Edgar Filing: PENNYMAC FINANCIAL SERVICES, INC.

pfsi_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-35916

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware		80-0882793
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


6101 Condor Drive, Moorpark, California		93021
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May 7, 2015
Class A Common Stock, $0.0001 par value		21,657,405
Class B Common Stock, $0.0001 par value		53

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

March 31, 2015

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		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements (Unaudited):	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65

PART II. OTHER INFORMATION		66

Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:

projections of our revenues, income, earnings per share, capital structure or other financial items;

descriptions of our plans or objectives for future operations, products or services;

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 13, 2015.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

the creation of the Consumer Financial Protection Bureau (“CFPB”), its rules and the enforcement thereof by the CFPB;

our dependence on U.S. government sponsored entities and changes in their current roles or their guarantees or guidelines;

changes to government mortgage modification programs;

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

foreclosure delays and changes in foreclosure practices;

certain banking regulations that may limit our business activities;

our dependence on the multi-family and commercial real estate sectors for future originations and investments in commercial mortgage loans and other commercial real estate related loans;

changes in macroeconomic and U.S. real estate market conditions;

difficulties inherent in growing loan production volume;

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

purchase opportunities for mortgage servicing rights (“MSRs”) and our success in winning bids;

changes in prevailing interest rates;

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increases in loan delinquencies and defaults;

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

our obligation to indemnify third party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

our obligation to indemnify PMT and certain investment funds if our services fail to meet certain criteria or characteristics or under other circumstances;

decreases in the historical returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

the extensive amount of regulation applicable to our investment management segment;

conflicts of interest in allocating our services and investment opportunities among ourselves and certain advised entities;

the effect of public opinion on our reputation;

our recent growth;

our ability to effectively identify, manage, monitor and mitigate financial risks;

our initiation of new business activities or expansion of existing business activities;

our ability to detect misconduct and fraud; and

our ability to mitigate cybersecurity risks and cyber incidents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31,		December 31,
	2015		2014
	(in thousands, except share data)
ASSETS
Cash	$	82,032	$	76,256
Short-term investments at fair value		30,275		21,687
Mortgage loans held for sale at fair value (includes $1,132,568 and $976,772 pledged to secure mortgage loans sold under agreements to repurchase; and $196,716 and $148,133 pledged to secure mortgage loan participation and sale agreement)		1,353,944		1,147,884
Derivative assets		61,064		38,457
Servicing advances, net (includes $20,197 and $18,686 valuation allowance)		242,397		228,630
Carried Interest due from Investment Funds		68,531		67,298
Investment in PennyMac Mortgage Investment Trust at fair value		1,597		1,582
Mortgage servicing rights (includes $361,413 and $325,383 mortgage servicing rights at fair value; $413,582 and $392,254 pledged to secure note payable; and $222,309 and $191,166 subject to excess servicing spread financing)		790,411		730,828
Furniture, fixtures, equipment and building improvements, net		11,118		11,339
Capitalized software, net		559		567
Receivable from Investment Funds		2,488		2,291
Receivable from PennyMac Mortgage Investment Trust		18,719		23,871
Deferred tax asset		42,141		46,038
Loans eligible for repurchase		112,201		72,539
Other		40,524		37,858
Total assets	$	2,858,001	$	2,507,125
LIABILITIES
Mortgage loans sold under agreements to repurchase	$	992,187	$	822,621
Mortgage loan participation and sale agreement		190,762		143,638
Note payable		134,665		146,855
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust		222,309		191,166
Derivative liabilities		10,903		6,513
Accounts payable and accrued expenses		86,945		62,715
Mortgage servicing liabilities at fair value		6,529		6,306
Payable to Investment Funds		32,011		35,908
Payable to PennyMac Mortgage Investment Trust		130,870		123,315
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		71,094		75,024
Liability for loans eligible for repurchase		112,201		72,539
Liability for losses under representations and warranties		14,689		13,259
Total liabilities		2,005,165		1,699,859

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 21,657,017 and 21,577,686 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 54 shares		—		—
Additional paid-in capital		164,656		162,720
Retained earnings		60,270		51,242
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		224,928		213,964
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		627,908		593,302
Total stockholders' equity		852,836		807,266
Total liabilities and stockholders’ equity	$	2,858,001	$	2,507,125

The accompanying notes are an integral part of these financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended March 31,
	2015		2014
	(in thousands, except per share data)
Revenues
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	76,667	$	36,436
Recapture payable to PennyMac Mortgage Investment Trust		(1,289)		(1,898)
		75,378		34,538
Loan origination fees		16,682		6,880
Fulfillment fees from PennyMac Mortgage Investment Trust		12,866		8,902
Net loan servicing fees:
Loan servicing fees
From non-affiliates		50,101		36,100
From PennyMac Mortgage Investment Trust		10,670		14,591
From Investment Funds		968		1,477
Ancillary and other fees		11,185		5,151
		72,924		57,319
Amortization, impairment and change in fair value of mortgage servicing rights:
Related to servicing for non-affiliates		(53,684)		(18,347)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		7,536		4,792
		(46,148)		(13,555)
Net loan servicing fees		26,776		43,764
Management fees:
From PennyMac Mortgage Investment Trust		7,003		8,074
From Investment Funds		1,486		2,035
		8,489		10,109
Carried Interest from Investment Funds		1,233		2,157
Net interest expense:
Interest income		8,933		4,110
Interest expense:
To non-affiliates		8,077		3,524
To PennyMac Mortgage Investment Trust		3,752		2,862
		11,829		6,386
Net interest expense		(2,896)		(2,276)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		107		115
Other		1,679		1,303
Total net revenue		140,314		105,492
Expenses
Compensation		58,144		42,886
Servicing		9,735		3,090
Technology		4,938		2,823
Professional services		2,833		2,199
Loan origination		4,351		1,417
Other		7,075		4,016
Total expenses		87,076		56,431
Income before provision for income taxes		53,238		49,061
Provision for income taxes		6,114		5,523
Net income		47,124		43,538
Less: Net income attributable to noncontrolling interest		38,096		35,566
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	9,028	$	7,972

Earnings per share
Basic	$	0.42	$	0.38
Diluted	$	0.42	$	0.38
Weighted average common shares outstanding
Basic		21,593		20,866
Diluted		76,050		75,952

The accompanying notes are an integral part of these financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	PennyMac Financial Services, Inc. Stockholders										Noncontrolling
											interest in Private
							Additional				National Mortgage
	Number of Shares		Common stock				paid-in		Retained		Acceptance
	Class A	Class B	Class A		Class B		capital		earnings		Company, LLC		Total equity
	(in thousands)
Balance at December 31, 2013	20,813	—	$	2	$	—	$	153,000	$	14,400	$	461,802	$	629,204
Net income	—	—		—		—		—		7,972		35,566		43,538
Stock and unit-based compensation	—	—		—		—		555		—		1,793		2,348
Distributions	—	—		—		—		—		—		(6)		(6)
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	66	—		—		—		563		—		(563)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—	—		—		—		(6)		—		—		(6)
Balance at March 31, 2014	20,879	—	$	2	$	—	$	154,112	$	22,372	$	498,592	$	675,078

Balance at December 31, 2014	21,578	—		2		—		162,720		51,242		593,302		807,266
Net income	—	—		—		—		—		9,028		38,096		47,124
Stock and unit-based compensation	31	—		—		—		1,124		—		2,824		3,948
Distributions	—	—		—		—		—		—		(5,522)		(5,522)
Issuance of common stock in settlement of directors' fees	4	—		—		—		74		—		—		74
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	44	—		—		—		792		—		(792)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—	—		—		—		(54)		—		—		(54)
Balance at March 31, 2015	21,657	—	$	2	$	—	$	164,656	$	60,270	$	627,908	$	852,836

The accompanying notes are an integral part of these financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31,
	2015		2014
	(in thousands)
Cash flow from operating activities
Net income	$	47,124	$	43,538
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(75,378)		(34,538)
Accrual of servicing rebate to Investment Funds		104		152
Amortization, impairment and change in fair value of mortgage servicing rights		46,148		13,555
Carried Interest from Investment Funds		(1,233)		(2,157)
Accrual of interest on excess servicing spread financing		3,752		2,862
Amortization of debt issuance costs and commitment fees relating to financing facilities		1,708		1,213
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(15)		(71)
Stock and unit-based compensation expense		3,948		2,473
Provision for servicing advance losses		1,510		—
Depreciation and amortization		394		286
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(4,989,838)		(3,130,530)
Originations of mortgage loans held for sale, net		(904,213)		(317,915)
Purchase of mortgage loans from Ginnie Mae securities for modification and subsequent sale		(84,488)		(26,827)
Capitalization of interest on mortgage loans held for sale at fair value		(1,154)		—
Sale and principal payments of mortgage loans held for sale		5,763,272		3,292,398
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		8,405		—
Repurchase of loans subject to representations and warranties		(1,294)		(1,970)
Increase in servicing advances		(15,277)		(17,067)
Increase in receivable from Investment Funds		(301)		(299)
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust		5,878		(1,493)
Decrease in deferred tax asset		4,212		5,520
Decrease in payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(4,299)		—
Increase in other assets		(5,315)		(6,664)
Increase in accounts payable and accrued expenses		24,307		3,263
(Decrease) increase in payable to Investment Funds		(3,897)		169
Increase in payable to PennyMac Mortgage Investment Trust		7,446		3,747
Net cash used in operating activities		(168,494)		(170,355)
Cash flow from investing activities
(Increase) decrease in short-term investments		(8,588)		101,625
Purchase of mortgage servicing rights		(63,137)		(25,866)
Settlements of derivative financial instruments used for hedging		15,404		—
Purchase of furniture, fixtures, equipment and building improvements		(660)		(2,084)
Acquisition of capitalized software		(77)		(35)
Increase in margin deposits and restricted cash		(1,328)		(2,462)
Net cash provided by (used in) investing activities		(58,386)		71,178
Cash flow from financing activities
Sale of loans under agreements to repurchase		5,431,114		3,161,215
Repurchase of loans sold under agreements to repurchase		(5,261,548)		(3,065,070)
Issuance of mortgage loan participation certificates		3,387,582		—
Repayment of mortgage loan participation certificates		(3,340,458)		—
Repayment of note payable		(12,190)		(3,335)
Issuance of excess servicing spread financing		46,412		20,526
Repayment of excess servicing spread financing		(12,731)		(7,413)
Distributions to Private National Mortgage Acceptance Company, LLC partners		(5,522)		(6)
Decrease in leases payable		(3)		(3)
Net cash provided by financing activities		232,656		105,914
Net increase in cash		5,776		6,737
Cash at beginning of period		76,256		30,639
Cash at end of period	$	82,032	$	37,376

The accompanying notes are an integral part of these financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac and operates and controls all of the businesses and affairs of PennyMac subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production (including correspondent production and consumer direct lending) and mortgage loan servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

Presently, PCM has management agreements with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust, PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., (the “Master Fund”), both registered under the Investment Company Act of 1940, as amended, an affiliate of these funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, “Investment Funds”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates or the Advised Entities, originates new prime credit quality residential mortgage loans, and engages in other mortgage banking activities for its own account and the account of PMT.

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively the “Agencies”.

PNMAC Opportunity Fund Associates, LLC (“PMOFA”)—a Delaware limited liability company and the general partner of the Master Fund. PMOFA is entitled to incentive fees representing allocations of profits (“Carried Interest”) from the Master Fund.

The accompanying consolidated financial statements have been prepared in compliance with generally accepted accounting principles (“GAAP”) in the United States as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“Codification”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015. Intercompany accounts and transactions have been eliminated.

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Preparation of financial statements in compliance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

Note 2—Concentration of Risk

A substantial portion of the Company’s activities relate to the Advised Entities. Fees charged to these entities (generally comprised of management fees, loan servicing fees, Carried Interest and fulfillment fees) totaled 26% and 35% of total net revenues for the quarters ended March 31, 2015 and 2014, respectively.

Note 3—Transactions with Affiliates

Transactions with PMT

Following is a summary of mortgage lending and sourcing activity between the Company and PMT:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Fulfillment fee revenue	$	12,866	$	8,902
Unpaid principal balance of loans fulfilled for PennyMac Mortgage Investment Trust	$	2,890,132	$	1,919,578

Sourcing fees paid	$	1,421	$	892
Unpaid principal balance of loans purchased from PennyMac Mortgage Investment Trust	$	4,735,374	$	2,974,077
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust	$	8,405	$	—
Mortgage servicing rights recapture recognized	$	—	$	8

Following is a summary of mortgage loan servicing fees earned from PMT:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Loan servicing fees relating to PennyMac Mortgage Investment Trust:
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	26	$	17
Activity-based		31		26
		57		43
Mortgage loans at fair value:
Base and supplemental		4,032		4,966
Activity-based		2,894		6,386
		6,926		11,352
Mortgage servicing rights:
Base and supplemental		3,656		3,148
Activity-based		31		48
		3,687		3,196
	$	10,670	$	14,591

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Following is a summary of the management fees earned from PMT:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Management fees:
Base	$	5,730	$	5,521
Performance incentive		1,273		2,553
	$	7,003	$	8,074

In the event of termination by PMT, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period before termination.

Following is a summary of financing activity between the Company and PMT:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Issuance of excess servicing spread	$	46,412	$	20,526
Repayment of excess servicing spread	$	(12,731)	$	(7,413)
Change in fair value of excess servicing spread	$	(7,536)	$	(4,792)
Interest expense from excess servicing spread	$	3,752	$	2,862
Excess servicing spread recapture recognized	$	1,289	$	1,890

Other Transactions

In connection with the initial public offering (“IPO”) of PMT’s common shares on August 4, 2009, the Company entered into an agreement with PMT pursuant to which PMT agreed to reimburse PennyMac for the $2.9 million payment that it made to the underwriters in such offering (the “Conditional Reimbursement”) if PMT satisfied certain performance measures over a specified period of time. Effective February 1, 2013, the parties amended the terms of the reimbursement agreement to provide for the reimbursement to the Company of the Conditional Reimbursement if PMT is required to pay the Company performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12 month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The Company received payments from PMT totaling $157,000 and $36,000 during the quarters ended March 31, 2015 and 2014, respectively.

In the event the termination fee is payable to the Company under the management agreement and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

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PMT reimburses the Company for other expenses, including common overhead expenses incurred on its behalf by the Company, in accordance with the terms of its management agreement. Such amounts are summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	2,729	$	2,578
Expenses incurred on PMT's behalf		379		445
	$	3,108	$	3,023
Payments and settlements during the period (1)	$	22,752	$	18,386

(1) Payments and settlements include payments for management fees and correspondent production activities

itemized in the preceding tables and netting settlements made pursuant to master netting agreements between

the Company and PMT.

Amounts due from PMT are summarized below:


	March 31,		December 31,
	2015		2014
	(in thousands)
Management fees	$	7,003	$	8,426
Allocated expenses		6,434		6,581
Servicing fees		3,432		3,385
Underwriting fees		980		1,137
Fulfillment fees		870		506
Unsettled excess servicing spread issuance		—		3,836
	$	18,719	$	23,871

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest as of March 31, 2015 and December 31, 2014. The common shares of beneficial interest had fair values of $1.6 million as of both March 31, 2015 and December 31, 2014.

Of the $130.9 million payable to PMT as of March 31, 2015, $125.1 million represents deposits made by PMT to fund servicing advances made by the Company, $5.3 million represents other expenses, including unsettled excess servicing spread (“ESS”) financing activity, and $503,000 represents MSR recapture payable to PMT.

Of the $123.3 million payable to PMT as of December 31, 2014, $116.7 million represents deposits made by PMT to fund servicing advances made by the Company, $6.2 million represents other expenses, including unsettled ESS financing activity, and $460,000 represents MSR recapture payable to PMT.

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Investment Funds

Amounts due from the Investment Funds are summarized below:


	March 31,		December 31,
	2015		2014
	(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	41,643	$	40,771
PNMAC Mortgage Opportunity Fund Investors, LLC		26,888		26,527
	$	68,531	$	67,298
Receivable from Investment Funds:
Management fees	$	1,488	$	1,596
Loan servicing fees		459		476
Expense reimbursements		345		30
Loan servicing rebate		196		189
	$	2,488	$	2,291

Amounts due to the Investment Funds totaling $32.0 million and $35.9 million represent amounts advanced by the Investment Funds to fund servicing advances made by the Company as of March 31, 2015 and December 31, 2014, respectively.

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company entered into a tax receivable agreement with PennyMac’s existing unitholders on the date of the IPO that will provide for the payment by PFSI to PennyMac’s exchanged unitholders an amount equal to 85% of the amount of the benefits, if any, that PFSI is deemed to realize as a result of (i) increases in tax basis resulting from such unitholders’ exchanges and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Based on the PennyMac unitholder exchanges to date, the Company has recorded a $71.1 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2015. During the quarter ended March 31, 2015, the Company made payments under the agreement totaling $4.3 million.

Note 4—Earnings Per Share of Common Stock

Basic earnings per share of common stock is determined using net income attributable to the Company’s common stockholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is determined by dividing net income attributable to the Company’s common stockholders by the weighted average number of shares of common stock outstanding, assuming all potentially dilutive shares of common stock were issued.

The Company applies the treasury stock method to determine the dilutive weighted average shares of common stock represented by the unvested stock-based compensation awards and the exchangeable PennyMac Class A units. The diluted earnings per share calculation assumes the exchange of these PennyMac Class A units for shares of common stock. Accordingly, earnings attributable to the Company’s common stockholders is also adjusted to include the earnings allocated to the PennyMac Class A units after taking into account the income taxes applicable to the shares of common stock assumed to be exchanged.

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The following table summarizes the basic and diluted earnings per share calculations:


	Quarter ended March 31,
	2015		2014
	(in thousands, except per share data)
Basic earnings per share of common stock:
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	9,028	$	7,972
Weighted average shares of common stock outstanding		21,593		20,866
Basic earnings per share of common stock	$	0.42	$	0.38

Diluted earnings per share of common stock:
Net income	$	9,028	$	7,972
Effect of net income attributable to noncontrolling interest, net of income taxes		22,762		21,010
Diluted net income attributable to common stockholders	$	31,790	$	28,982
Weighted average shares of common stock outstanding		21,593		20,866
Dilutive shares:
PennyMac Class A units exchangeable to common stock		53,562		55,051
Non-vested PennyMac Class A units issuable under unit-based stock compensation plan and exchangeable to common stock		779		—
Shares issuable under stock-based compensation plans		116		35
Diluted weighted average shares of common stock outstanding		76,050		75,952
Diluted earnings per share of common stock	$	0.42	$	0.38

Note 5—Loan Sales and Servicing Activities

The Company originates or purchases and sells mortgage loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the mortgage loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the mortgage loans.

The following table summarizes cash flows between the Company and transferees as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement with the mortgage loans as well as aggregate unpaid principal balance information at period end with respect to all such mortgage loans previously sold:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Cash flows:
Sales proceeds	$	5,765,845	$	3,298,915
Servicing fees received	$	58,969	$	22,184
Net servicing advances	$	1,902	$	(608)
Period end information:
Unpaid principal balance of mortgage loans outstanding at end of period	$	39,624,553	$	26,289,208
Delinquencies:
30-89 days	$	756,211	$	362,131
90 days or more or in foreclosure or bankruptcy	$	871,250	$	176,608

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The Company’s mortgage servicing portfolio in unpaid principal balance (“UPB”) is summarized as follows:


	March 31, 2015
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities	$	72,407,441	$	—	$	72,407,441
Affiliated entities		—		41,542,426		41,542,426
Mortgage loans held for sale		1,288,744		—		1,288,744
	$	73,696,185	$	41,542,426	$	115,238,611
Amount subserviced for the Company (1)	$	4,771,144	$	29,786	$	4,800,930
Delinquent mortgage loans:
30 days	$	1,272,111	$	296,631	$	1,568,742
60 days		391,777		134,358		526,135
90 days or more
Not in foreclosure		806,491		970,183		1,776,674
In foreclosure		519,756		1,655,088		2,174,844
Foreclosed		30,294		547,863		578,157
	$	3,020,429	$	3,604,123	$	6,624,552
Custodial funds managed by the Company (2)