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 June 30, 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 August 5, 2015
Class A Common Stock, $0.0001 par value		21,792,701
Class B Common Stock, $0.0001 par value		52

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

June 30, 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	53
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75
Item 4.	Controls and Procedures	75

PART II. OTHER INFORMATION		76

Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	78

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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 mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

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)


	June 30,		December 31,
	2015		2014
	(in thousands, except share data)
ASSETS
Cash	$	74,728	$	76,256
Short-term investments at fair value		23,577		21,687
Mortgage loans held for sale at fair value (includes $1,369,324 and $976,772 pledged to secure mortgage loans sold under agreements to repurchase; and $202,076 and $148,133 pledged to secure mortgage loan participation and sale agreement)		1,594,262		1,147,884
Derivative assets		43,568		38,457
Servicing advances, net (includes $21,589 and $18,686 valuation allowance)		244,806		228,630
Carried Interest due from Investment Funds		68,713		67,298
Investment in PennyMac Mortgage Investment Trust at fair value		1,307		1,582
Mortgage servicing rights (includes $581,269 and $325,383 at fair value; $536,172 and $392,254 pledged to secure note payable; and $359,102 and $191,166 subject to excess servicing spread financing)		1,135,510		730,828
Furniture, fixtures, equipment and building improvements, net		11,773		11,339
Capitalized software, net		1,250		567
Note receivable from PennyMac Mortgage Investment Trust—secured		52,526		—
Receivable from PennyMac Mortgage Investment Trust		16,245		23,871
Receivable from Investment Funds		2,148		2,291
Deferred tax asset		34,165		46,038
Loans eligible for repurchase		77,529		72,539
Other		48,498		37,419
Total assets	$	3,430,605	$	2,506,686
LIABILITIES
Mortgage loans sold under agreements to repurchase	$	1,263,248	$	822,182
Mortgage loan participation and sale agreement		195,959		143,638
Note payable		246,456		146,855
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust		359,102		191,166
Derivative liabilities		13,584		6,513
Accounts payable and accrued expenses		84,357		62,715
Mortgage servicing liabilities at fair value		11,791		6,306
Payable to Investment Funds		31,255		35,908
Payable to PennyMac Mortgage Investment Trust		139,699		123,315
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		71,895		75,024
Liability for loans eligible for repurchase		77,529		72,539
Liability for losses under representations and warranties		16,257		13,259
Total liabilities		2,511,132		1,699,420

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 21,790,666 and 21,577,686 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 52 and 54 shares, respectively		—		—
Additional paid-in capital		167,536		162,720
Retained earnings		73,019		51,242
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		240,557		213,964
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		678,916		593,302
Total stockholders' equity		919,473		807,266
Total liabilities and stockholders’ equity	$	3,430,605	$	2,506,686

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 June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands, except earnings per share)
Revenues
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	85,411	$	42,230	$	162,078	$	78,666
Recapture payable to PennyMac Mortgage Investment Trust		(1,456)		(2,526)		(2,745)		(4,424)
		83,955		39,704		159,333		74,242
Loan origination fees		24,421		10,345		41,103		17,225
Fulfillment fees from PennyMac Mortgage Investment Trust		15,333		12,433		28,199		21,335
Net loan servicing fees:
Loan servicing fees
From non-affiliates		66,867		43,314		116,968		79,414
From PennyMac Mortgage Investment Trust		12,136		14,180		22,806		28,771
From Investment Funds		153		4,161		1,121		5,638
Ancillary and other fees		11,850		4,838		23,035		9,989
		91,006		66,493		163,930		123,812
Amortization, impairment and change in fair value of mortgage servicing rights		(15,324)		(19,586)		(69,008)		(37,933)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		(7,133)		10,062		403		14,854
		(22,457)		(9,524)		(68,605)		(23,079)
Net loan servicing fees		68,549		56,969		95,325		100,733
Management fees:
From PennyMac Mortgage Investment Trust		5,779		8,912		12,782		16,986
From Investment Funds		1,184		2,086		2,670		4,121
		6,963		10,998		15,452		21,107
Carried Interest from Investment Funds		182		1,834		1,415		3,991
Net interest expense:
Interest income:
To non-affiliates		12,651		6,252		21,584		10,362
To PennyMac Mortgage Investment Trust		533		—		533		—
		13,184		6,252		22,117		10,362
Interest expense:
To non-affiliates		10,531		5,593		18,608		9,117
To PennyMac Mortgage Investment Trust		5,818		3,139		9,570		6,001
		16,349		8,732		28,178		15,118
Net interest expense		(3,165)		(2,480)		(6,061)		(4,756)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(244)		(103)		(137)		12
Other		357		735		2,036		2,038
Total net revenue		196,351		130,435		336,665		235,927
Expenses
Compensation		70,422		46,971		128,566		89,857
Servicing		28,603		11,694		38,338		14,784
Technology		6,490		3,741		11,428		6,564
Loan origination		4,148		1,998		8,499		3,415
Professional services		4,074		2,661		6,907		4,860
Other		7,815		5,323		14,890		9,339
Total expenses		121,552		72,388		208,628		128,819
Income before provision for income taxes		74,799		58,047		128,037		107,108
Provision for income taxes		8,619		6,630		14,733		12,153
Net income		66,180		51,417		113,304		94,955
Less: Net income attributable to noncontrolling interest		53,431		41,799		91,527		77,365
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	12,749	$	9,618	$	21,777	$	17,590

Earnings per share
Basic	$	0.59	$	0.45	$	1.01	$	0.84
Diluted	$	0.59	$	0.45	$	1.01	$	0.83
Weighted average common shares outstanding
Basic		21,700		21,142		21,647		21,005
Diluted		76,105		75,915		76,063		75,895

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		Total
	Number of shares		Common stock				paid-in		Retained		Acceptance		stockholders'
	Class A	Class B	Class A		Class B		capital		earnings		Company, LLC		equity
	(in thousands)
Balance at December 31, 2013	20,813	—	$	2	$	—	$	153,000	$	14,400	$	461,802	$	629,204
Net income	—	—		—		—		—		17,590		77,365		94,955
Stock and unit-based compensation	32	—		—		—		1,596		—		3,886		5,482
Distributions	—	—		—		—		—		—		(7,731)		(7,731)
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.	479	—		—		—		4,598		—		(4,598)		—
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.	—	—		—		—		(291)		—		—		(291)
Balance at June 30, 2014	21,328	—	$	2	$	—	$	158,977	$	31,990	$	530,724	$	721,693

Balance at December 31, 2014	21,578	—	$	2	$	—	$	162,720	$	51,242	$	593,302	$	807,266
Net income	—	—		—		—		—		21,777		91,527		113,304
Stock and unit-based compensation	72	—		—		—		2,452		—		6,146		8,598
Distributions	—	—		—		—		—		—		(9,627)		(9,627)
Issuance of common stock in settlement of directors' fees	8	—		—		—		149		—		—		149
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	133	—		—		—		2,432		—		(2,432)		—
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.	—	—		—		—		(217)		—		—		(217)
Balance at June 30, 2015	21,791	—	$	2	$	—	$	167,536	$	73,019	$	678,916	$	919,473

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)


	Six months ended June 30,
	2015		2014
	(in thousands)
Cash flow from operating activities
Net income	$	113,304	$	94,955
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(159,333)		(74,242)
Accrual of servicing rebate to Investment Funds		1,114		563
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread		68,605		23,079
Carried Interest from Investment Funds		(1,415)		(3,991)
Accrual of interest on excess servicing spread financing		9,570		6,001
Amortization of debt issuance costs and commitment fees relating to financing facilities		3,631		2,646
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		275		76
Stock and unit-based compensation expense		8,598		5,482
Provision for servicing advance losses		16,013		—
Depreciation and amortization		911		612
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(13,523,345)		(7,085,859)
Originations of mortgage loans held for sale		(2,052,648)		(728,040)
Purchase of mortgage loans from Ginnie Mae securities for modification and subsequent sale		(531,842)		(679,882)
Capitalization of interest on mortgage loans held for sale at fair value		(4,745)		—
Sale and principal payments of mortgage loans held for sale		15,619,191		8,022,045
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		10,828		—
Repurchase of mortgage loans by PennyMac Mortgage Investment Trust		8,777		—
Repurchase of mortgage loans subject to representations and warranties		(11,567)		(1,784)
Increase in servicing advances		(32,189)		(30,254)
Increase in receivable from Investment Funds		(971)		(2,302)
Decrease in receivable from PennyMac Mortgage Investment Trust		9,175		343
Decrease in deferred tax asset		12,826		10,721
Decrease in payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(4,299)		—
Increase in other assets		(14,282)		(27,005)
Increase in accounts payable and accrued expenses		20,941		24,040
Decrease in payable to Investment Funds		(4,653)		(2,008)
Increase in payable to PennyMac Mortgage Investment Trust		16,120		13,360
Net cash used in operating activities		(421,410)		(431,444)
Cash flow from investing activities
(Increase) decrease in short-term investments		(1,890)		96,191
Advance on note receivable from PennyMac Mortgage Investment Trust—secured		(71,072)		—
Repayment of note receivable from PennyMac Mortgage Investment Trust—secured		18,546		—
Purchase of mortgage servicing rights		(270,133)		(97,644)
Sale of mortgage servicing rights		—		10,881
Settlement of derivative financial instruments used for hedging		(8,293)		7,023
Purchase of furniture, fixtures, equipment and building improvements		(2,277)		(3,054)
Acquisition of capitalized software		(860)		(52)
Decrease (increase) in margin deposits and restricted cash		19,932		(7,733)
Net cash (used in) provided by investing activities		(316,047)		5,612
Cash flow from financing activities
Sale of loans under agreements to repurchase		14,379,136		7,453,139
Repurchase of loans sold under agreements to repurchase		(13,937,711)		(7,099,464)
Issuance of mortgage loan participation certificates		7,937,026		—
Repayment of mortgage loan participation certificates		(7,884,705)		—
Borrowing on note payable		129,012		63,160
Repayment of note payable		(29,411)		—
Issuance of excess servicing spread financing		187,287		73,393
Repayment of excess servicing spread financing		(31,083)		(16,494)
Repayment of leases payable		(5)		—
Payment of debt issuance costs		(3,990)		—
Distribution to Private National Mortgage Acceptance Company, LLC partners		(9,627)		(7,731)
Net cash provided by financing activities		735,929		466,003
Net (decrease) increase in cash		(1,528)		40,171
Cash at beginning of period		76,256		30,639
Cash at end of period	$	74,728	$	70,810

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., 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 Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development and a lender/servicer with the Veterans Administration and U.S. Department of Agriculture. We refer to each of Fannie Mae, Freddie Mac and Ginnie Mae as an “Agency” and collectively the “Agencies.”

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

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards 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.

Reclassification of previously presented balances

In April of 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.

ASU 2015-03 specifies that its adoption be made on a retrospective basis. Accordingly, the Company has reclassified its debt issuance costs from Other assets as previously presented to Mortgage loans sold under agreements to repurchase to conform its December 31, 2014 balance sheet to the current presentation. The adoption of ASU 2015-03 did not result in changes to the Company’s previously presented consolidated statements of income or consolidated statements of cash flows.

Following is a summary of the balance sheet reclassifications:


	December 31, 2014
	As reported		As previously reported		Reclassification
	(in thousands)
Assets:
Other	$	37,419	$	37,858	$	(439)
Total assets	$	2,506,686	$	2,507,125	$	(439)
Liabilities:
Mortgage loans sold under agreements to repurchase	$	822,182	$	822,621	$	(439)
Total liabilities	$	1,699,420	$	1,699,859	$	(439)
Total liabilities and stockholders' equity	$	2,506,686	$	2,507,125	$	(439)

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 fulfillment fees, loan servicing fees, management fees and Carried Interest) totaled 10% and 37% of total net revenues for the quarters ended June 30, 2015 and 2014, respectively, and 17% and 36% for the six months ended June 30, 2015 and 2014, respectively.

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Note 3—Transactions with Affiliates

Transactions with PMT

Correspondent Production

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Fulfillment fee revenue	$	15,333	$	12,433	$	28,199	$	21,335
Unpaid principal balance of loans fulfilled for PennyMac Mortgage Investment Trust	$	3,579,078	$	2,991,764	$	6,469,210	$	4,911,342

Sourcing fees paid	$	2,427	$	1,125	$	3,848	$	2,017
Unpaid principal balance of loans purchased from PennyMac Mortgage Investment Trust	$	8,082,764	$	3,748,874	$	12,818,138	$	6,722,951

Proceeds from sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust	$	2,423	$	1,985	$	10,828	$	1,985
Tax service fee receivable from PennyMac Mortgage Investment Trust	$	1,113	$	684	$	2,002	$	1,050
Mortgage servicing rights recapture recognized	$	—	$	1	$	—	$	9

Mortgage Loan Servicing

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Loan servicing fees relating to PennyMac Mortgage Investment Trust:
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	42	$	29	$	68	$	46
Activity-based		59		51		90		77
		101		80		158		123
Mortgage loans at fair value:
Base and supplemental		4,183		4,975		8,215		9,941
Activity-based		3,093		5,746		5,987		12,132
		7,276		10,721		14,202		22,073
Mortgage servicing rights:
Base and supplemental		4,654		3,323		8,310		6,471
Activity-based		105		56		136		104
		4,759		3,379		8,446		6,575
	$	12,136	$	14,180	$	22,806	$	28,771

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Management Fees

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Management fees:
Base	$	5,709	$	5,838	$	11,439	$	11,359
Performance incentive		70		3,074		1,343		5,627
	$	5,779	$	8,912	$	12,782	$	16,986

In the event of termination of the management agreement 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.

Investing and Financing Activities

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


	Quarter ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
	(in thousands)
Issuance of excess servicing spread	$	140,875	$	52,867	$	187,287	$	73,393
Repayment of excess servicing spread