PFSI - Earnings call 4 2023 | PennyMac Financial Services, Inc.

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Operator

Good afternoon, and welcome to PennyMac Financial Services, Inc.'s Fourth Quarter and Full Year 2023 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 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.

I'd now like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac's Financial's Chief Financial Officer. Gentlemen, I'll turn the call over to you.

David Spector

Thank you, operator. you call. for thank fourth in and earnings quarter afternoon, to participating everyone our Good

the a rate loss in value net reported of with on hedges These PFSI Black net and included declines $XXX equity volatility annualized and results significant quarter. $XX our given of on return million an Knight relating MSRs negative long-standing nonrecurring and fair X% a the during to quarter. of fourth interest accrual $XX arbitration million of million

Excluding XX%, impact performance outstanding very culmination the business and these of was balanced return another our company model. strong items, operating annualized highlighting on with of the year of marking an for the equity strength of the

recent and industry from was approximately XX% originations down unit history, with level the one markets XXXX of since XXXX volumes their more at lowest challenging XXXX. in origination

generated X% its income down UPB to through only production our and multichannel to strong ability This customers business the purchase nearly profitably access partners. PennyMac of $XXX produced pretax market and However, million in and from both demonstrates billion platform our of our support production loans, XXXX. mortgage $XX

volumes continue servicing which than the end the the organic to growth year. portfolio billion more and of X.X up year our with over customers from XX% drive ended million $XXX production UPB, These in of last

excluding Knight accrual. Black pretax the business servicing income, million $XXX Our in generated

maturities. always to competitive fifth and for come. our PFSI, to years million the debt new in stockholders I steps of a ability proud servicer, mortgage we mortgage second at we am country capacity strengthen terms and profitability $XXX with in redeeming have the capital platform issuing more billion effectively the share we manage did extraordinarily team's and management in debt the for long-term work $XXX continued $X.X million return than in largest As took achieved largest sheet, of has to through repurchases more upcoming meaningful than scale banking producer further been dividends, we balance This in XXXX. the and Not and advantage to accomplished growth significant the in with only loans attractive the

like would Black the earnings litigation the Black our arbitrator the In Knight, outlined issued January, from on fourth with of as Knight expense update determined brief X PFSI long-standing a on quarter, Slide recorded down to plus presentation. noted. of million award November. in accrual a I to interest provide previously our in interim award the $XXX related as final

our pleased as and customers that it with fit the ruling, disagree with as ability the affirmation to benefit we see we we SSE the providing arbitrator's technology very stakeholders. well utilize are While to remains own as PennyMac our proprietary

helping this for Since restrictions our or on meaningfully while potential is With we launched now opportunities believe the XXXX, well, the capabilities there extremely over drive it free costs. stakeholders use enhancing development, clear company for and technology down performed system has additional in and time. to of any we

high market declined both troughed scale or summer increased and to on Much business in and spring in moving further. quarter believe rate $X into cuts later of rates the and model remain from year, market. and of before on for for Turning XXXX seasonally in approximately season. decline now With low XXXX rate if first expect the the we industry we remain interest XXXX production the mortgage in well recent and servicing, in to a volume have very origination rates loan positioned trillion. highs, home-buying overall this balanced the have remain their growth origination reductions as interest market estimates is We originations future anticipated based anticipated to the in third-party expectations

increased have the Servicing segment of income X on The beginning to balances and from equity Slide of to year. double fees drive consistent short-term the and on pretax earnings with continues own the see can the goals operating due to increased returning you of our presentation, the in returns at in throughout As XXXX, PFSI's earnings digits custodial growth placement has and portfolio to on improved recent earnings due higher rates. the size quarters operating

estimate expenses over delinquencies. to gained expected have we operational while the share, market. considerable amount scale of a and purchase low remain broker market the low to margins course channels, strong access especially Operating market production, which in provides given of continued our direct improved correspondent competitive, is and growing remain In XXXX, the we the and have

rate these customers note As our interest business a when we for excess rates note decline. At XX% mortgage rate new year-end, our servicing with X%. do mortgages opportunities additional creating we rates are direct our portfolio add to lower of in offer portfolio, higher consisted mortgages our to of of consumer

expect we first fourth in as build this production the the in income In to $XX expect we origination some million. profitability future was quarters quarter, quarter, the And on improves. seasonality while market pretax

we proud and I am Financial's of said I earlier, I accomplished about am future. XXXX, As PennyMac even in what extraordinarily more excited

our and record operational and industry-leading positions financial production has balanced both business and disciplines. well as of management strong performance and risk industry track as is driven capital the been strong the by mortgage long in model our resilience unique Our in servicing of with

needs. strong best-positioned their business company we and a of balanced believe number proprietary the customers in benefit servicing stand a that technology, the growing model, the are from we industry to services with a balance scaled products sheet and to fulfill industry-leading I homeownership fully offer

to will of performance. turn financial fourth review quarter drivers I will over it PFSI's Dan, the now who

Daniel Perotti

Thank you, David.

negative $XX ROE of earnings annualized the $X.XX in for million share loss an net a per fourth negative reported quarter in X%. PFSI of or

dividend taxes, to the of after down include award prior accrual $XXX the $X.XX related arbitration As $X.XX Knight. David taxes these per Black diluted cash fourth our due income declared primarily long-standing final results mentioned, net Board quarter, per loss. share or quarter share. to a expense share of million $XX.XX, per a income value of PFSI's end the of before of from nonrecurring with the Book also was Directors

this segment. to We estimate position more PennyMac production from to that PMT. prior market the with Turning acquisition billion last despite and quarter. than $XX.X correspondent for in the XXXX. of up XX% We in billion million, the of represented lending, $XX.X levels reported correspondent more than prior were $XX quarter. million acquisitions billion size $XX billion, not to up from total in volume XXXX, maintained January up in origination to the quarter principal prior unpaid account, in growth the for similar retreat $XX.X $X.X but own XX% in fulfillment fourth and X% its decrease total in was to of market attribute of approximately XX% margins market quarter. fee-based Acquisitions $X.X Pretax are share consistency total locks billion. in market the lending, technology. are certain to PFSI's was only from billion share participants, origination industry-leading a expected from activity expected also was $X.X execution Total in dominant the in PennyMac and quarter our our and and balance, income

as strong estimate in and mortgage last were declined. quarter, of we the market, down and $X from January, of the the number percentages were broker overall as approximately was continued $XXX of levels approved higher In year, were and PennyMac leaders. end see growth locks year-end the than In of interest fallout XXXX. from X,XXX, the prior channel position at and channel represented and fundings direct due to in originations in single-digit X.X% as alternative quarter strong over less that we were trends Both million broker a market to the rates The the we margins share originations brokers up in direct, for down billion. locks XX% we

well In about, as consumer the performance. higher X% financial expense given quarter, net we number low. talked of than mortgage customers Production to volumes of primarily lower to were remain accruals have lower But related origination the to David compensation added with the expenses positioned prior portfolio direct, loan due remain rates. we

a segment primarily by of Servicing The $XX loss Servicing. to nonrecurring the pretax mentioned Turning earlier. recorded expense accrual driven million,

$XXX to primarily MSR down quarter, Servicing accrual, $XX from prior the contributed in the to declines. valuation-related net Excluding million higher million due pretax income,

of larger from $XXX from up valuation-related Excluding owned been prior in had prior quarter. Loan strong quarter, the periods. with contribution X.X very acquiring PFSI of pretax UPB, fees X.X results conventional or Servicing has the or portion million basis primarily portfolio were points nonrecurring Servicing $XXX in items, correspondent recent growth in million in up changes a portfolio to due as servicing production PFSI's average basis of points the

related Operating PFSI's also to compensation performance. expenses declined accruals to due lower financial

balances $XX higher Realization interest cash to declined $XX the and deposits tax and balances million the custodial rates on property the of low relatively earnings quarter prior decreased for average as other million of decreased from from expected, outstanding. will to while its prior due quarter the seasonal prior payments. quarter EBO income flows to for contribution MSR few remained from As remain the expense to debt the expect due of average unchanged, next interest and majority increased we income quarter. quarters, higher balances continue due

of of Hedging the fair which value were the contributed million, quarter, rates, increased $X.XX. XX% the $XX PFSI's share and prepayment negative during hedge from MSR in of MSR to expectations income gains negative impact under PFSI's MSR the value by was in unchanged $XXX the changes Investment on drove the the quarter, on a by Management million, The were The $X.X management $XXX million and during million impact quarter. end fair earnings was future. of net decreased income pretax mortgage decline The pretax prior assets per and the segment activity in fair values. for offsetting driven decline

successfully the Finally, million Ginnie on a notes of due $XXX secured million notes MSRs loan $XXX senior capital. by servicing and term X-year Mae we subsequently advances. Last In $XXX quarter, December, issuance million raised XXXX. X-year secured we unsecured retired noted term in in of and October

We'll for up Operator? now open questions. it

Operator

the question [Operator Instructions] Piper line our from Kevin with first Sandler. of Barker take We'll today

Kevin Barker

the follow just free to and your restrictions. and about technology clear I SSE on wanted being up any from comments with

with upon within of quote for PennyMac -- expound there's and PennyMac? You utilize company. also it's it expand PennyMac can Could the whether within potential technology do I opportunities the of outside for a that technology, maybe this maybe benefits made what use the or believe or upon you additional you

David Spector

Sure, Kevin.

of needs meet us the with it full it rates. of to SSE and a very, with great competitive our terms forbearances it's very, from components. back tested end It's We offering First COVID advantage. gives And middleware very that We cloud-based, firm. believe for we but mobile XXXX. it high able tested, front attached it's and unique our to system and end, modifications. integration has of being were as XXXX, and are easily we able to not of of performed with web, system IVR the servicer a it amount in got Customers tremendous all, been workflow put well to in adopted It's and borrowers in at a satisfaction state-of-the-art end technology. with access it a advanced and solutions us use

I think the look, competitive gives marketplace. in it And us a advantage

itself, as something and in servicing driven a our see been meaningful servicer. of something X that we so since And to expenses I that it, in us down evolution continue to it's our and get it's adopted top think has we

final say, to retain and very more the our servicing to SSE the ruling, clear rearview And while than We see for the own of pertains use unfortunate fit. as it and we free As be in disagree lawsuit happy clearly we're suffice had positive to negative. We it to were ruling I to the ownership mirror. happy look, with system. litigation,

encouraged hurry that opportunities, industry best been process. behind the very it feel get we days for do all approaching do a unique been to that's exploration and been of In presented suffice and and stakeholders, the we're very came something to I've say, this other -- and really opportunities terms ruling us. evaluation but advantage. get to gives people themselves is it's it's the something. working real us, out and us don't to since something XX we've beginning this And any that to want in We by

Kevin Barker

significant within equity on quite then seems return into origination not you but like only going bit the momentum XXXX, to you quarter. of have on side. were is the also particularly now, ROE And you channel, feel the the see XX% It bigger upside there Do produced XX% a operating rate if potential servicing a a for run this and 'XX, that origination in is market? we

David Spector

the quarter, the QX in was the out, which the just in ROE interest as third us the pointed operating core to to been seasonality Profitability quarter, fourth going and us. The unbelievable to servicing but I'm to Look, on you be continue the I results. for There's this was is think build strong quarter. to continuing XX% first in stay environment. high current. up some consumer remain that, perform XX% from continue has expecting rate

We the have fees our and continuing servicing in portfolio. growth higher own

production the in 'XX. we very on profitable Look, side, were

and the and as encouraged see do that can really our broker I'm we in profitability. on markets back direct, And in also projecting, seeing given we rate we half 'XX but said, I As first production business margins in were were are of 'XX we correspond profitable the especially foremost, if side. in I'm see grows declines, than in the the we're production year the then trends seeing and trends that more

Daniel Perotti

that mortgage looking -- be you that necessarily think not a the There business XX% operating noted, we do as is XXXX through what ROEs really see people bit. consistent potential the this totally To seasonality sort we're some in -- on expect a echo is at larger those we if -- upwards upside It's said, to ROE Just becomes line. to forth upside QX from year ROEs in as to XXXX as -- put increase QX, for, with last overall, a David there what trough. where did the of we had although little straight saw and hoped add especially market of the of year to beginning how if move market. we going at

Operator

of from Fargo. next Our Michael Wells the question line comes with Kaye

Michael Kaye

a your that a bought the then. back wondering what's you during At know stock pandemic some environment? said was of lot like the -- XXXX It back normalized XX% a since Investor analysis Day, in minuses more What ahead and you of been is the Just XX%, pluses the ROE probably in of a period. out of considering I of and that direct direct broker bit. too. the has XX% likely trying figure a doing to challenging I'm are Correspondent opportunity you a mortgage is is count. goalpost Consumer just share right did plan, pushed market? out very out great still little servicing XX%

Daniel Perotti

XX% I think our focus we think mantra, that plus. achievable still we we that have. -- part we're goalpost of David's -- to is think more That's that's Obviously, that and in XX% the But the do striving certainly what is have normalized generally do we on. a market.

the probably the growth has size market over of is a little still market If of given and we because what portfolio if market. in we we time we're a normalized looking the at XXXX lighter -- of in positives, smaller. specific, projection. just what we had it's of sort under correspondent, your servicing point, but probably that especially even the the changed since expected -- terms bit we're that at -- some The probably period expected would the over outperformed period what time what's than To totally of looking consider total been of in

direct on overall especially just been And the the market the in of because size lending a constrained of then growth bit terms the channels and of consumer market more direct. the of has refi

business sort that, ROEs, continue fourth think in of what XX% is build that helps overall the So on target. our core still we the overall we we we of have our led XX% sort quarter, is XX% the we reasonable We can us and but to business which have balanced and but servicing think still drive as an that, those achievable top goal to that ROE still on -- model that's of where think a goal. production balanced up models, here

Michael Kaye

things competitive update I in in large looking was Freedom Okay. talk large bit I correspondent far year? raising happening other competitive landscape I've the January. in more a correspondent, what's been just And looks wanted to so about an like debt. corporate down nonbanks of some about getting a this talking for slowed little after amount on like hearing

David Spector

have Look, I in a look, think that -- we correspondent. position dominant

growth share in of start because off think that that part relationships, latter the coming lot activity year in drove of we're activity share of is in the out our correspondent, builders have I have is that very going something where of very good than lot deep even Dec. market growth. the that would saying deep by the be in to And that's smaller specifically with the builders. really helped we of and I And relationships. a We A January seeing

of to they're you to out. stepping going about As able to delivering because are and a And just disproportionate there's banks being that things been we're point have the quality, more of Sellers to flight at their witnessing [ and say servicing. amount loans I'm not the ]. back be retaining is and not one where know, more a we're to seeing sellers we're also going us that

in enough XXX. saw of XXX from down decrease sellers. to correspondent, in Interestingly number It's the a we

so place. bit is But our value and day. get for we're little proposition We We're I we tried value that. seeing pretty consolidation true. that the in And market a of taking think -- every

then in I think are then creates sellers. in and that out when they're some others they're and with consternation out, they're and

quarter some increasing from at I find of pricing the to that basis 'XX. -- And at but is away good it's saw growth executions so XX provided really additional we points some margin. were in why in And able of fourth in combination margin we're We 'XX. power, the continue of fourth also basis correspondent. this points XX a We GSEs were quarter the

and have and people them correspondent there. to But margin, may more continue is to the to so on be. capital it you I to more something -- have I the be we're mean for raise little But that our continue that core franchise a I expect yes, think that leader aggressive. like it's sell I And loans get because someone reason the industry bid. they better will to a But to

Operator

question Hagen line with Our from Eric of next BTIG. the comes

Eric Hagen

the there there rates hedging thought during value you sensitivity hope I even you next do it, the I were fair are feel Is prevented maybe maybe the lower the results like value more from to, hedging like but in points respect mark? mark XX guys Yes, call sense you of fair mortgage much for well. good, a quarter? to feel how what is basis with the you

Daniel Perotti

Sure.

pleased fourth So hedging pretty performance we're our with in the quarter.

As rates interest you little all map -- down We fourth the were below up know, XX-year was over were in bit and over the the as or quarter. high X%. up X% a

So we rates -- were terms rates and quarter. the little costs included to through interest that mortgage that really bit went significant a swing hedge, up ate a the which We the have able the in XX% to direction, as the and that cover well. pretty of that direction mortgage move of

targeting a interest is and when rates been but that higher at said, we of point, your We fair could asset with given, ratio interest of down also sensitivity. been increasing that tighter the rates, overall, interest have decline. a have a territory do because we have you in than loans those pleased -- of move we the have rates into pretty of as greater like our that performance. To historically, Part refinanceable this that's portfolio so if the environment, -- part rates strategy further, adding hedge interest as amount if of loans we're move interest volatility loans or we those been has move rates that we've

increased in asset lower hedge so bit of we servicing and as the to the interest sensitivity that. rates moved And has we've continue a

an first in consistent But what is strategy our the in also uptick seen quarter. refinances we've here with

terms channel, the taken You here we've that of of rate and in We're pretty leg sort some can for our in run rates. example. had lower another we direct in just up our from interest in -- of in the January see locks QX that consumer meaningfully

and the on to business slightly with faster [ port gets the serves again, prepayment the to refinanceability balanced side we speeds the the potential with back really, servicing that that and of model ] see extent to So hedge our that. offset how,

Eric Hagen

helpful. that's No, Yes.

market balance So guys financing are mean, I question -- are how of with for replacing about you you secured thinking guys how here, that some maybe MSRs versus unsecured any the that debt? a And do separate could unsecured? risk appetite kind banks for that funding? pull from MSR of in And for drive you see any the does way back your supporting

Daniel Perotti

the mean, -- past more So we've really -- our that move generally toward strategy we've I talked unsecured it in we financing. to is about

on other pay to there QX some or $XXX MSR we really drive profile more the favorable that over issuance move of our a the continuing that continue with time and financing, we is the we bilateral as of isn't as to think million We have unsecured side. towards expect rally, unsecured significant if unsecured favorable more sort Our of for than of margin debt position the rate sort sort our more we margin down that credit notes used of to has capital debt where of towards really banks. sort ratings call benefits off for a so Really we secured are move -- Overall, to stability. from opposed financing more in agencies, interest subject move term stable some and has costs example, rating bolster since a can to more position to although calls financing. reasons unsecured that

secured, flipping a the terms we the MSR banks. other In financing not have the -- of in side on from pullback to seen

really In willing fact, opposite. banks in really structures. MSR the MSRs different to more and on seen lend been it's We've

all we of management previously. our and risk I major other that's of We don't issue. driver been, that there our that banks and It's for diversify really over really to adding don't see not are of -- we've just we the a that motivations But the banks so a and discussed number as that we have time, see our to want MSRs that continue toward MSR to So an facilities, pullback debt. financing move purposes. unsecured

Operator

from the is Bose KBW. question line of George next with Our

Bose George

thought valuation? share updated give us your you just Can given buybacks just the on current

Daniel Perotti

Sure.

has repurchases, quarter. So up sure you're repurchases few in in significantly ago any share The a share we of have didn't as quarters moved aware. price terms share from the pretty fourth I'm

our it versus looking we're time deploying what back And is our shares in correspondents we're any and through value at servicing in deployment, continuing so and capital to MSRs really portfolio. relative and at the into to return business looking add the relative acquire

we And optimal as that so really of see path currently. sort the the

other piece is that And overall plays our into of this the management company. the of the ratio leverage

And that our equity manage looking bit to been. so there. continuing where or to point a our terms ratio in in managing debt similar that X a range above leverage and Xx nonfunding We're to of is we've

repurchases so And bit obviously, that. on pressure share little of a puts

the to in certainly the as in quarter, business in we'd really those expect back the that into given environment, we're to deployment how current opposed everything fourth But is So -- MSRs are currently with balancing. situated, repurchases. share the into our and factors capital continue

Bose George

follow-up over the Okay. Great. Makes sense. just switching then MSR And earlier. actually a on from question hedging

said abates, call. in that of prepayments? sort last on of see we noted big run have of mean, more you to hedge you're XXX% a think don't quarter a assuming You hedge result, a pickup I sort ratio, we matched the tighter I should If going a sort volatility

Daniel Perotti

were which the quarter, both continue first amount in the are a volatility as terms we down curve, a tighter our hedge hedging be and said XXX%. ratio. territory fair quite I again, of And to higher we with mortgage an so far a quarter, first won't we in of fourth inverted yield our What into the to necessarily are get portfolio bit lower of costs. close negative XX%. a higher hedge percentage In to further manage of as and to seen quarter, we've in seeking of at rates, so So

the the hedge I a -- be and we've cost the you historically, some first differences ratio,. still of hedge positioned, think right be in terms but is XXX% than where higher little between terms expect won't MSR for quarter. bit could we the been of at of our us and to in portfolio So potential in necessarily

Operator

Deutsche next Mark comes Our from line of question Bank. DeVries the with

Mark DeVries

the Dan on question decline I fallout on a consumer attributable in on lower there broker direct direct. that Was being pushed effect? in First, fallout Or is hear in else comment you effect. consumer the commented for it again you quarter-over-quarter whether the something margin the the sale direct? to heard in Didn't margin. decline same

Daniel Perotti

consumer what was the is refinances to Sure. a toward influencing margin In direct, second-lien origination. really as shift there more opposed

second-lien balance. So smaller a have originations

loan is And of a although so on lower are a the per higher, the unit for per basis is because refinance loan points dollars revenue basis, the size larger.

in -- So that rate QX it really of we've end driving is QX, basis reacted. QX, interest given started points from the And a in toward that's we to really and what's the decline decline declines. margin we the saw rally seeing pickup repo basis, But But the we're in those seen a we're really quarter basis, revenue unit per interest rates. with points -- first a it's seeing further on on that basis actually, the unit continue up. a seeing here go

Mark DeVries

source do the your follow-up that? trade-offs Okay. platform. incremental sharing think David with How the Got it. And opportunities you that you off might competitive versus new be a of competitors potentially on about the generate between of around for able servicing then revenue a to advantage

David Spector

come I all the from Look, but as we of we're out questions litigation. asking perspective, the our these ourselves -- think are

given market any for on in demand view. think And out the of one industry I for leader to there, that the share have marketplace of there or person. are more point the many there the It's share my in the healthy competition. reliance good not who is industry

work served perspective, we are other versus I our what this and the means. process, we're we platform by going value, on best already continue question I place. down we're our this the in it, by and productivity we're very always is answer something that as to going -- get can in terms to maintain we early do, as driving But And said get have to is of whole something we to that to on. increasing seeing an think we're that working and earlier, going just from economic in we're right that on competitive is continuing costs from advantage the servicing and this to to

Operator

question comes Joseph next Our from of the line with Kyle Jefferies.

Kyle Joseph

Just correspondent your pick want little bit on a the brain to channel. more

sellers went impacts do doing get on of demand, curious that margins segment? you supply to that number your how the was to necessarily see that obviously Obviously, just and what margins in I down, time? but over your that but not thoughts impacts So

David Spector

who think lot really we don't it's weren't of in active weren't impact a I selling us Yes. marketplace. really loans, any sellers margins. on and the It's

I think margins they the pretty down, quarters. from where very are were in stable, nicely albeit seeing have stable of margins up year And we're a margins ago. volumes been over couple even with January past they're --

that, we a think Doug and I Look, that get I and of job -- we're always people like always remind I phenomenal higher Abby you margins, course, just and to team the more But do are afford continuing think to can't support to servicing. really the sellers. prices value to the loan And provide sellers we're our -- operation on where keep in -- today, terms correspondent look, can't that of proposition they margin.

a either to where alternative lot retain ultimately GSE's the has a or so period the window cash for the lengthy it. they of the been execution servicing time sell of years would over And

more getting channel. we're in think loan the I so coming through And loans whole

us something this at margin it got been and ago. years in both And and you effect correspondent to where said, that day it got into I getting XX when where as people people business. gives of almost since -- flight the there's you see and out a natural every we to halo have a in quality us you out a and And there's And share. it's maintain just marketplace going allows we've

Kyle Joseph

it. have been particularly expenses, outlook getting the 'XX. for Obviously, segment. then parallel And but in in a kind the guys job more helpful. would Got how on line to of of you on in Very variability just stay with item those sorry, production there efficient that doing is much tough expect Or volumes? good a you market, --

Daniel Perotti

served That of lot 'XX. us production segment, going in bringing a really point, of in did our expense down the back work to the On base. well 'XX we your to terms even

'XX in on pretax getting David actually As due our had side, rightsized. was noted did and 'XX, . higher in really production expense that the in base we income to the we than segment production

As the and functionality, well servicing about of we if services of the side. -- shared talking the most of corporate rest as the we're sort as business, core in the

fairly on landing the expect side the grow extent grows. we to in the to servicing to portfolio of increases We business have really that slightly be some soft we expect those stable of in will and that not sort additional be see significant be contained. as but the some to the expense relatively very and corporate efficiencies given delinquencies, those we There that

be expenses. side determined by expands, the growth the size the some would refinance if on And of that, the production, And in on that in goes market. with particular, those and rate will interest really see then along that to in and some side, be the expenses uptick we on uptick an the there extent the production decline additional that that will necessitate that in production

Operator

is with question the Our from Trevor line of Securities. JMP Cranston next

Trevor Cranston

One of in sort funds in the on have talk move impact custodial about side hedges obviously of And of pretty place that the sort fund the balances Can stream about economics the quarters. guys of put Fed to the think business. also as the just we that should potentially starts the significant servicing to protect lower? of things. general lower earnings on more have talk how earnings servicing The of over you on you any last become hedging about question several

Daniel Perotti

Sure.

-- projected the custodial curve. are on custodial the -- So follow our servicing forward on balances to the portfolio the earnings our really balances,

we into if earnings you an for, interest shock or on of what hedging of see would rates our on for what cash in embedded lower forward those MSR our rates So the hedging are, up change flows that's value the in also part balances if they hedge. against. move incorporated the in those That's shock forward curve our part changes we're that's interest projection as to see servicing were that reflects today And in we short-term forward those are decline which extent earnings down, interest that in changing move -- those value rates, to time. as projecting -- a of changes we since balances are down. custodial And the custodial rate we the

way really that in or look some -- to I our you portfolio interest some financing expect of balances, rates rate. sort costs custodial to floating -- followed the earning our also of We'll funds that as we'd our is to see of of, materials -- closely rate the at custodial generally our as short-term it earnings to portion MSRs If portion generally tied that Fed our that's out we're same rates earnings see financing that down, we and on we've balances think, by follow follow those put custodial interest increased. balances on the our there the are that relatively decrease secured extent the extent to funds Fed go

revenue part so And expense. of be for the terms interest somewhat there are will have against versus -- decline as in offsetting. But in so -- those a side But on the you custodial hedging of what a those decline rates on well on side, an that is offset the we bit of balances. earnings in -- that's the in hedging that hedging the

Operator

question America. of Chao Shana Our the line Bank of next with is from

Unknown Analyst

the mentioned how under the on decline impact we Previously, rates how on should Like margin you facilities? calls to debt. see about your secured you much secured calls think margin need any before of call,

Daniel Perotti

at the over-collateralized pretty moment. We're

little we end cash had the a on currently, the billion of sheet. QX, $X balance So at under of

during billion against our value. draw $X facilities secured the to some additional of unsecured And facilities ability quarter issuance. debt our with the as our I secured of down we have around paid We mentioned, for

significant point unsecured in we So -- a debt. we have have our a really reduction where a margin get to value would would a on to it pretty call pretty to have be .

pay Additionally, place, might margin be rates, cash and that the in generate have. interest then calls hedges if we a any cash used have we off that we decline that to can in have

of margin the over-collateralization from against from as the off hedges, as pretty really And we're risk view of both point significantly the well impact. of an we're so sort covered performance of the

Unknown Analyst

third XX%. It Great. for from like books, helpful. delinquencies looks Mae I even pools there's And heard think certain season Ginnie first been over Okay. That's parties that we've then of some Can the you're still you going but then XX-day the for and just expectations low generate and on seeing X.X%. forward? USDA, what delinquencies XX delinquency comment increased bps sequentially relatively at

Daniel Perotti

Overall, pretty through in December. usually, an we've seen Mae March as our downtick going there's And book as stable. uptick Ginnie quarter. of seasonality will always the towards February and have amount fairly fourth in the Ginnie receive Mae meaningful some tax income a There's delinquency you their folks you're especially refunds.

though, year. the delinquencies. the we saw up in delinquency a bit deck so overall were overall overall our pretty the were prior in MSR We they have that for on been overall portfolio, And year -- the the whole as profile of the delinquencies through portfolio of publish slightly terms delinquencies, contained in from

So seen it's others. better-than-expected we significant been we've a in there has in I delinquencies, certain pressure, seen issue. not performance have that some probably agree certain pockets, some in see that and areas, something Similarly, as some uptick. we

impact mentioned, I which that piece that other The us. way delinquencies the is

property escrowed may A have That where by of maybe X catches sort quarter-over-quarter. You driven not a delinquencies. the a that analysis driven up. our borrowers amounts tax was shortage or for Property impacts very over the that property Really, past change, the from is by amount while current that years. account really redone significantly and was that then payments. significantly pretty seasonal increase have tax was appreciated values escrow few really borrower's increased and advances lot of seen the that's being just escrow servicing payment

year-over-year to servicing went down you If of advances look year-over-year, in terms looking our at they actually slightly at QX QX.

a terms it year. that basis contained has of And cash a on significant just to been how shift. delinquencies, very that we is summary of us very in the impacts all similar So seen and last have not

Operator

We the final Sandler. Piper question of Barker Kevin today a have line with from

Kevin Barker

prepay follow to also quarter. quite of came And the amortization -- that cash realization wanted this just a I flows meaningfully. up saw down bit the pretty drop we on line speeds

the cash played of obviously, XXXX realization portfolio given in producing a we do would you low feel fairly But speeds that time? remain big half that. Now through low seasonality very flows this part of at go prepay is first the the as

Daniel Perotti

point, cash a QX To fourth as of for interest were going declined the bit of your realization most QX quarter. from rates high the flows to

through to We have an decent we QX, into as decline I -- some in that flow some we in seen a go uptick uptick interest uptick prepayment have refinances seen as rate mentioned there, speeds. will

given of there's and uptick we're profitability realization I But those expect that still some servicing so be expect for the in -- as do overall, going cash will And we're servicing into the flows the as going year. the quarter, meaningful next dynamics. first and think we through significant we portfolio

Kevin Barker

a Great. more little closed-end the depth provide And for then versus could just you maybe on seconds. bit refinances demand

but towards the are given very you still in second starting Now in you it base refinances the been portfolio, to low start I to past, the demand realize to closed-end the servicing and or your what two in the relative seeing customers in more customer more seeing are month attention? garner lean is overall your just market or has last

David Spector

and think, pre we outs, me, see cash seconds. rates decline, in that's excuse the look, closed-end into the down And On on It's going out on -- know, property to as is, do added XXXX lead leaning in their you -- marketplace as we're it appropriate in X% rates the I closed-end . But lean think cash outs it's in not their us, I take they're the have take primarily mortgages. seconds. lower cost rates position mix as be opportunity servicing to X% we cash mortgage typically have the more market product a borrowers see as rallies higher, of into in as as rates now that closed-end versus we decline, XXXX. that the effect of as customer right seconds, debt. to you'll And out -- meaningful Look, pay where still more majority borrowers gives of -- closed-end equity for for the kind that seconds. of as stay

increased see think of you an rates. amount So I that will

in do decline. look, been closed-end We've place. product rates refi launched as see do But terms profitable for when direct. significant of to it us You'll rates allows great increased do a and maintain of capacity the maintaining in in which seconds non-port has second to direct us decline amount in consumer see consumer customers, for we our capacity place for closed-end in an

more best We've broker direct. we like also that I proposition direct to starting in their continuing if gain I look, we a need consumer lot the encouraged. that in And customers. think serves that have a adds capacity direct, do we're I brokers addition, broker more introduced to be and invested product up support in brokers. in just value direct. it's think And have. And strong also that we're broker the that brokers see participants. maintain technology remiss and I'd to the bring X we've seeing And share I'm as to did it to And look, that's alternative the something the a to top It PennyMac

we margins that broker maintaining and seeing levels. think we're like in And are so direct I what their

and it going cash got cover And term so our as we've production to closed-end no participate what matter rate environment out we're refi is. to versus and versus divisions, the in refi, rate second

Daniel Perotti

David of just address add to what question. said on and one your part to And to

a our primarily in So and I lien to what that something to the had -- the and the and really that on refinances we're that that us because for isn't profitable QX interest term our really shifting refinances resources is opposed addressing rate rates. to -- as QX at seeing persistent in shift that second is more of end necessarily product depending really happens about talked also

QX impression -- now that -- able extent sure kind shifting make have and shift. the to breadth interest second of and where over to move It's lien it cross I extent really to uptick product and a to want will David's didn't cash rates isn't to the loans It second we are saw in doing the give didn't the ability threshold. up, second term refinances out be from We expanding in we of decline, I we have to that wasn't to be the go doing point, were refis. so that we into rate rates And interest that refinanceable. more the lien QX.

Operator

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

David Spector

afternoon. all Thank a of thought We lot and this everyone quarter. joining I we was outstanding really you. us to thank a over good went what for want I to thank I information, had has want for anyone And feel out thoughtful everyone or to joining by reach for Investor thank again, questions. any additional you phone. free the our questions, If e-mail Relations team the to call.

PennyMac Financial Services (PFSI) 1 Feb 242023 Q4 Earnings call transcript