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 September 30, 2016

☐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.)


3043 Townsgate Road, Westlake Village, California		91361
(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 November 7, 2016
Class A Common Stock, $0.0001 par value		22,309,354
Class B Common Stock, $0.0001 par value		49

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2016

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.		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	61
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	86

PART II. OTHER INFORMATION		87

Item 1.	Legal Proceedings	87
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 3.	Defaults Upon Senior Securities	87
Item 4.	Mine Safety Disclosures	87
Item 5.	Other Information	87
Item 6.	Exhibits	88

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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, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2016.

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)


	September 30,		December 31,
	2016		2015
	(in thousands, except share amounts)

ASSETS
Cash (includes $84,851 and $93,757 pledged to creditors)	$	94,727	$	105,472
Short-term investments at fair value		58,749		46,319
Mortgage loans held for sale at fair value (includes $3,094,617 and $1,079,489 pledged to creditors)		3,127,377		1,101,204
Derivative assets		135,777		50,280
Servicing advances, net (includes valuation allowance of $38,031 and $33,458)		306,150		299,354
Carried Interest due from Investment Funds pledged to creditors		70,870		69,926
Investment in PennyMac Mortgage Investment Trust at fair value		1,169		1,145
Mortgage servicing rights (includes $492,028 and $660,247 at fair value; $1,333,078 and $803,560 pledged to creditors)		1,337,674		1,411,935
Real estate acquired in settlement of loans		1,996		—
Furniture, fixtures, equipment and building improvements, net (includes $22,281 and $14,034 pledged to creditors)		29,121		16,311
Capitalized software, net (includes $444 and $783 pledged to creditors)		8,361		3,025
Note receivable from PennyMac Mortgage Investment Trust		150,000		150,000
Receivable from PennyMac Mortgage Investment Trust		14,747		18,965
Receivable from Investment Funds		1,596		1,316
Deferred tax asset		—		18,378
Mortgage loans eligible for repurchase		197,819		166,070
Other		60,061		45,594
Total assets	$	5,596,194	$	3,505,294
LIABILITIES
Assets sold under agreements to repurchase	$	2,491,366	$	1,166,731
Mortgage loan participation and sale agreement		782,913		234,872
Notes payable		110,619		61,136
Obligations under capital lease		20,700		13,579
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		280,367		412,425
Derivative liabilities		4,426		9,083
Accounts payable and accrued expenses		106,684		89,915
Mortgage servicing liabilities at fair value		13,045		1,399
Payable to Investment Funds		27,265		30,429
Payable to PennyMac Mortgage Investment Trust		165,264		162,379
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		75,434		74,315
Income taxes payable		11,415		—
Liability for mortgage loans eligible for repurchase		197,819		166,070
Liability for losses under representations and warranties		18,473		20,611
Total liabilities		4,305,790		2,442,944

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,274,145 and 21,990,831 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49 and 51 shares, respectively		—		—
Additional paid-in capital		179,134		172,354
Retained earnings		141,805		98,470
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		320,941		270,826
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		969,463		791,524
Total stockholders' equity		1,290,404		1,062,350
Total liabilities and stockholders’ equity	$	5,596,194	$	3,505,294

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
	(in thousands, except earnings per share)

Revenue
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	183,811	$	85,744	$	409,405	$	247,822
Recapture payable to PennyMac Mortgage Investment Trust		(1,690)		(3,098)		(5,557)		(5,843)
		182,121		82,646		403,848		241,979
Mortgage loan origination fees		34,621		29,448		85,962		70,551
Fulfillment fees from PennyMac Mortgage Investment Trust		27,255		17,553		59,301		45,752
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates		98,865		83,424		282,962		200,392
From PennyMac Mortgage Investment Trust		11,039		11,736		38,919		34,542
From Investment Funds		770		796		2,194		1,917
Ancillary and other fees		11,913		10,096		34,183		33,131
		122,587		106,052		358,258		269,982
Amortization, impairment and change in fair value of mortgage servicing rights		(80,830)		(59,065)		(309,304)		(128,073)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		4,107		10,271		40,984		10,674
		(76,723)		(48,794)		(268,320)		(117,399)
Net mortgage loan servicing fees		45,864		57,258		89,938		152,583
Management fees:
From PennyMac Mortgage Investment Trust		5,025		5,742		15,576		18,524
From Investment Funds		496		714		1,587		3,384
		5,521		6,456		17,163		21,908
Carried Interest from Investment Funds		107		1,483		944		2,898
Net interest expense:
Interest income:
From non-affiliates		20,735		13,764		50,994		35,348
From PennyMac Mortgage Investment Trust		1,974		1,289		5,798		1,822
		22,709		15,053		56,792		37,170
Interest expense:
To non-affiliates		22,689		12,918		56,414		31,526
To PennyMac Mortgage Investment Trust		4,827		8,026		17,555		17,596
		27,516		20,944		73,969		49,122
Net interest expense		(4,807)		(5,891)		(17,177)		(11,952)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(13)		(158)		130		(295)
Result of real estate acquired in settlement of loans		42		—		—		—
Other		684		410		2,493		2,446
Total net revenue		291,395		189,205		642,602		525,870
Expenses
Compensation		96,132		74,129		247,577		202,695
Servicing		22,177		16,770		56,494		55,108
Technology		9,733		6,676		24,313		18,104
Loan origination		6,471		4,314		15,567		12,813
Professional services		4,631		3,803		12,923		10,710
Other		12,973		9,590		32,053		24,480
Total expenses		152,117		115,282		388,927		323,910
Income before provision for income taxes		139,278		73,923		253,675		201,960
Provision for income taxes		16,976		8,575		30,535		23,308
Net income		122,302		65,348		223,140		178,652
Less: Net income attributable to noncontrolling interest		98,617		52,668		179,805		144,195
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	23,685	$	12,680	$	43,335	$	34,457

Earnings per share
Basic	$	1.07	$	0.58	$	1.96	$	1.59
Diluted	$	1.06	$	0.58	$	1.95	$	1.58
Weighted average common shares outstanding
Basic		22,217		21,810		22,101		21,702
Diluted		76,355		76,138		76,331		76,098

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Class A Common Stock							Noncontrolling
								interest in Private
				Additional				National Mortgage		Total
	Number of	Par		paid-in		Retained		Acceptance		stockholders'
	shares	value		capital		earnings		Company, LLC		equity
	(in thousands)

Balance at December 31, 2014	21,578	$	2	$	162,720	$	51,242	$	593,302	$	807,266
Net income	—		—		—		34,457		144,195		178,652
Stock and unit-based compensation	75		—		3,746		—		9,358		13,104
Distributions	—		—		—		—		(9,627)		(9,627)
Issuance of common stock in settlement of directors' fees	13		—		223		—		—		223
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	177		—		2,919		—		(2,919)		—
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.	—		—		(311)		—		—		(311)
Balance at September 30, 2015	21,843	$	2	$	169,297	$	85,699	$	734,309	$	989,307

Balance at December 31, 2015	21,991	$	2	$	172,354	$	98,470	$	791,524	$	1,062,350
Net income	—		—		—		43,335		179,805		223,140
Stock and unit-based compensation	99		—		3,341		—		8,914		12,255
Distributions	—		—		—		—		(6,742)		(6,742)
Issuance of common stock in settlement of directors' fees	18		—		230		—		—		230
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	166		—		4,038		—		(4,038)		—
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.	—		—		(829)		—		—		(829)
Balance at September 30, 2016	22,274	$	2	$	179,134	$	141,805	$	969,463	$	1,290,404

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2016		2015
	(in thousands)

Cash flow from operating activities
Net income	$	223,140	$	178,652
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(403,848)		(241,979)
Accrual of servicing rebate payable to Investment Funds		209		1,193
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread		268,320		117,399
Carried Interest from Investment Funds		(944)		(2,898)
Capitalization of interest on mortgage loans held for sale at fair value		(20,451)		(11,703)
Accrual of interest on excess servicing spread financing		17,555		17,596
Amortization of debt issuance costs and commitment fees relating to financing facilities		7,944		5,688
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(24)		422
Stock and unit-based compensation expense		12,255		13,104
Provision for servicing advance losses		19,799		23,538
Depreciation and amortization		3,965		1,585
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(29,144,685)		(24,864,698)
Originations of mortgage loans held for sale		(4,428,426)		(3,106,147)
Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(1,588,711)		(989,009)
Sale and principal payments of mortgage loans held for sale		33,124,241		28,346,871
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		13,146		13,708
Repurchase of mortgage loans subject to representations and warranties		(13,525)		(17,112)
Increase in servicing advances		(28,591)		(47,080)
Increase in receivable from Investment Funds		(489)		(444)
Decrease in receivable from PennyMac Mortgage Investment Trust		5,491		8,889
Decrease in deferred tax asset		18,668		21,399
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		—		(4,299)
Increase in other assets		(24,325)		(23,113)
Increase in accounts payable and accrued expenses		12,992		22,280
Decrease in payable to Investment Funds		(3,164)		(5,697)
Increase in payable to PennyMac Mortgage Investment Trust		1,971		22,698
Increase in income taxes payable		11,415		—
Net cash used in operating activities		(1,916,072)		(519,157)
Cash flow from investing activities
Increase in short-term investments		(12,430)		(3,079)
Advance on note receivable from PennyMac Mortgage Investment Trust		—		(168,546)
Repayment of note receivable from PennyMac Mortgage Investment Trust		—		18,546
Purchase of mortgage servicing rights		(23)		(379,264)
Net settlement of derivative financial instruments used for hedging		173,696		(3,678)
Purchase of furniture, fixtures, equipment and leasehold improvements		(17,539)		(5,716)
Acquisition of capitalized software		(5,572)		(1,745)
(Increase) decrease in margin deposits and restricted cash		(39,467)		5,331
Net cash provided by (used in) investing activities		98,665		(538,151)
Cash flow from financing activities
Sale of assets under agreements to repurchase		31,708,423		25,947,385
Repurchase of assets sold under agreements to repurchase		(30,384,066)		(25,482,890)
Issuance of mortgage loan participation certificates		21,895,964		13,265,896
Repayment of mortgage loan participation certificates		(21,347,920)		(13,162,123)
Advances on notes payable		97,000		289,556
Repayment of notes payable		(48,661)		(29,411)
Issuance of excess servicing spread financing		—		271,452
Repayment of excess servicing spread financing		(54,623)		(55,800)
Repurchase of excess servicing spread financing		(59,045)		—
Advances of obligations under capital lease		12,651		—
Repayment of obligation under capital lease		(5,530)		(6)
Payment of debt issuance costs		(6,525)		(5,965)
Assumption of mortgage servicing liability		5,736		—
Distribution to Private National Mortgage Acceptance Company, LLC members		(6,742)		(9,627)
Net cash provided by financing activities		1,806,662		1,028,467
Net decrease in cash		(10,745)		(28,841)
Cash at beginning of period		105,472		76,256
Cash at end of period	$	94,727	$	47,415

The accompanying notes are an integral part of these consolidated 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 mortgage loan servicing activities are conducted on behalf of entities 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, 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 registered funds, PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”) and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). 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 residential mortgage loans on behalf of non-affiliates and the Advised Entities, purchases and 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 (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each 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 accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 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, 2015.

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

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indicative of income to be anticipated for the full year ending December 31, 2016. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management to make estimates and judgments 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 (generally comprised of fulfillment fees, mortgage loan servicing fees, management fees, Carried Interest and servicing recapture fees) and interest charged to these entities totaled 15% and 20% of total net revenue for the quarters ended September 30, 2016 and 2015, respectively, and 22% and 18% for the nine months ended September 30, 2016 and 2015, respectively.

Note 3—Transactions with Affiliates

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities

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


	Quarter ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
	(in thousands)

Mortgage servicing rights and excess servicing spread recapture incurred	$	1,690	$	3,098	$	5,557	$	5,843
Fulfillment fee revenue	$	27,255	$	17,553	$	59,301	$	45,752
Unpaid principal balance of mortgage loans fulfilled for PMT	$	7,263,557	$	4,073,201	$	15,696,940	$	10,542,411

Sourcing fees paid to PMT	$	3,509	$	3,236	$	8,282	$	7,084
Unpaid principal balance of mortgage loans purchased from PMT	$	11,694,065	$	10,783,882	$	27,599,186	$	23,602,020

Proceeds from sale of mortgage loans held for sale to PMT	$	5,007	$	1,047	$	13,146	$	11,875
Tax service fees received from PMT	$	2,006	$	1,291	$	4,537	$	3,293
Early purchase program fees earned from PMT	$	5	$	—	$	7	$	—

Table of Contents

Mortgage Loan Servicing Activities

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


	Quarter ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	90	$	130	$	225	$	198
Activity-based		210		153		497		243
		300		283		722		441
Mortgage loans at fair value:
Base and supplemental		2,615		3,930		8,881		12,145
Activity-based		3,014		2,961		14,981		8,948
		5,629		6,891		23,862		21,093
Mortgage servicing rights: