Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

Or

 

o          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)

 

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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  x No  o

 

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  x No  o

 

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 o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company o
(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 o No x

 

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 12, 2014
Class A Common Stock, $0.0001 par value		21,513,727
Class B Common Stock, $0.0001 par value		57

 

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

June 30, 2014

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements (Unaudited):	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Changes in Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	68
PART II. OTHER INFORMATION		69
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	70
Item 6.	Exhibits	71

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		June 30, 2014			December 31, 2013
		(in thousands, except share data)
ASSETS
Cash		$	70,810		$	30,639
Short-term investments at fair value		46,391			142,582
Mortgage loans held for sale at fair value (includes $997,506 and $512,350 pledged to secure mortgage loans sold under agreements to repurchase)		1,000,415			531,004
Servicing advances (includes $5,564 pledged to secure note payable at December 31, 2013)		179,169			154,328
Derivative assets		34,302			21,540
Carried Interest due from Investment Funds		65,133			61,142
Investment in PennyMac Mortgage Investment Trust at fair value		1,646			1,722
Mortgage servicing rights (includes $308,599 and $224,913 mortgage servicing rights at fair value; $303,831 and $258,241 pledged to secure note payable; and $190,244 and $138,723 pledged to secure excess servicing spread financing)		621,681			483,664
Receivable from Investment Funds		4,654			2,915
Receivable from PennyMac Mortgage Investment Trust		19,636			18,636
Furniture, fixtures, equipment and building improvements, net		11,452			9,837
Capitalized software, net		654			764
Deferred tax asset		55,754			63,117
Loans eligible for repurchase		31,496			46,663
Other		39,001			15,922
Total assets		$	2,182,194		$	1,584,475
LIABILITIES
Mortgage loans sold under agreements to repurchase		$	825,267		$	471,592
Note payable		115,314			52,154
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust		190,244			138,723
Derivative liabilities		6,711			2,462
Mortgage servicing liabilities		5,821			—
Accounts payable and accrued expenses		70,353			46,387
Payable to Investment Funds		34,929			36,937
Payable to PennyMac Mortgage Investment Trust		95,483			81,174
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		74,705			71,056
Liability for loans eligible for repurchase		31,496			46,663
Liability for losses under representations and warranties		10,178			8,123
Total liabilities		1,460,501			955,271
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 21,328,115 and 20,812,777 shares, respectively		$	2		$	2
Class B common stock—authorized 1,000 shares of $0.0001 par value; 58 shares issued and outstanding		—			—
Additional paid-in capital		158,977			153,000
Retained earnings		31,990			14,400
Total stockholders’ equity attributable to PennyMac Financial Services, Inc. common stockholders		190,969			167,402
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		530,724			461,802
Total stockholders’ equity		721,693			629,204
Total liabilities and stockholders’ equity		$	2,182,194		$	1,584,475

 

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,
		2014			2013			2014			2013
		(in thousands, except per share data)
Revenue
Net gains on mortgage loans held for sale at fair value		$	39,704		$	42,654		$	74,242		$	82,611
Loan origination fees		10,345			6,312			17,225			11,980
Fulfillment fees from PennyMac Mortgage Investment Trust		12,433			22,054			21,335			50,298
Net loan servicing fees:
Loan servicing fees
From non-affiliates		43,314			11,744			79,414			20,801
From PennyMac Mortgage Investment Trust		14,180			8,787			28,771			16,513
From Investment Funds		4,161			2,066			5,638			4,074
Ancillary and other fees		4,838			2,662			9,989			4,923
		66,493			25,259			123,812			46,311
Amortization, impairment and change in estimated fair value of mortgage servicing rights		(9,524		)	(3,190		)	(23,079		)	(8,200		)
Net loan servicing fees		56,969			22,069			100,733			38,111
Management fees:
From PennyMac Mortgage Investment Trust		8,912			8,455			16,986			14,947
From Investment Funds		2,086			1,974			4,121			3,888
		10,998			10,429			21,107			18,835
Carried Interest from Investment Funds		1,834			2,862			3,991			7,599
Net interest (expense) income:
Interest income		6,252			4,474			10,362			6,217
Interest expense		8,732			4,200			15,118			7,530
		(2,480		)	274			(4,756		)	(1,313		)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(103		)	(320		)	12			(233		)
Other		735			243			2,038			1,057
Total net revenue		130,435			106,577			235,927			208,945
Expenses
Compensation		46,971			42,339			89,857			78,020
Loan origination		1,998			2,516			3,415			5,023
Servicing		11,694			1,609			14,784			3,141
Technology		3,741			2,030			6,564			3,616
Professional services		2,661			2,783			4,860			5,070
Other		5,323			5,071			9,339			8,553
Total expenses		72,388			56,348			128,819			103,423
Income before provision for income taxes		58,047			50,229			107,108			105,522
Provision for income taxes		6,630			2,038			12,153			2,038
Net income		51,417			48,191			94,955			103,484
Less: Net income attributable to noncontrolling interest		41,799			45,398			77,365			100,691
Net income attributable to PennyMac Financial Services, Inc. common stockholders		$	9,618		$	2,793		$	17,590		$	2,793
Earnings per share
Basic		$	0.45		$	0.22		$	0.84		$	0.22
Diluted		$	0.45		$	0.22		$	0.83		$	0.22
Weighted-average common shares outstanding
Basic		21,142			12,778			21,005			12,778
Diluted		75,915			77,163			75,895			77,163

 

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
		Members’			Number of Shares				Common stock						Additional			Retained			Private National Mortgage
		equity			Class A		Class B		Class A			Class B			paid-in capital			earnings			Acceptance Company, LLC			Total equity
		(in thousands)
Balance at December 31, 2012		$	261,750		—		—		$	—		$	—		$	—		$	—		$	—		$	261,750
Capital:
Distributions		(19,623		)	—		—		—			—			—			—			—			(19,623		)
Unit-based compensation expense		238			—		—		—			—			—			—			—			238
Partner capital issuance costs		(3,745		)	—		—		—			—			—			—			—			(3,745		)
Net income		76,834																						76,834
Exchange of existing partner units to Class A units of Private National Mortgage Acceptance Company, LLC		(315,454		)	—		—		—			—			—			—			315,454			—
Balance post-reorganization		—			—		—		—			—			—			—			315,454			315,454
Issuance of common shares in initial public offering, net of issuance costs		—			12,778		—		1			—			229,999			—			—			230,000
Underwriting and offering costs		—			—		—		—			—			(13,225		)	—			—			(13,225		)
Initial recognition of noncontrolling interest		—			—		—		—			—			(127,160		)	—			127,160			—
Stock and unit-based compensation		—			—		—		—			—			545			—			115			660
Distributions		—			—		—		—			—			—			—			(3,395		)	(3,395		)
Net income		—			—		—		—			—			—			2,793			23,857			26,650
Balance at June 30, 2013		—			12,778		—		1			—			90,159			2,793			463,191			556,144
Balance at December 31, 2013		$	—		20,813		—		$	2		$	—		$	153,000		$	14,400		$	461,802		$	629,204
Stock and unit-based compensation		—			32		—		—			—			1,596			—			3,886			5,482
Issuance of common stock in settlement of directors’ fees		—			4		—		—			—			74			—			—			74
Distributions		—			—		—		—			—			—			—			(7,731		)	(7,731		)
Net income		—			—		—		—			—			—			17,590			77,365			94,955
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A 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 stock of PennyMac Financial Services, Inc.		—			—		—		—			—			(291		)	—			—			(291		)
Balance at June 30, 2014		$	—		21,328		—		$	2		—			$	158,977		$	31,990		$	530,724		$	721,693

 

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,
		2014			2013
		(in thousands)
Cash flow from operating activities
Net income		$	94,955		$	103,484
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(74,242		)	(82,611		)
Accrual of servicing rebate to Investment Funds		563			173
Amortization, impairment and change in fair value of mortgage servicing rights		23,079			8,200
Carried Interest from Investment Funds		(3,991		)	(7,599		)
Accrual of interest on excess servicing spread financing		6,001			—
Amortization of debt issuance costs and commitment fees relating to financing facilities		2,646			2,346
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		76			318
Stock and unit-based compensation expense		5,482			898
Depreciation and amortization		612			317
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(7,085,859		)	(8,282,163		)
Purchase of mortgage loans from Ginnie Mae securities for modification and subsequent sale		(679,882		)	—
Originations of mortgage loans held for sale, net		(728,040		)	(612,966		)
Sale and principal payments of mortgage loans held for sale		8,022,045			8,695,704
Repurchase of loans subject to representations and warranties		(1,784		)	—
Repurchase of real estate acquired in settlement of loans subject to representations and warranties		—			(309		)
Increase in servicing advances		(30,254		)	(1,638		)
(Increase) decrease in receivable from Investment Funds		(2,302		)	512
Decrease in receivable from PennyMac Mortgage Investment Trust		343			999
Increase in other assets		(27,005		)	(5,310		)
Decrease in deferred tax asset		10,721			—
Increase in accounts payable and accrued expenses		24,040			15,987
Increase in income taxes payable		—			2,031
Decrease in payable to Investment Funds		(2,008		)	(467		)
Increase in payable to PennyMac Mortgage Investment Trust		13,360			5,450
Net cash used in operating activities		(431,444		)	(156,644		)
Cash flow from investing activities
Decrease (increase) in short-term investments		96,191			(102,984		)
Purchase of mortgage servicing rights		(97,644		)	(4,009		)
Sale of mortgage servicing rights		10,881			—
Settlements of derivative financial instruments used for hedging		7,023			—
Purchase of furniture, fixtures, equipment and building improvements		(3,054		)	(3,735		)
Acquisition of capitalized software		(52		)	(342		)
(Increase) decrease in margin deposits and restricted cash		(7,733		)	2,759
Net cash provided by (used in) investing activities		5,612			(108,311		)
Cash flow from financing activities
Sale of loans under agreements to repurchase		7,453,139			8,127,574
Repurchase of loans sold under agreements to repurchase		(7,099,464		)	(8,020,681		)
Increase (decrease) in note payable		63,160			(5,804		)
Issuance of excess servicing spread financing		73,393			—
Repayment of excess servicing spread financing		(16,494		)	—
Issuance of common stock		—			230,000
Payment of common stock underwriting and offering costs		—			(13,225		)
Payment by noncontrolling interest of common stock issuance costs		—			(3,745		)
Distributions to Private National Mortgage Acceptance Company, LLC partners		(7,731		)	(23,019		)
Net cash provided by financing activities		466,003			291,100
Net increase in cash		40,171			26,145
Cash at beginning of year		30,639			12,323
Cash at end of year		$	70,810		$	38,468

 

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, through PennyMac and its subsidiaries, continues to conduct the business previously conducted by these 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 loan production (including correspondent production and consumer-direct lending) and 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, and three investment funds: 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; 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 (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) (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 .

 

Initial Public Offering and Recapitalization

 

On May 14, 2013, PFSI completed an initial public offering (“IPO”) in which it sold approximately 12.8 million shares of its Class A common stock, at a public offering price of $18.00 per share. PFSI received net proceeds of $216.8 million, after deducting underwriting discounts and commissions, from sales of its shares in the IPO. PFSI used these net proceeds to purchase approximately 12.8 million Class A units of PennyMac. PFSI operates and controls all of the business and affairs and consolidates the financial results of PennyMac and its subsidiaries.

 

The purchase of 12.8 million Class A units of PennyMac has been accounted for as a transfer of interests under common control. Accordingly, the accompanying consolidated financial statements reflect a reclassification of members’ equity to noncontrolling interests in the Company of $315.5 million. This amount represents the carrying value in the Company of the existing owners of PennyMac on the date of the IPO.

 

Before the IPO, PennyMac completed a reorganization by amending its limited liability company agreement to convert all classes of ownership interests held by its existing owners to a single class of common units. The conversion of existing interests was based on the various interests’ liquidation priorities as specified in PennyMac’s prior limited liability company agreement. In connection with that reorganization, PFSI became the sole managing member of PennyMac.

 

After the completion of the recapitalization and reorganization transactions, PennyMac became a consolidated subsidiary of the Company. Accordingly, PennyMac’s consolidated financial statements are the Company’s historical financial statements. The historical consolidated financial statements of PennyMac are reflected herein based on the historical ownership interests of the then-existing PennyMac unitholders.

 

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Tax Receivable Agreement

 

As part of the IPO, PFSI entered into an Exchange Agreement with PennyMac’s existing unitholders whereby the existing unitholders may exchange their PennyMac units for PFSI stock. PennyMac has made an election pursuant to Section 754 of the Internal Revenue Code which remains in effect. As a result of this election an exchange under the Exchange Agreement results in a special adjustment for PFSI that may increase PFSI’s tax basis of certain assets of PennyMac that otherwise would not have been available. These increases in tax basis may reduce the amount of income tax that PFSI would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent a portion of the increased tax basis is allocated to those assets.

 

As part of the IPO, PFSI entered into a tax receivable agreement with PennyMac’s existing unitholders that will provide for the payment by PFSI to PennyMac 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 the exchanges noted above and (ii) certain other tax benefits related to PFSI entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement .

 

The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless PFSI exercises its right to terminate the tax receivable agreement. In the event of termination of the tax receivable agreement, the Company would be required to make an immediate payment equal to the present value of the anticipated future net tax benefits, which upfront payment may be made years in advance of the actual realization of such future benefits.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s 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 U.S. 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, 2013. Intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, 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, 2014.

 

Reclassification of previously presented balances

 

Certain prior period amounts have been reclassified to conform to the current presentation. Specifically:

 

·                   Interest expense is included in Interest income as a new caption of Net interest (expense) income to better reflect results of the Company’s portfolio of interest-earning assets. Previously,  Interest expense was included within Total expenses. The reclassification results in the presentation of Net interest (expense) income .

 

Following is a summary of the reclassifications:

 

		Quarter ended June 30, 2013									Six months ended June 30, 2013
		As reported			As previously reported			Reclassification			As reported			As previously reported			Reclassification
		(in thousands)
Net interest (expense) income :
Interest income		$	4,474		$	4,474		$	—		$	6,217		$	6,217		$	—
Interest expense		4,200			—			4,200			7,530			—			7,530
		$	274		$	4,474		$	(4,200	)	$	(1,313	)	$	6,217		$	(7,530	)

 

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 net of loan servicing rebates, Carried Interest and fulfillment fees) totaled 33% and 43% of total net revenues for the quarters ended June 30, 2014 and 2013, respectively, and 34% and 47% for the six months ended June 30, 2014 and 2013, respectively.

 

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Note 3—Transactions with Affiliates

 

Transactions with PMT

 

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

 

		Quarter ended June 30,						Six months end June 30,
		2014			2013			2014			2013
		(in thousands)
Management fees:
Base		$	5,838		$	4,575		$	11,359		$	8,940
Performance incentive		3,074			3,880			5,627			6,007
		$	8,912		$	8,455		$	16,986		$	14,947

 

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 mortgage loan servicing fees earned from PMT:

 

		Quarter ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
		(in thousands)
Loan servicing fees relating to:
Mortgage loans acquired for sale at fair value:
Base and supplemental		$	29		$	90		$	46		$	169
Activity-based		51			111			77			183
		80			201			123			352
Distressed mortgage loans:
Base and supplemental		4,975			3,699			9,941			7,572
Activity-based		5,746			2,447			12,132			4,324
		10,721			6,146			22,073			11,896
MSRs:
Base and supplemental		3,323			2,363			6,471			4,126
Activity-based		56			77			104			139
		3,379			2,440			6,575			4,265
		$	14,180		$	8,787		$	28,771		$	16,513

 

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

 

		Quarter ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
		(in thousands)
Fulfillment fee revenue		$	12,433		$	22,054		$	21,335		$	50,298
Unpaid principal balance of loans fulfilled for PennyMac Mortgage Investment Trust		$	2,991,764		$	4,323,885		$	4,911,342		$	9,110,711
Sourcing fees paid		$	1,125		$	1,349		$	2,017		$	2,359
Fair value of loans purchased from PennyMac Mortgage Investment Trust		$	3,955,329		$	4,733,767		$	7,085,859		$	8,282,163

 

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Table of Contents

 

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

 

		Quarter ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
		(in thousands)
Issuance of excess servicing spread		$	52,867		$	—		$	73,393		$	—
Interest expense from excess servicing spread		$	3,139		$	—		$	6,001		$	—
Excess servicing spread recapture recognized		$	2,525		$	—		$	4,415		$	—
MSR recapture recognized		$	1		$	367		$	9		$	499

 

Other Transactions

 

In connection with the 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 the Company 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 $36,000 during the six months ended June 30, 2014.

 

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.

 

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 June 30,						Six months ended June 30,
		2014			2013			2014			2013
		(in thousands)
Reimbursement of common overhead incurred by PCM and its affiliates		$	2,691		$	3,201		$	5,269		$	5,807
Reimbursement of expenses incurred on PMT’s behalf		104			585			549			1,834
		$	2,795		$	3,786		$	5,818		$	7,641
Payments and settlements during the year (1)		$	22,968		$	32,616		$	41,354		$	65,290

 

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(1)          Payments and settlements include payments for management fees and correspondent lending 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:

 

		June 30, 2014			December 31, 2013
		(in thousands)
Management fees		$	8,912		$	8,924
Servicing fees		5,208			5,915
Allocated expenses		3,764			2,009
Underwriting fees		1,752			1,788
		$	19,636		$	18,636

 

The Company also holds an investment in PMT in the form of 75,000 common shares of beneficial interest as of June 30, 2014 and December 31, 2013. The shares had fair values of $1.6 million and $1.7 million as of June 30, 2014 and December 31, 2013, respectively.

 

Amounts due to PMT totaling $91.3 million and $75.2 million represents deposits made by PMT to fund servicing advances made by the Company on PMT’s behalf as of June 30, 2014 and December 31, 2013, respectively.

 

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