PennyMac Financial Services, Inc. (NYSE:PFSI) Q2 2020 Earnings Conference Call - Final Transcript

Aug 06, 2020 • 04:30 pm ET

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PennyMac Financial Services, Inc. (NYSE:PFSI) Q2 2020 Earnings Conference Call - Final Transcript

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Presentation
Operator
Operator

Good afternoon, and welcome to the Second Quarter 2020 Earnings discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial's website at ir.pennymacfinancial.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. Thank you.

Now I'd like to begin by introducing David Spector, PennyMac Financial's President and Chief Executive Officer, who will review the company's second quarter 2020 results.

Executive
David A. Spector

Thank you, Isaac. PennyMac Financial reported record earnings in the second quarter, driven by core Production and Servicing results, partially offset by fair value losses on mortgage servicing rights and associated hedging and other losses. Net income was $352.7 million or diluted earnings per share of $4.39. Book value per share increased 15% to $34.26 from $29.85 at the end of the prior quarter.

In June, we purchased in the BlackRock foundation approximately 7 million shares of PFSI's common stock or approximately 9% of our total shares outstanding. The shares were purchased at a price of $34 per share. Finally, I'm pleased to note that PFSI's Board of Directors increased the quarterly cash dividend to $0.15 per share, a 25% increase from the prior quarter.

Production segment pretax income was a record $538.1 million, up 124% from the prior quarter and up 448% from the second quarter of 2019, driven by record volumes in the direct lending channels and record margins across all of our channels. Direct lending locks were a record $13 billion in unpaid principal balance, up 31% from the prior quarter and 177% from the second quarter of 2019.

Of these, $8.9 billion were in the Consumer Direct channel, while $4.1 billion were in the Broker Direct channel. Government correspondent lock volume was $12.9 billion in UPB, down 13% from the prior quarter, reflecting a temporary slowdown in the origination market for government loans early in the quarter from the impact of COVID-19. Government correspondent lock volume was up 7% from the second quarter of 2019.

Total production volume for the quarter was $37.6 billion in UPB, up 6% from the prior quarter and up 56% from the second quarter of 2019. And finally, correspondent acquisitions of conventional loans fulfilled for PMT totaled $18.9 billion in UPB, up 17% from the prior quarter and up 76% from the second quarter of 2019.

Continuing on to Slide 4. The Servicing segment reported a pretax loss of $62.4 million versus pretax income of $170.8 million in the prior quarter and a pretax loss of $2.7 million in the second quarter of 2019. The segment results this quarter were primarily driven by valuation related items. Valuation related items included $108.4 million in MSR fair value losses and $15.1 million in hedging and other losses, driven by elevated hedge costs and fair value losses on options due to a decrease in volatility.

The net impact of these items was a pretax loss of $123.5