were 4.4%, down from 6.9% in the prior quarter. PFSI's own servicing portfolio, which consists primarily of January-May MSRs, had a 60-day delinquency rate of 3.8% up from 3.5% at the end of the prior quarter, while our subservice portfolio, consisting primarily of conventional loans, reported a 60-day-plus delinquency rate of 0.6% up from 0.5% at September 30th. The UPB of completed modifications was $2.3 billion, down slightly from the prior quarter, while EBO loan volumes remained low. We expect EBO revenues to remain low in coming quarters as the lower overall volumes and redelivery gains are expected to be limited due to the higher interest rate environment. I'll now turn it over to Dan, who will review PFSI's financial results for the quarter. Thanks, Doug.

As David mentioned earlier, PFSI's net income was $38 million, or diluted earnings per share of 71 cents. The fourth quarter included non-recurring tax items, which resulted in an effective tax rate of 44.4% versus 27.1% in the prior quarter. The increase in the effective tax rate was primarily driven by an increase in the provision tax rate, which increased from 26.5% to 26.85% for 2022. The increase in tax rate resulted in the repricing of PFSI's net deferred tax liability, which was the primary driver of a nonrecurring tax expense of approximately $11.9 million in the quarter. The impact of this tax rate change was negative 22 cents in earnings per share. Production segment pre-tax income was negative $9 million. As you will see on slide 12, we provide a breakdown of the revenue contribution from each of PFSI's loan production channels, net of loan origination expenses, including the fulfillment fees received from PMT for the conventional correspondent loans it retains. Production revenue margins were lower across all three channels. Revenue per followed adjusted lock for PFSI's own account was 55 basis points in the fourth quarter, down from 99 basis points in the prior quarter driven by lower volumes in consumer direct and lower overall margins. This includes $24 million in gains realized related to the timing of revenue and loan origination expense recognition, hedging, pricing and execution changes, and other items. As David mentioned earlier, we remained focused on managing expenses in the current market environment, and although fallout-adjusted locks were up 11% from the prior quarter, production expenses net of loan origination expense were down 13%. The servicing segment recorded pre-tax income of $76 million, down from pre-tax income of $145 million in the prior quarter, and $126 million in the fourth quarter of 2021. Thank you. Thank you. Operating revenues increased from the prior quarter as loan servicing fees grew by $9 million, primarily due to growth in our servicing portfolio. Earnings on custodial balances and deposits and other income increased $17 million. With rates at current levels, we expect a continued meaningful contribution to overall servicing profitability. Operating expenses as a percentage of average servicing portfolio UPB decreased. Payoff-related expenses, which include interest shortfall and recording and release fees related to prepayments, decreased by $1 million. Realization of MSR cash flows increased by $7 million, driven by higher average MSR values during the quarter. In order to protect the value of our MSR asset, we utilize a comprehensive hedging strategy. The strategy is designed to moderate the impact of interest rate changes on the fair value of our MSR asset, and also considers production-related income. On slide 16, you can see the fair value of our MSR increased by $83 million in the fourth quarter, driven by lower than expected realized prepayment speeds as well as expectations for lower prepayment activity in the future. Hedging losses totaled $73 million, primarily driven by hedge costs and higher interest rates. Thank you for joining us today. Regarding the $650 million of Ginnie Mae MSR term notes originally due February 2023, we exercised our option to extend the maturity for two years. Importantly, the $650 million of Ginnie Mae MSR term notes due in August 2023 also contain an optional extension at PFSI's discretion. Finally, our investment management segment delivered pre-tax income of $1.2 million, down from $1.6 million in the prior quarter. Net assets under management totaled $2 billion as of December 31st, down 3% from September 30th. Segment revenue was $9.9 million, down 4% from the prior quarter. And with that, I would like to turn it back to David for some closing remarks.

Thank you, Dan. More than 15 years ago, we founded PennyMac with a vision to help revitalize the mortgage market and become a trusted partner in home ownership. Since then, we have grown responsibly and profitably into one of the largest residential mortgage producers and servicers in the country with an industry-leading correspondent production business and a growing presence in the direct lending channels. Though 2023 is expected to be another challenging year for the mortgage industry, I remain confident in PennyMac Financial's ability to continue executing given its balanced business model and long history of generating stockholder value through different mortgage market cycles and environments. We encourage investors with any questions to reach out to our investor relations team by email or phone. Thank you.

This concludes PennyMac Financial Services, Inc.'s fourth quarter earnings discussion. For any questions, please visit our website at pfsi.pennymac.com or call our Investor Relations Department at 818-264-4907. Thank you.