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~~March 31, 2015

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)

~~Delaware~~
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
Large accelerated filer ☐		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		Outstanding at May 7, 2015
Class A Common Stock, $0.0001 par value		~~21,513,727~~21,657,405
Class B Common Stock, $0.0001 par value		5753

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

~~June 30, 2014~~March 31, 2015

TABLE OF CONTENTS

		~~Page~~
~~PART I. FINANCIAL INFORMATION~~		2Page
	Special Note Regarding Forward-Looking Statements	3

~~Item 1.~~PART I. FINANCIAL INFORMATION		~~Financial Statements (Unaudited):~~	2 5
	~~Consolidated Balance Sheets~~	2
Item 1.	Financial Statements (Unaudited):	5
	Consolidated ~~Statements of Income~~Balance Sheets	3 5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	4 7
	Consolidated Statements of Cash Flows	5 8
	Notes to Consolidated Financial Statements	6 9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46 44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68 65
Item 4.	Controls and Procedures	68 65

PART II. OTHER INFORMATION		69 66

Item 1.	Legal Proceedings	69 66
Item 1A.	Risk Factors	69 66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69 66
Item 3.	Defaults Upon Senior Securities	69 66
Item 4.	Mine Safety Disclosures	69 66
Item 5.	Other Information	70 66
Item 6.	Exhibits	71 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~~INFORMATION

Item 1. Financial ~~Statements~~Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE ~~SHEETS~~SHEETS (UNAUDITED)


					March 31,		December 31,
	June 30, 2014		December 31, 2013		2015		2014
	(in thousands, except share data)				(in thousands, except share data)
ASSETS
Cash	$	70,810	$	30,639	$	82,032	$	76,256
Short-term investments at fair value	46,391		142,582			30,275		21,687
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
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	34,302		21,540			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	65,133		61,142			68,531		67,298
Investment in PennyMac Mortgage Investment Trust at fair value	1,646		1,722			1,597		1,582
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
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	4,654		2,915			2,488		2,291
Receivable from PennyMac Mortgage Investment Trust	19,636		18,636			18,719		23,871
Furniture, fixtures, equipment and building improvements, net	11,452		9,837
Capitalized software, net	654		764
Deferred tax asset	55,754		63,117			42,141		46,038
Loans eligible for repurchase	31,496		46,663			112,201		72,539
Other	39,001		15,922			40,524		37,858
Total assets	$	2,182,194	$	1,584,475	$	2,858,001	$	2,507,125
LIABILITIES
Mortgage loans sold under agreements to repurchase	$	825,267	$	471,592	$	992,187	$	822,621
Mortgage loan participation and sale agreement						190,762		143,638
Note payable	115,314		52,154			134,665		146,855
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	190,244		138,723			222,309		191,166
Derivative liabilities	6,711		2,462			10,903		6,513
Mortgage servicing liabilities	5,821		—
Accounts payable and accrued expenses	70,353		46,387			86,945		62,715
Mortgage servicing liabilities at fair value						6,529		6,306
Payable to Investment Funds	34,929		36,937			32,011		35,908
Payable to PennyMac Mortgage Investment Trust	95,483		81,174			130,870		123,315
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement	74,705		71,056			71,094		75,024
Liability for loans eligible for repurchase	31,496		46,663			112,201		72,539
Liability for losses under representations and warranties	10,178		8,123			14,689		13,259
Total liabilities	1,460,501		955,271			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, 21,328,115 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	—		—
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	158,977		153,000			164,656		162,720
Retained earnings	31,990		14,400			60,270		51,242
Total stockholders’ equity attributable to PennyMac Financial Services, Inc. common stockholders	190,969		167,402
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders						224,928		213,964
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC	530,724		461,802			627,908		593,302
Total stockholders’ equity	721,693		629,204
Total stockholders' equity						852,836		807,266
Total liabilities and stockholders’ equity	$	2,182,194	$	1,584,475	$	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~~INCOME (UNAUDITED)

	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013			Quarter ended March 31,
	(in thousands, except per share data)												2015		2014
Revenue
Net gains on mortgage loans held for sale at fair value	$	39,704		$	42,654		$	74,242		$	82,611
													(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	10,345			6,312			17,225			11,980				16,682		6,880
Fulfillment fees from PennyMac Mortgage Investment Trust	12,433			22,054			21,335			50,298				12,866		8,902
Net loan servicing fees:
Loan servicing fees
From non-affiliates	43,314			11,744			79,414			20,801				50,101		36,100
From PennyMac Mortgage Investment Trust	14,180			8,787			28,771			16,513				10,670		14,591
From Investment Funds	4,161			2,066			5,638			4,074				968		1,477
Ancillary and other fees	4,838			2,662			9,989			4,923				11,185		5,151
	66,493			25,259			123,812			46,311				72,924		57,319
Amortization, impairment and change in estimated fair value of mortgage servicing rights	(9,524		)	(3,190		)	(23,079		)	(8,200		)
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	56,969			22,069			100,733			38,111				26,776		43,764
Management fees:
From PennyMac Mortgage Investment Trust	8,912			8,455			16,986			14,947				7,003		8,074
From Investment Funds	2,086			1,974			4,121			3,888				1,486		2,035
	10,998			10,429			21,107			18,835				8,489		10,109
Carried Interest from Investment Funds	1,834			2,862			3,991			7,599				1,233		2,157
Net interest (expense) income:
Net interest expense:
Interest income	6,252			4,474			10,362			6,217				8,933		4,110
Interest expense	8,732			4,200			15,118			7,530
Interest expense:
To non-affiliates														8,077		3,524
To PennyMac Mortgage Investment Trust														3,752		2,862
	(2,480		)	274			(4,756		)	(1,313		)		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	(103		)	(320		)	12			(233		)		107		115
Other	735			243			2,038			1,057				1,679		1,303
Total net revenue	130,435			106,577			235,927			208,945				140,314		105,492
Expenses
Compensation	46,971			42,339			89,857			78,020				58,144		42,886
Loan origination	1,998			2,516			3,415			5,023
Servicing	11,694			1,609			14,784			3,141				9,735		3,090
Technology	3,741			2,030			6,564			3,616				4,938		2,823
Professional services	2,661			2,783			4,860			5,070				2,833		2,199
Loan origination														4,351		1,417
Other	5,323			5,071			9,339			8,553				7,075		4,016
Total expenses	72,388			56,348			128,819			103,423				87,076		56,431
Income before provision for income taxes	58,047			50,229			107,108			105,522				53,238		49,061
Provision for income taxes	6,630			2,038			12,153			2,038				6,114		5,523
Net income	51,417			48,191			94,955			103,484				47,124		43,538
Less: Net income attributable to noncontrolling interest	41,799			45,398			77,365			100,691				38,096		35,566
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	9,618		$	2,793		$	17,590		$	2,793		$	9,028	$	7,972

Earnings per share
Basic	$	0.45		$	0.22		$	0.84		$	0.22		$	0.42	$	0.38
Diluted	$	0.45		$	0.22		$	0.83		$	0.22		$	0.42	$	0.38
Weighted-average common shares outstanding
Weighted average common shares outstanding
Basic	21,142			12,778			21,005			12,778				21,593		20,866
Diluted	75,915			77,163			75,895			77,163				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~~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


	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~~FLOWS (UNAUDITED)


	Six months ended June 30,						Quarter ended March 31,
	2014			2013			2015		2014
	(in thousands)						(in thousands)
Cash flow from operating activities
Net income	$	94,955		$	103,484		$	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	(74,242		)	(82,611		)		(75,378)		(34,538)
Accrual of servicing rebate to Investment Funds	563			173				104		152
Amortization, impairment and change in fair value of mortgage servicing rights	23,079			8,200				46,148		13,555
Carried Interest from Investment Funds	(3,991		)	(7,599		)		(1,233)		(2,157)
Accrual of interest on excess servicing spread financing	6,001			—				3,752		2,862
Amortization of debt issuance costs and commitment fees relating to financing facilities	2,646			2,346				1,708		1,213
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust	76			318				(15)		(71)
Stock and unit-based compensation expense	5,482			898				3,948		2,473
Provision for servicing advance losses								1,510		—
Depreciation and amortization	612			317				394		286
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust	(7,085,859		)	(8,282,163		)		(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	(679,882		)	—				(84,488)		(26,827)
Originations of mortgage loans held for sale, net	(728,040		)	(612,966		)
Capitalization of interest on mortgage loans held for sale at fair value								(1,154)		—
Sale and principal payments of mortgage loans held for sale	8,022,045			8,695,704				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	(1,784		)	—				(1,294)		(1,970)
Repurchase of real estate acquired in settlement of loans subject to representations and warranties	—			(309		)
Increase in servicing advances	(30,254		)	(1,638		)		(15,277)		(17,067)
(Increase) decrease in receivable from Investment Funds	(2,302		)	512
Decrease in receivable from PennyMac Mortgage Investment Trust	343			999
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	(27,005		)	(5,310		)		(5,315)		(6,664)
Decrease in deferred tax asset	10,721			—
Increase in accounts payable and accrued expenses	24,040			15,987				24,307		3,263
Increase in income taxes payable	—			2,031
Decrease in payable to Investment Funds	(2,008		)	(467		)
(Decrease) increase in payable to Investment Funds								(3,897)		169
Increase in payable to PennyMac Mortgage Investment Trust	13,360			5,450				7,446		3,747
Net cash used in operating activities	(431,444		)	(156,644		)		(168,494)		(170,355)

Cash flow from investing activities
Decrease (increase) in short-term investments	96,191			(102,984		)
(Increase) decrease in short-term investments								(8,588)		101,625
Purchase of mortgage servicing rights	(97,644		)	(4,009		)		(63,137)		(25,866)
Sale of mortgage servicing rights	10,881			—
Settlements of derivative financial instruments used for hedging	7,023			—				15,404		—
Purchase of furniture, fixtures, equipment and building improvements	(3,054		)	(3,735		)		(660)		(2,084)
Acquisition of capitalized software	(52		)	(342		)		(77)		(35)
(Increase) decrease in margin deposits and restricted cash	(7,733		)	2,759
Increase in margin deposits and restricted cash								(1,328)		(2,462)
Net cash provided by (used in) investing activities	5,612			(108,311		)		(58,386)		71,178

Cash flow from financing activities
Sale of loans under agreements to repurchase	7,453,139			8,127,574				5,431,114		3,161,215
Repurchase of loans sold under agreements to repurchase	(7,099,464		)	(8,020,681		)		(5,261,548)		(3,065,070)
Increase (decrease) in note payable	63,160			(5,804		)
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	73,393			—				46,412		20,526
Repayment of excess servicing spread financing	(16,494		)	—				(12,731)		(7,413)
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		)		(5,522)		(6)
Decrease in leases payable								(3)		(3)
Net cash provided by financing activities	466,003			291,100				232,656		105,914
Net increase in cash	40,171			26,145				5,776		6,737
Cash at beginning of year	30,639			12,323
Cash at end of year	$	70,810		$	38,468
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~~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~~consolidates the financial results of 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 mortgage loan production (including correspondent production and ~~consumer-direct~~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.

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;~~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.

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”) ~~(each~~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.

~~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.

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.

~~Table of Contents~~

~~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 generally accepted accounting principles ~~generally accepted~~(“GAAP”) in the United States ~~(“U.S. GAAP”)~~ 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 ~~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.~~2014.

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

~~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%~~26% and ~~43%~~35% of total net revenues for the quarters ended ~~June 30,~~March 31, 2015 and 2014, ~~and 2013, respectively, and 34% and 47% for the six months ended June 30, 2014 and 2013,~~ respectively.

~~Table of Contents~~

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 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


	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~~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

~~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


	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 ~~IPO~~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 ~~the Company~~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 ~~six months~~quarters ended ~~June 30, 2014.~~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 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


	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 ~~lending~~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,
	June 30, 2014		December 31, 2013		2015		2014
	(in thousands)				(in thousands)
Management fees	$	8,912	$	8,924	$	7,003	$	8,426
Allocated expenses						6,434		6,581
Servicing fees	5,208		5,915			3,432		3,385
Allocated expenses	3,764		2,009
Underwriting fees	1,752		1,788			980		1,137
Fulfillment fees						870		506
Unsettled excess servicing spread issuance						—		3,836
	$	19,636	$	18,636	$	18,719	$	23,871

The Company ~~also~~ holds an investment in PMT in the form of 75,000 common shares of beneficial interest as of ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014. The common shares of beneficial interest had fair values of $1.6 million ~~and $1.7 million~~ as of ~~June 30, 2014~~both March 31, 2015 and December 31, ~~2013, respectively.~~2014.

~~Amounts due~~Of the $130.9 million payable to PMT ~~totaling $91.3 million and $75.2~~as of March 31, 2015, $125.1 million represents deposits made by PMT to fund servicing advances made by the Company, ~~on PMT’s behalf~~$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 ~~June 30, 2014 and~~ December 31, ~~2013, respectively.~~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,
	June 30, 2014			December 31, 2013		2015		2014
	(in thousands)					(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	40,012		$	37,702	$	41,643	$	40,771
PNMAC Mortgage Opportunity Fund Investors, LLC	25,121			23,440			26,888		26,527
	$	65,133		$	61,142	$	68,531	$	67,298

Receivable from Investment Funds:
Management fees	$	2,077		$	2,031	$	1,488	$	1,596
Loan servicing fees	2,658			727			459		476
Expense reimbursements							345		30
Loan servicing rebate	(111		)	136			196		189
Expense reimbursements	30			21
	$	4,654		$	2,915	$	2,488	$	2,291

Amounts due to the Investment Funds totaling ~~$34.9~~$32.0 million and ~~$36.9~~$35.9 million represent amounts advanced by the Investment Funds to fund servicing advances made by the Company as of ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013,~~2014, respectively.

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

~~As discussed in Note 1,~~ ~~Organization and Basis of Presentation,~~ ~~the~~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 ~~$74.7~~$71.1 million ~~liability and it has not~~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 ~~a payment~~payments under the ~~tax sharing~~ agreement ~~as of June 30, 2014.~~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 June 30,				Six months ended		Quarter ended March 31,
	2014		2013		June 30, 2014		2015		2014
	(in thousands, except per share data)						(in thousands, except per share data)
Basic earnings per share of common stock:
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	9,618	$	2,793	$	17,590	$	9,028	$	7,972
Weighted-average shares of common stock outstanding	21,142		12,778		21,005
Weighted average shares of common stock outstanding								21,593		20,866
Basic earnings per share of common stock	$	0.45	$	0.22	$	0.84	$	0.42	$	0.38

Diluted earnings per share of common stock:
Net income	$	9,618	$	2,793	$	17,590	$	9,028	$	7,972
Effect of net income attributable to noncontrolling interest, net of income taxes	24,743		13,813		45,754			22,762		21,010
Diluted net income attributable to common stockholders	$	34,361	$	16,606	$	63,344	$	31,790	$	28,982
Weighted-average shares of common stock outstanding	21,142		12,778		21,005
Weighted average shares of common stock outstanding								21,593		20,866
Dilutive shares:
PennyMac Class A units exchangeable to common stock	53,509		64,380		53,609			53,562		55,051
Non-vested PennyMac Class A units issuable under unit-based stock compensation plan and exchangeable to common stock	1,216		—		1,247			779		—
Shares issuable under stock-based compensation plans	48		5		34			116		35
Diluted weighted-average shares of common stock outstanding	75,915		77,163		75,895
Diluted weighted average shares of common stock outstanding								76,050		75,952
Diluted earnings per share of common stock	$	0.45	$	0.22	$	0.83	$	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 ~~upon~~as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement with the mortgage loans ~~(primarily the obligation~~as well as aggregate unpaid principal balance information at period end with respect to ~~service the~~all such mortgage loans ~~on behalf of the loans’ owners or owners’ agents):~~previously sold:


	Quarter ended June 30,					Six months ended June 30,						Quarter ended March 31,
	2014			2013		2014			2013			2015		2014
	(in thousands)											(in thousands)
Cash flows:
Sales proceeds	$	4,729,647		$	4,561,998	$	8,022,045		$	8,607,810		$	5,765,845	$	3,298,915
Servicing fees received	$	25,282		$	12,402	$	47,466		$	21,701		$	58,969	$	22,184
Net servicing advance (recoveries) advances	$	(3,730	)	$	78	$	(4,338	)	$	(3,658	)
Net servicing advances												$	1,902	$	(608)
Period end information:
Unpaid principal balance of loans outstanding at end of period	$	29,546,095		$	16,408,013
Unpaid principal balance of mortgage loans outstanding at end of period												$	39,624,553	$	26,289,208
Delinquencies:
30-89 days	$	543,347		$	204,998							$	756,211	$	362,131
90 days or more or in foreclosure or bankruptcy	$	120,560		$	63,049							$	871,250	$	176,608

Table of Contents

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

June 30, 2014

Servicing
rights owned

Contract servicing
and subservicing

Total
loans serviced

(in thousands)

Agencies

$
57,051,424

$
—

$
57,051,424

Affiliated entities

—

35,554,830

35,554,830

Mortgage loans held for sale

959,014

—

959,014

$
58,010,438

$
35,554,830

$
93,565,268

Amount subserviced for the Company

$
5,749,967

$
325,127

$
6,075,094

Delinquent mortgage loans:

30 days

$
4,629,546

$
271,058

$
4,900,604

60 days

1,926,177

121,641

2,047,818

90 days or more

750,546

1,178,449

1,928,995

7,306,269

1,571,148

8,877,417

Loans pending foreclosure

289,936

1,629,700

1,919,636

$
7,596,205

$
3,200,848

$
10,797,053

Custodial funds managed by the Company (1)

$
1,181,638

$
353,913

$
1,535,551

December 31, 2013

Servicing
rights owned

Contract servicing
and subservicing

Total
loans serviced

(in thousands)

Agencies

$
44,969,026

$
—

$
44,969,026

Affiliated entities

—

31,632,718

31,632,718

Private investors

969,794

89,361

1,059,155

Mortgage loans held for sale

506,540

—

506,540

$
46,445,360

$
31,722,079

$
78,167,439

Amount subserviced for the Company

$
156,347

$
582,610

$
738,957

Delinquent mortgage loans:

30 days

$
1,304,054

$
263,518

$
1,567,572

60 days

346,912

112,275

459,187

90 days or more

605,555

1,416,498

2,022,053

2,256,521

1,792,291

4,048,812

Loans pending foreclosure

168,776

1,792,128

1,960,904

$
2,425,297

$
3,584,419

$
6,009,716

Custodial funds managed by the Company (1)

$
568,161

$
246,587

$
814,748


	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)	$	2,179,665	$	587,846	$	2,767,511

(1)

Certain of the mortgage loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers. Mortgage loans are subserviced for the Company on a transitional basis for loans where the Company has obtained the rights to service the loans but servicing of the loans has not yet transferred to the Company’s servicing system.

(2)

Borrower and investor custodial cash accounts relate to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interest on custodial funds it manages on behalf of the mortgage loans investors, which is recorded as part of the interest income in the Company’s consolidated statements of income.

~~(1)~~Borrower and investor custodial cash accounts relate to loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interest on custodial funds it manages on behalf of the loans’ investors, which is recorded as part of the interest income in the Company’s consolidated statements of income.


	December 31, 2014
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities	$	65,169,194	$	—	$	65,169,194
Affiliated entities		—		39,709,945		39,709,945
Mortgage loans held for sale		1,100,910		—		1,100,910
	$	66,270,104	$	39,709,945	$	105,980,049
Amount subserviced for the Company	$	—	$	330,768	$	330,768
Delinquent mortgage loans:
30 days	$	1,372,915	$	302,091	$	1,675,006
60 days		434,428		135,777		570,205
90 days or more
Not in foreclosure		779,129		1,057,973		1,837,102
In foreclosure		422,330		1,544,762		1,967,092
Foreclosed		32,444		533,067		565,511
	$	3,041,246		3,573,670	$	6,614,916
Custodial funds managed by the Company (1)	$	1,522,295	$	388,498	$	1,910,793

(1)

Table of Contents

Following is a summary of the geographical distribution of loans included in the Company’s servicing portfolio for the top five and all other states as measured by ~~the total unpaid principal balance (“UPB”):~~UPB:


					March 31,		December 31,
State	June 30, 2014		December 31, 2013		2015		2014
	(in thousands)				(in thousands)
California	$	32,301,976	$	30,320,616	$	34,192,278	$	33,751,630
Texas	5,598,942		4,470,123			7,880,148		6,954,778
Virginia	5,141,366		3,769,683			6,795,903		6,360,171
Florida	4,500,059		3,416,274			6,315,648		5,573,215
Washington	3,422,660		2,760,900			*		3,830,587
Maryland						4,193,669		*
All other states	42,600,265		33,429,843			55,860,965		49,509,668
	$	93,565,268	$	78,167,439	$	115,238,611	$	105,980,049

~~Certain~~* State did not represent a top five state as of the loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers. Loans are subserviced for the Company on a transitional basis for loans where the Company has obtained the rights to service the loans but servicing of the loans has not yet transferred to the Company’s servicing system.respective date.

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk for the interest rate lock commitments (“IRLCs”) it makes to purchase or originate mortgage loans at specified interest rates, its inventory of mortgage loans held for sale and ~~mortgage servicing rights (“MSRs”).~~MSRs. The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.

Following are summaries of derivative assets and related netting amounts.

Offsetting of Derivative Assets


																	March 31, 2015						December 31, 2014
																	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
																	amount of		offset		of assets		amount of		offset		of assets
	June 30, 2014								December 31, 2013								recognized		in the		in the		recognized		in the		in the
	Gross amount of recognized assets		Gross amount offset in the balance sheet			Net amount of assets in the balance sheet			Gross amount of recognized assets		Gross amount offset in the balance sheet			Net amount of assets in the balance sheet			assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)																(in thousands)
Derivatives subject to master netting arrangements:																						��
Forward purchase contracts																	$	33,048	$	—	$	33,048	$	9,060	$	—	$	9,060
Forward sale contracts																		909		—		909		320		—		320
MBS put options	$	188	$	—		$	188		$	665	$	—		$	665			449		—		449		476		—		476
MBS call options	438		—			438			91		—			91				—		—		—		—		—		—
Forward purchase contracts	13,601		—			13,601			416		—			416
Forward sale contracts	636		—			636			18,762		—			18,762
Put options on Eurodollar futures	256		—			256			—		—			—
Call options on Eurodollar futures	254		—			254			—		—			—
Put options on interest rate futures purchase contracts																		894		—		894		862		—		862
Call options on interest rate futures purchase contracts																		4,011		—		4,011		2,193		—		2,193
Netting	—		(12,230		)	(12,230		)	—		(7,358		)	(7,358		)		—		(33,595)		(33,595)		—		(7,807)		(7,807)
	15,373		(12,230		)	3,143			19,934		(7,358		)	12,576				39,311		(33,595)		5,716		12,911		(7,807)		5,104
Derivatives not subject to master netting arrangements - IRLCs	31,159		—			31,159			8,964		—			8,964				55,348		—		55,348		33,353		—		33,353
	$	46,532	$	(12,230	)	$	34,302		$	28,898	$	(7,358	)	$	21,540		$	94,659	$	(33,595)	$	61,064	$	46,264	$	(7,807)	$	38,457

Table of Contents

Derivative Assets, Financial Assets, and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.

June 30, 2014

December 31, 2013

Net amount

Gross amount not
offset in the
consolidated
balance sheet

Net amount

Gross amount not offset in
the
consolidated
balance sheet

of assets
in the balance
sheet

Financial
instruments

Cash
collateral
received

Net
amount

of assets
in the balance
sheet

Financial
instruments

Cash
collateral
received

Net
amount

(in thousands)

Interest rate lock commitments

$
31,159

$

—

$
—

$
31,159

$
8,964

$
—

$

—

$

8,964

Jefferies & Co.

520

—

—

520

627

—

—

627

RJ O’Brien

510

—

—

510

—

—

—

—

RBS Securities

497

—

—

497

—

—

—

—

Royal Bank of Canada

335

—

—

335

—

—

—

—

Citibank, N.A.

318

—

—

318

28

—

—

28

Deutsche Bank

301

—

—

301

50

—

—

50

Nomura

293

—

—

293

839

—

—

839

Daiwa Capital Markets

55

—

—

55

1,190

—

—

1,190

Others

314

—

—

314

9,842

—

—

9,842

$
34,302

$

—

$

—

$
34,302

$
21,540

$
—

$

—

$

21,540


	March 31, 2015								December 31, 2014
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
			balance sheet								balance sheet
	Net amount								Net amount
	of assets				Cash				of assets				Cash
	in the		Financial		collateral		Net		in the		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	55,348	$	—	$	—	$	55,348	$	33,353	$	—	$	—	$	33,353
RJ O'Brien		4,023		—		—		4,023		2,005		—		—		2,005
Jefferies & Co.		937		—		—		937		764		—		—		764
Cantor Fitzgerald, LP		332		—		—		332		—		—		—		—
Bank of New York Mellon		221		—		—		221		—		—		—		—
Goldman Sachs		—		—		—		—		600		—		—		600
JP Morgan		—		—		—		—		526		—		—		526
Wells Fargo		—		—		—		—		379		—		—		379
Nomura		—		—		—		—		322		—		—		322
Others		203		—		—		203		508		—		—		508
	$	61,064	$	—	$	—	$	61,064	$	38,457	$	—	$	—	$	38,457

~~Table of Contents~~

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. The ~~assets~~mortgage loans sold under agreements to repurchase do not qualify for netting.


																	March 31, 2015						December 31, 2014
																					Net						Net
																					amount						amount
																	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
																	amount of		offset in the		in the		amount of		offset in the		in the
	June 30, 2014								December 31, 2013								recognized		consolidated		consolidated		recognized		consolidated		consolidated
	Gross amount of recognized liabilities		Gross amount offset in the consolidated balance sheet			Net amount of liabilities in the consolidated balance sheet			Gross amount of recognized liabilities		Gross amount offset in the consolidated balance sheet			Net amount of liabilities in the consolidated balance sheet			liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)																(in thousands)
Derivatives subject to a master netting arrangement:
Forward purchase contracts	$	205	$	—		$	205		$	6,542	$	—		$	6,542		$	909	$	—	$	909	$	141	$	—	$	141
Forward sale contracts	24,489		—			24,489			504		—			504				46,711		—		46,711		16,110		—		16,110
Put options on interest rate futures sale contracts																		141		—		141		8		—		8
Netting	—		(19,393		)	(19,393		)	—		(6,787		)	(6,787		)		—		(37,814)		(37,814)		—		(10,698)		(10,698)
	24,694		(19,393		)	5,301			7,046		(6,787		)	259				47,761		(37,814)		9,947		16,259		(10,698)		5,561
Derivatives not subject to a master netting arrangement - IRLCs	1,410		—			1,410			2,203		—			2,203				956		—		956		952		—		952
Total derivatives	26,104		(19,393		)	6,711			9,249		(6,787		)	2,462				48,717		(37,814)		10,903		17,211		(10,698)		6,513
Mortgage loans sold under agreements to repurchase	825,267		—			825,267			471,592		—			471,592				992,187		—		992,187		822,621		—		822,621
	$	851,371	$	(19,393	)	$	831,978		$	480,841	$	(6,787	)	$	474,054		$	1,040,904	$	(37,814)	$	1,003,090	$	839,832	$	(10,698)	$	829,134

Table of Contents

Derivative Liabilities, Financial Liabilities, and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and ~~assets~~mortgage loans sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that does not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or ~~exceed~~have fair value that exceeds the liability amount recorded on the consolidated balance sheets.


																			March 31, 2015								December 31, 2014
																					Gross amount								Gross amount
																					not offset in the								not offset in the
																					consolidated								consolidated
																					balance sheet								balance sheet
																			Net amount								Net amount
																			of liabilities								of liabilities
	June 30, 2014									December 31, 2013									in the				Cash				in the				Cash
	Net amount of		Gross amount not offset in the consolidated balance sheet							Net amount of		Gross amount not offset in the consolidated balance sheet							consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	liabilities in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		liabilities in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount
	(in thousands)																		(in thousands)
Interest rate lock commitments	$	1,410	$	—		$	—	$	1,410	$	2,203	$	—		$	—	$	2,203	$	956	$	—	$	—	$	956	$	952	$	—	$	—	$	952
Credit Suisse First Boston Mortgage Capital LLC																				501,400		(498,333)		—		3,067		464,737		(463,541)		—		1,196
Bank of America, N.A.	206,715		(206,581		)	—		134		234,511		(234,511		)	—		—			272,970		(271,868)		—		1,102		236,909		(236,771)		—		138
Credit Suisse First Boston Mortgage Capital LLC	507,158		(505,132		)	—		2,026		198,888		(198,888		)	—		—
Morgan Stanley Bank, N.A.	113,604		(113,554		)	—		50		38,193		(38,193		)	—		—			122,263		(121,986)		—		277		122,148		(122,031)		—		117
Citibank, N.A.	—		—			—		—		—		—			—		—			101,126		(100,000)		—		1,126		699		(278)		—		421
Nomura																				1,110		—		—		1,110		—		—		—		—
JP Morgan																				704		—		—		704		—		—		—		—
Daiwa Capital Markets																				598		—		—		598		291		—		—		291
Bank of Oklahoma																				481		—		—		481		486		—		—		486
Bank of New York Mellon																				—		—		—		—		1,552		—		—		1,552
Others	3,091		—			—		3,091		259		—			—		259			1,482		—		—		1,482		1,360		—		—		1,360
	$	831,978	$	(825,267	)	$	—	$	6,711	$	474,054	$	(471,592	)	$	—	$	2,462	$	1,003,090	$	(992,187)	$	—	$	10,903	$	829,134	$	(822,621)	$	—	$	6,513

Note 7—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their ~~estimated~~ fair values. The application of fair value ~~estimates~~ may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its ~~estimated~~ fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

Management identified all of its non-cash financial assets and its originated MSRs relating to loans with initial interest rates of more than 4.5% and MSRs purchased subject to ~~excess servicing spread (“ESS”) financing~~ESS to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Management has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSR’s fair value risk.

Table of Contents

For originated MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, management has concluded that such assets present different risks to the Company than originated MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assets are aimed at mainly moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ fair values. Management has identified these assets for accounting using the amortization method.

Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at mainly moderating the effects of changes in interest rates on the assets’ fair values. ~~At times during~~During the ~~three months~~quarters ended ~~June 30,~~March 31, 2015 and 2014, ~~and 2013,~~ derivatives were used to hedge the fair value changes of the MSRs.

~~Table of Contents~~

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at fair value on a recurring basis:


	June 30, 2014									March 31, 2015
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(in thousands)									(in thousands)
Assets:
Short-term investments	$	46,391	$	—	$	—	$	46,391		$	30,275	$	—	$	—	$	30,275
Mortgage loans held for sale at fair value	—		745,759		254,656		1,000,415				—		1,270,260		83,684		1,353,944
Derivative assets:
Interest rate lock commitments	—		—		31,159		31,159				—		—		55,348		55,348
MBS put options	—		188		—		188
MBS call options	—		438		—		438
Forward purchase contracts	—		13,601		—		13,601				—		33,048		—		33,048
Forward sales contracts	—		636		—		636				—		909		—		909
Put options on Eurodollar futures	—		256		—		256
Call options on Eurodollar futures	—		254		—		254
MBS put options											—		449		—		449
Put options on interest rate futures purchase contracts											894		—		—		894
Call options on interest rate futures purchase contracts											4,011		—		—		4,011
Total derivative assets before netting	—		15,373		31,159		46,532				4,905		34,406		55,348		94,659
Netting (1)	—		—		—		(12,230		)		—		—		—		(33,595)
Total derivative assets	—		15,373		31,159		34,302				4,905		34,406		55,348		61,064
Investment in PennyMac Mortgage Investment Trust	1,646		—		—		1,646				1,597		—		—		1,597
Mortgage servicing rights at fair value	—		—		308,599		308,599				—		—		361,413		361,413
	$	48,037	$	761,132	$	594,414	$	1,391,353		$	36,777	$	1,304,666	$	500,445	$	1,808,293
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	190,244	$	190,244		$	—	$	—	$	222,309	$	222,309
Derivative liabilities:
Interest rate lock commitments	—		—		1,410		1,410				—		—		956		956
Forward purchase contracts	—		205		—		205				—		909		—		909
Forward sales contracts	—		24,489		—		24,489				—		46,711		—		46,711
Put options on interest rate futures sale contracts											141		—		—		141
Total derivative liabilities before netting	—		24,694		1,410		26,104				141		47,620		956		48,717
Netting (1)	—		—		—		(19,393		)		—		—		—		(37,814)	��
Total derivative liabilities	—		24,694		1,410		6,711				141		47,620		956		10,903
Mortgage servicing liabilities	—		—		5,821		5,821				—		—		6,529		6,529
	$	—	$	24,694	$	197,475	$	202,776		$	141	$	47,620	$	229,794	$	239,741

(1)

Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

~~(1)~~Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

Table of Contents


	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	21,687	$	—	$	—	$	21,687
Mortgage loans held for sale at fair value		—		937,976		209,908		1,147,884
Derivative assets:
Interest rate lock commitments		—		—		33,353		33,353
Forward purchase contracts		—		9,060		—		9,060
Forward sales contracts		—		320		—		320
MBS put options		—		476		—		476
Put options on interest rate futures purchase contracts		862		—		—		862
Call options on interest rate futures purchase contracts		2,193		—		—		2,193
Total derivative assets before netting		3,055		9,856		33,353		46,264
Netting (1)		—		—		—		(7,807)
Total derivative assets		3,055		9,856		33,353		38,457
Investment in PennyMac Mortgage Investment Trust		1,582						1,582
Mortgage servicing rights at fair value		—		—		325,383		325,383
	$	26,324	$	947,832	$	568,644	$	1,534,993
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	191,166	$	191,166
Derivative liabilities:
Interest rate lock commitments		—		—		952		952
Forward purchase contracts		—		141		—		141
Forward sales contracts		—		16,110		—		16,110
Put options on interest rate futures sale contracts		8		—		—		8
Total derivative liabilities before netting		8		16,251		952		17,211
Netting (1)		—		—		—		(10,698)
Total derivative liabilities		8		16,251		952		6,513
Mortgage servicing liabilities		—		—		6,306		6,306
	$	8	$	16,251	$	198,424	$	203,985

(1)

December 31, 2013

Level 1

Level 2

Level 3

Total

(in thousands)

Assets:

Short-term investments

$
142,582

$
—

$
—

$
142,582

Mortgage loans held for sale at fair value

—

527,071

3,933

531,004

Derivative assets:

Interest rate lock commitments

—

—

8,964

8,964

Forward purchase contracts

—

416

—

416

Forward sales contracts

—

18,762

—

18,762

MBS put options

—

665

—

665

MBS call options

—

91

—

91

Total derivative assets before netting

—

19,934

8,964

28,898

Netting (1)

—

—

—

(7,358
)
Total derivative assets

—

19,934

8,964

21,540

Investment in PennyMac Mortgage Investment Trust

1,722

—

—

1,722

Mortgage servicing rights at fair value

—

—

224,913

224,913

$
144,304

$
547,005

$
237,810

$
921,761

Liabilities:

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

$
—

$
—

$
138,723

$
138,723

Derivative liabilities:

Interest rate lock commitments

—

—

2,203

2,203

Forward purchase contracts

—

6,542

—

6,542

Forward sales contracts

—

504

—

504

Total derivative liabilities before netting

—

7,046

2,203

9,249

Netting (1)

—

—

—

(6,787
)
Total derivative liabilities

—

7,046

2,203

2,462

$
—

$
7,046

$
140,926

$
141,185

Table of Contents

As shown above, certain of the Company’s mortgage loans held for sale, IRLCs, MSRs at fair value, ~~IRLCs,~~ and ESS financing at fair value are measured using Level 3 inputs. Following ~~is a~~are roll ~~forward~~forwards of these items for the quarters ended March 31, 2015 and ~~six-month periods ended June 30, 2014 and 2013 where~~2014:


	Quarter ended March 31, 2015
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2014	$	209,908	$	32,401	$	325,383	$	567,692
Purchases		65,613		—		63,137		128,750
Sales		(125,268)		—		—		(125,268)
Repayments		(8,392)		—		—		(8,392)
Interest rate lock commitments issued, net		—		82,780		—		82,780
Mortgage servicing rights resulting from mortgage loan sales		—		—		2,675		2,675
Changes in fair value included in income arising from:		—		—		—
Changes in instrument-specific credit risk		(33)		—		—		(33)
Other factors		778		(47)		(29,782)		(29,051)
		745		(47)		(29,782)		(29,084)
Transfers to Level 2 mortgage loans held for sale (2)		(58,922)		—		—		(58,922)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(60,742)		—		(60,742)
Balance, March 31, 2015	$	83,684	$	54,392	$	361,413	$	499,489
Changes in fair value recognized during the period relating to assets still held at March 31, 2015	$	640	$	(47)	$	(29,782)	$	(29,189)

(1)

For the purpose of this table, the interest rate lock asset and liability positions are shown net.

(2)

Mortgage loans held for sale transferred from Level 3 to Level 2 as a result of the mortgage loan becoming saleable into active mortgage markets pursuant to a loan modification, borrower reperformance or resolution of deficiencies.


	Quarter ended March 31, 2015
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2014	$	191,166	$	6,306	$	197,472
Proceeds received from issuance of excess servicing spread		46,412		—		46,412
Mortgage servicing liabilities resulting from mortgage loan sales		—		2,928		2,928
Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,246		—		1,246
Accrual of interest on excess servicing spread		3,752		—		3,752
Repayments		(12,731)		—		(12,731)
Changes in fair value included in income		(7,536)		(2,705)		(10,241)
Balance, March 31, 2015	$	222,309	$	6,529	$	228,838
Changes in fair value recognized during the period relating to liabilities still held at March 31, 2015	$	(7,536)	$	(2,705)	$	(10,241)

Table of Contents


	Quarter ended March 31, 2014
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance, December 31, 2013	$	3,933	$	6,761	$	224,913	$	235,607
Purchases		—		—		25,866		25,866
Repayments		(14)		—		—		(14)
Interest rate lock commitments issued, net		—		36,438		—		36,438
Mortgage servicing rights resulting from mortgage loan sales		—		—		6,933		6,933
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—		—				—
Other factors		66		5,353		(10,728)		(5,309)
		66		5,353		(10,728)		(5,309)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(34,255)		—		(34,255)
Balance, March 31, 2014	$	3,985	$	14,297	$	246,984	$	265,266
Changes in fair value recognized during the period relating to assets still held at March 31, 2014	$	66	$	14,297	$	(10,728)	$	3,635

(1)

For the purpose of this table, the interest rate lock asset and liability positions are shown net.


	Excess
	servicing
	spread
	financing
	(in thousands)
Liability:
Balance, December 31, 2013	$	138,723
Proceeds received from issuance of excess servicing spread		20,526
Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment		1,113
Accrual of interest on excess servicing spread		2,862
Repayments		(7,413)
Changes in fair value included in income		(4,792)
Balance, March 31, 2014	$	151,019
Changes in fair value recognized during the period relating to liability still held at March 31, 2014	$	(4,792)

The information used in the preceding roll forwards represents activity for any financial statement items identified as using Level 3 significant inputs ~~were used on a recurring basis:~~

Quarter ended June 30, 2014

Mortgage
loans held
for sale

Net interest
rate lock
commitments (1)

Mortgage
servicing
rights

Total

(in thousands)

Assets:

Balance, March 31, 2014

$
3,985

$
14,297

$
246,984

$
265,266

Repayments

(15,033
)
—

—

(15,033
)
Interest rate lock commitments issued, net

—

46,394

—

46,394

Purchases

679,882

—

71,778

751,660

Mortgage servicing rights received as proceeds from mortgage loan sales

—

—

7,333

7,333

Sales

(407,133
)
—

(10,881
)
(418,014
)
Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

—

Other factors

(2,789
)
14,126

(6,615
)
4,722

(2,789
)
14,126

(6,615
)
4,722

Transfers to Level 2 mortgage loans held for sale (2)

(4,256
)
—

—

(4,256
)
Transfers of interest rate lock commitments to mortgage loans held for sale

—

(45,067
)
—

(45,067
)
Balance, June 30, 2014

$
254,656

$
29,750

$
308,599

$
593,005

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

$
(2,789
)
$
29,750

$
(6,615
)

~~(1) For~~at either the ~~purpose of this table,~~beginning or the ~~interest rate lock asset and liability positions are shown net.~~

~~(2) Mortgage loans held for sale transferred from Level 3 to Level 2 as the result~~end of the ~~mortgage loan becoming salable into active mortgage markets pursuant to a loan modification or borrower reperformance.~~

Quarter ended June 30, 2014

Excess
servicing spread
financing

Mortgage servicing
liabilities

Total

(in thousands)

Liabilities:

Balance, March 31, 2014

$
151,019

$
—

$
151,019

Issuances

52,867

—

52,867

Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

2,362

—

2,362

Accrual of interest on excess servicing spread financing

3,139

—

3,139

Repayments

(9,081
)
—

(9,081
)

Changes in fair value included in income

(10,062
)
5,821

(4,241
)

Balance, June 30, 2014

$
190,244

$
5,821

$
196,065

Changes in fair value recognized during the period relating to liabilities still held at June 30, 2014

$
(10,062
)
$
5,821

~~Table of Contents~~

Quarter ended June 30, 2013

Mortgage
loans held
for sale

Net interest
rate lock
commitments (1)

Mortgage servicing
rights

Total

(in thousands)

Assets:

Balance, March 31, 2013

$
4,487

$
25,437

$
18,622

$
48,546

Repurchases of mortgage loans subject to representations and warranties

923

—

—

923

Repayments

(608
)
—

—

(608
)
Interest rate lock commitments issued, net

—

23,530

—

23,530

Purchases

—

—

4,008

4,008

Mortgage servicing rights received as proceeds from mortgage loan sales

—

—

17

17

Sales

—

—

(550
)
(550
)
Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

—

Other factors

(277
)
(20,983
)
973

(20,287
)

(277
)
(20,983
)
973

(20,287
)
Transfers of interest rate lock commitments to mortgage loans held for sale

—

(44,194
)
—

(44,194
)
Balance, June 30, 2013

$
4,525

$
(16,210
)
$
23,070

$
11,385

Changes in fair value recognized during the period relating to assets still held at June 30, 2013

$
(329
)
$
(16,210
)
$
973

~~(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.~~

~~Table of Contents~~

Six months ended June 30, 2014

Mortgage
loans held
for sale

Net interest
rate lock
commitments (1)

Mortgage
servicing
rights

Total

(in thousands)

Assets:

Balance, December 31, 2013

$
3,933

$
6,761

$
224,913

$
235,607

Repayments

(15,047
)
—

—

(15,047
)
Interest rate lock commitments issued, net

—

82,832

—

82,832

Purchases

679,882

—

97,644

777,526

Mortgage servicing rights received as proceeds from mortgage loan sales

—

—

14,266

14,266

Sales

(407,133
)
—

(10,881
)
(418,014
)
Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

—

Other factors

(2,723
)
19,479

(17,343
)
(587
)

(2,723
)
19,479

(17,343
)
(587
)
Transfers to Level 2 mortgage loans held for sale (2)

(4,256
)
—

—

(4,256
)
Transfers of interest rate lock commitments to mortgage loans held for sale

—

(79,322
)
—

(79,322
)
Balance, June 30, 2014

$
254,656

$
29,750

$
308,599

$
593,005

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

$
(2,723
)
$
29,750

$
(17,343
)

~~(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.~~

(2) Mortgage loans held for sale transferred from Level 3 to Level 2 as the result of the mortgage loan becoming salable into active mortgage markets pursuant to a loan modification or borrower reperformance.

Six months ended June 30, 2014

Excess
servicing spread
financing

Mortgage servicing
liabilities

Total

(in thousands)

Liabilities:

Balance, December 31, 2013

$
138,723

$
—

$
138,723

Issuances

73,393

—

73,393

Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

3,475

—

3,475

Accrual of interest on excess servicing spread financing

6,001

—

6,001

Repayments

(16,494
)
—

(16,494
)

Changes in fair value included in income

(14,854
)
5,821

(9,033
)

Balance, June 30, 2014

$
190,244

$
5,821

$
196,065

Changes in fair value recognized during the period relating to liabilities still held at June 30, 2014

$
(14,854
)
$
5,821

~~Table of Contents~~

Six months ended June 30, 2013

Mortgage
loans held
for sale

Net interest
rate lock
commitments (1)

Mortgage servicing
rights

Total

(in thousands)

Assets:

Balance, December 31, 2012

$
—

$
23,951

$
19,798

$
43,749

Repurchases of mortgage loans subject to representations and warranties

5,529

—

—

5,529

Repayments

(622
)
—

—

(622
)
Interest rate lock commitments issued, net

—

57,179

—

57,179

Purchases

—

—

4,008

4,008

Mortgage servicing rights received as proceeds from mortgage loan sales

—

—

20

20

Sales

—

—

(550
)
(550
)
Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

—

—

Other factors

(382
)
(21,090
)
(206
)
(21,678
)

(382
)
(21,090
)
(206
)
(21,678
)
Transfers of interest rate lock commitments to mortgage loans held for sale

—

(76,250
)
—

(76,250
)
Balance, June 30, 2013

$
4,525

$
(16,210
)
$
23,070

$
11,385

Changes in fair value recognized during the period relating to assets still held at June 30, 2013

$
(443
)
$
(16,210
)
$
(206
)

~~(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.~~

periods presented. The Company had no transfers in or out among the levels ~~other than~~arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage ~~loans.~~loans and from the return to salability in the active secondary market of certain loans held for sale. Such loans became saleable into the active secondary market due to curing of the

Table of Contents

loans’ defects through borrower reperformance, modification of the loan or resolution of deficiencies contained in the borrowers’ credit file.

Net ~~gains (losses) from~~ changes in ~~estimated~~ fair values included in ~~earnings~~income for financial statement items carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:

Quarter ended June 30,

2014

2013

Net gains on mortgage
loans held for sale at
fair value

Net
servicing
fees

Total

Net gains on mortgage
loans held for sale at
fair value

Net
servicing
fees

Total

(in thousands)

Assets:

Mortgage loans held for sale at fair value

$
67,993

$
—

$
67,993

$
(7,791
)
$
—

$
(7,791
)
Mortgage servicing rights at fair value

—

(6,615
)
(6,615
)
—

973

973

$
67,993

$
(6,615
)
$
61,378

$
(7,791
)
$
973

$
(6,818
)
Liabilities:

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

$
—

$
10,062

$
10,062

$
—

$
—

$
—

Mortgage servicing liabilities

—

(5,821
)

(5,821
)

—

—

—

$
—

$
4,241

$
4,241

$
—

$
—

$
—


	Quarter ended March 31,
	2015						2014
	Net gains on						Net gains on
	mortgage						mortgage
	loans held		Net loan				loans held		Net loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	84,531	$	—	$	84,531	$	49,902	$	—	$	49,902
Mortgage servicing rights at fair value		—		(29,782)		(29,782)		—		(10,728)		(10,728)
	$	84,531	$	(29,782)	$	54,749	$	49,902	$	(10,728)	$	39,174
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	7,536	$	7,536	$	—	$	4,792	$	4,792
Mortgage servicing liabilities		—		2,705		2,705		—		—		—
	$	—	$	10,241	$	10,241	$	—	$	4,792	$	4,792

~~Table of Contents~~

Six months ended June 30,

2014

2013

Net gains on mortgage
loans held for sale at
fair value

Net
servicing
fees

Total

Net gains on mortgage
loans held for sale at
fair value

Net
servicing
fees

Total

(in thousands)

Assets:

Mortgage loans held for sale at fair value

$
117,895

$
—

$
117,895

$
18,489

$
—

$
18,489

Mortgage servicing rights at fair value

—

(17,343
)
(17,343
)
—

(206
)
(206
)

$
117,895

$
(17,343
)
$
100,552

$
18,489

$
(206
)
$
18,283

Liabilities:

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust

$
—

$
14,854

$
14,854

$
—

$
—

$
—

Mortgage servicing liabilities

—

(5,821
)

(5,821
)

—

—

—

$
—

$
9,033

$
9,033

$
—

$
—

$
—

Following are the fair value and related principal amounts due upon maturity of assets ~~and liabilities~~ accounted for under the fair value option:

	June 30, 2014
	Fair value		Principal amount due upon maturity		Difference			March 31, 2015
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	784,173	$	735,622	$	48,551
90 days or more delinquent:
Not in foreclosure	168,111		171,035		(2,924		)
In foreclosure	48,131		48,856		(725		)
	$	1,000,415	$	955,513	$	44,902				Principal
										amount
	December 31, 2013							Fair		due upon
	Fair value		Principal amount due upon maturity		Difference			value		maturity		Difference
	(in thousands)							(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	524,665	$	504,705	$	19,960		$	1,284,168	$	1,209,848	$	74,320
90 days or more delinquent:
Not in foreclosure	5,567		5,479		88				43,214		45,670		(2,456)
In foreclosure	772		660		112				26,562		27,588		(1,026)
	$	531,004	$	510,844	$	20,160		$	1,353,944	$	1,283,106	$	70,838


	December 31, 2014
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	950,697	$	894,924	$	55,773
90 days or more delinquent:
Not in foreclosure		126,171		128,533		(2,362)
In foreclosure		71,016		72,039		(1,023)
	$	1,147,884	$	1,095,496	$	52,388

Table of Contents

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at fair value on a nonrecurring basis:

June 30, 2014

Level 1

Level 2

Level 3

Total

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
—

$
—

$
194,442

$
194,442

$
—

$
—

$
194,442

$
194,442


	March 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	305,005	$	305,005
	$	—	$	—	$	305,005	$	305,005

December 31, 2013

Level 1

Level 2

Level 3

Total

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
—

$
—

$
136,690

$
136,690

$
—

$
—

$
136,690

$
136,690


	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	139,505	$	139,505
	$	—	$	—	$	139,505	$	139,505

The following table summarizes the total ~~gains (losses)~~losses on assets measured at fair ~~values~~value on a nonrecurring basis:

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
(3,786
)
$
88

$
(4,207
)
$
643

$
(3,786
)
$
88

$
(4,207
)
$
643


	Quarter ended March 31,
	2015		2014
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(31,692)	$	(421)
	$	(31,692)	$	(421)

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Cash as well as its Carried Interest due from Investment Funds, Mortgage loans sold under agreements to repurchase, Note payable, ~~Carried Interest due from Investment Funds~~, and amounts receivable from and payable to the Advised Entities are carried at amortized cost.

Cash is measured using a “Level 1” ~~significant inputs.~~ input.

Management has concluded that the carrying value of the Carried Interest due from Investment Funds approximates its fair value as the balance represents the amount distributable to the Company at the balance sheet date assuming liquidation of the Investment Funds.

The Company’s ~~borrowings~~Mortgage loans sold under agreements to repurchase, Mortgage loan participation and sale agreement and Note payable are carried at amortized ~~cost~~cost. These borrowings do not have ~~active markets or~~ observable inputs and the fair value is measured using management’s estimate of fair value, where the inputs into the determination of fair value require significant ~~management~~ judgment or estimation. The Company has classified these financial instruments as “Level 3” financial statement items as of ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 due to the lack of ~~current market activity and the Company’s reliance on unobservable~~observable inputs to estimate the fair value.

~~Management has concluded that the carrying value of the~~ ~~Carried Interest due from Investment Funds~~ ~~approximates its fair value as the balance represents the amount distributable to the Company at the balance sheet date assuming liquidation of the Investment Funds.~~ Management has concluded that the fair value of ~~the~~ ~~Note payable~~these borrowings approximates ~~the agreements’~~their carrying ~~value~~values due to ~~the agreement’s~~their short ~~term~~terms and variable interest rate. The Company has classified these financial instruments as “Level 3” financial statement items due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair value.rates.

The Company also carries the ~~receivable~~receivables from and ~~payable~~payables to the Advised Entities at cost. Management has concluded that the fair value of such balances approximates ~~the~~their carrying ~~value~~values due to the short terms of such balances.

Valuation Techniques and Assumptions

Most of the Company’s financial assets ~~including~~and its ESS liability are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and all of its MSRs and ESS are “Level 3” financial statement items which require the use of ~~significant~~ unobservable inputs inthat are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

Table of Contents

Due to the difficulty in estimating the fair values of “Level 3” financial statement items, management has assigned the estimating of fair value of these assets to specialized staff and subjects the valuation process to significant executive management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”)~~, which~~ is responsible for ~~valuing and monitoring the Company’s investment portfolios and maintenance of its valuation policies and procedures, estimates~~estimating the fair values of “Level 3” financial ~~instruments~~statement items and ~~MSRs.~~maintaining its valuation policies and procedures.

~~Table of Contents~~

~~The~~With respect to the Level 3 valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The ~~results developed in the FAV group’s monitoring activities may be used to calibrate subsequent projections used for valuation.~~Company’s senior management valuation committee includes PFSI’s chief executive, financial, operating, credit and asset/liability management officers.

The FAV group is responsible for reporting to the Company’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value financial statement items:

Mortgage Loans Held for Sale

~~Most~~A substantial portion of the Company’s mortgage loans held for sale at fair value are ~~salable~~saleable into active markets and are therefore categorized as “Level 2” fair value financial statement items and their fair values are ~~estimated~~determined using their quoted market or contracted price or market price equivalent.

Certain of the Company’s mortgage loans may become ~~non salable~~non-saleable into active markets due to identification of a defect by the Company or to the repurchase of ~~a mortgage loan with an identified defect. Because such~~ mortgage loans ~~are generally not salable into active mortgage markets, they are classified as “Level 3” financial statement items.~~with identified defects. The Company may also purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie Mae guaranteed pools in its servicing portfolio. The Company’s right to purchase such mortgage loans arises as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. To the extent such mortgage loans (“early buyout loans”) have not become ~~salable~~saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms, the Company measures such mortgage loans along with other mortgage loans with identified defects using “Level 3” inputs.

The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” mortgage loans held for sale at fair value are discount rates, home price projections, voluntary prepayment speeds and ~~default~~total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

Table of Contents

Following is a quantitative summary of key “Level 3” inputs used in the valuation of mortgage loans held for sale at fair ~~value valued using “Level 3” inputs:~~value:

	June 30, 2014	December 31, 2013
Key inputs	Range (Weighted average)		March 31, 2015	December 31, 2014
Discount rate	2.2% - 13.4%	7.8% - 13.4%
	(2.3)%	(8.9)%
Range			2.4% - 9.7%	2.3% - 9.6%
Weighted average			2.6%	2.4%
Twelve-month projected housing price index change	-0.8% - 12.2%	4.5% - 4.7%
	(4.2)%	(4.6)%
Prepayment speed (1)	2.0% - 18.7%	1.6% - 5.1%
	(15.8)%	(4.4)%
Range			3.3% - 6.1%	4.2% - 5.4%
Weighted average			3.7%	4.5%
Prepayment/resale speed (1)
Range			0.8% - 17.1%	1.3% - 15.5%
Weighted average			15.7%	15.1%
Total prepayment speed (2)	3.6% - 36.3%	2.9% - 5.2%
	(35.5)%	(4.7)%
Range			1.0% - 39.1%	2.1% - 38.1%
Weighted average			34.7%	35.7%

(1) ~~Prepayment~~Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(2)Total prepayment speed is measured using Life Total CPR.

Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective loan’s delinquency status at period end from the later of the beginning of the period or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains on mortgage loans held for sale at fair value in the consolidated statements of income.

~~Table of Contents~~

Derivative Financial Instruments

The Company categorizes IRLCs as a “Level 3” financial statement item. The Company estimates the fair value of an IRLC based on quoted Agency mortgage-backed securities (“MBS”) prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the mortgage loans and the probability that the mortgage loan will fund or be purchased (the “pull-through rate”).

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in fair value measurement. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for loans that have decreased in fair value.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:


	June 30, 2014	December 31, 2013
Key inputs	Range (Weighted average)		March 31, 2015	December 31, 2014
Pull-through rate	57.0% - 98.0%	62.1% - 98.1%
	(76.1)%	(81.7)%
Range			54.1% - 100.0%	55.4% - 99.9%
Weighted average			87.5%	85.5%
Mortgage servicing rights value expressed as:
Servicing fee multiple	1.9 - 4.9	2.0 - 5.0
	(3.8)	(3.7)
Range			1.9 - 4.8	2.0 - 5.0
Weighted average			3.2	3.7
Percentage of unpaid principal balance	0.4% - 2.4%	0.4% - 2.4%
	(1.0)%	(0.9)%
Range			0.4% - 3.0%	0.4% - 3.1%
Weighted average			1.4%	1.2%

Table of Contents

Hedging Derivatives

The remaining derivative financial instruments held or issued by the Company are categorized as “Level 1” or “Level 2” financial statement items. The Company estimates the fair value of commitments to sell or purchase loans based on ~~quoted~~observable MBS prices. The Company estimates the fair value of ~~the~~ MBS options ~~and futures it purchases~~ based on observed interest rate volatilities in the MBS market. Changes in fair value of IRLCs and related hedging derivatives are included in Net gains on mortgage loans held for sale at fair value in the consolidated statements of income.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting net servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSRs include prepayment rates of the underlying loans, the applicable discount rate or pricing spread, and the per-loan annual cost to service the respective mortgage loans.

~~The results of the estimates of fair value of MSRs are reported to the Company’s valuation committee as part of their review and approval of monthly valuation results.~~ Changes in the fair value of MSRs are included in Net servicing fees—Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights in the consolidated statements of income.

~~Table of Contents~~

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:

	Quarter ended June 30,
	2014		2013		Quarter ended March 31,
	Range (Weighted average)				2015		2014
	Fair value	Amortized cost	Fair value	Amortized cost	Fair	Amortized	Fair	Amortized
	(Amount recognized and unpaid princiapl balance of underlying mortgage loans in thousands)				value	cost	value	cost
					(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)
MSR and pool characteristics:
Amount recognized	$7,333	$42,327	$17	$52,461	$2,675	$67,281	$6,933	$30,581
Unpaid principal balance of underlying mortgage loans	$600,196	$3,550,411	$423,031	$4,372,786	$241,518	$5,137,085	$511,467	$2,623,599
Weighted-average servicing fee rate (in basis points)	33	30	25	29

Weighted average servicing fee rate (in basis points)					31	33	32	30
Inputs:
Pricing spread (1)	8.3% - 16.2%	6.8% - 15.2%	6.4% - 9.6%	5.4% - 12.4%
	(11.5)%	(10.9)%	(7.2)%	(8.0)%
Range					7.3% - 14.4%	6.8% - 15.9%	8.5% - 13.8%	7.3% - 14.8%
Weighted average					10.7%	9.8%	11.2%	10.5%
Annual total prepayment speed (2)	7.6% - 25.0%	7.6% - 43.6%	8.7% - 15.3%	8.5% - 18.5%
	(8.8)%	(8.2)%	(9.0)%	(8.8)%
Range					7.8% - 62.4%	7.6% - 39.4%	7.9% - 17.2%	7.6% - 45.3%
Weighted average					11.9%	8.9%	8.5%	8.1%
Life (in years)	2.1 – 7.5	1.5 – 7.3	3.0 – 6.9	2.9 – 6.9
	(7.0)	(7.1)	(6.7)	(6.7)
Range					1.1 – 7.3	1.8 – 7.3	2.7 – 7.5	1.5 – 7.5
Weighted average					6.1	6.9	7.2	7.1
Per-loan annual cost of servicing	$53 – $100	$53 – $100	$68 – $68	$68 – $120
	$(88)	$(90)	$(68)	$(103)
Range					$59 – $82	$59 – $82	$68 – $100	$68 – $100
Weighted average					$74	$75	$97	$100

(1)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”) curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

~~(1)~~Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offering Rate (“LIBOR”) curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

(2)

Prepayment speed is measured using Life Total CPR.

~~(2)Prepayment speed is measured using Life Total CPR.~~

Table of Contents

Six months ended June 30,

2014

2013

Range
(Weighted average)

Fair
value

Amortized
cost

Fair
value

Amortized
cost

(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)

Amount recognized

$14,266

$72,908

$20

$94,194

Unpaid principal balance of underlying mortgage loans

$1,111,663

$6,174,010

$423,355

$8,229,142

Weighted-average servicing fee rate (in basis points)

33

30

25

28

Pricing spread (1)

8.3% - 16.2%

6.8% - 15.2%

6.4% - 9.6%

5.4% - 12.5%

(11.3)%

(10.7)%

(7.2)%

(8.2)%

Annual total prepayment speed (2)

7.6% - 25.0%

7.6% - 45.3%

8.7% - 15.3%

8.5% - 18.5%

(8.7)%

(8.1)%

(9.0)%

(8.8)%

Life (in years)

2.1 – 7.5

1.5 – 7.5

3.0 – 6.9

2.9 – 6.9

(7.1)

(7.1)

(6.7)

(6.7)

Per-loan annual cost of servicing

$53 – $100

$53 – $100

$68 – $68

$68 – $120

$(92)

$(94)

$(68)

$(102)

~~(1)~~Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

~~(2)Prepayment speed is measured using Life Total CPR.~~

~~Table of Contents~~

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs at period end and the effect on the estimated fair value from adverse changes in those ~~assumptions~~inputs (weighted averages are based upon UPB):

~~Purchased MSRs Backed by Distressed Mortgage Loans~~

~~During the quarter ended June 30, 2014, the Company sold a portfolio of purchased MSRs backed by distressed mortgage loans to a non-affiliated entity.~~


	March 31, 2015		December 31, 2014
	Fair	Amortized	Fair	Amortized
	value	cost	value	cost
	(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$361,413	$428,998	$325,383	$405,445
Unpaid principal balance of underlying mortgage loans	$35,738,618	$36,247,371	$30,945,000	$33,745,613
Weighted average note interest rate	4.15%	3.81%	4.24%	3.82%
Weighted average servicing fee rate (in basis points)	30	30	31	30
Inputs:
Pricing spread (1) (2)
Range	3.4% – 21.3%	6.3% – 16.4%	2.9% – 21.3%	6.3% – 15.3%
Weighted average	9.2%	9.3%	9.2%	9.7%
Effect on fair value of:
5% adverse change	($6,167)	($8,680)	($5,550)	($8,710)
10% adverse change	($12,120)	($17,037)	($10,908)	($17,083)
20% adverse change	($23,429)	($32,848)	($21,084)	($32,890)
Average life (in years)
Range	0.4 – 8.2	1.3 – 7.3	0.4 – 8.2	1.6 – 7.3
Weighted average	5.7	6.7	5.8	6.8
Prepayment speed (1) (3)
Range	7.6% – 66.4%	7.7% – 56.5%	7.6% – 60.5%	7.6% – 42.8%
Weighted average	11.8%	9.4%	11.2%	8.5%
Effect on fair value of:
5% adverse change	($8,094)	($8,635)	($7,052)	($7,359)
10% adverse change	($15,866)	($16,977)	($13,835)	($14,494)
20% adverse change	($30,519)	($32,837)	($26,654)	($28,132)
Annual per-loan cost of servicing (1)
Range	$60 – $99	$59 – $82	$59 – $109	$59 – $81
Weighted average	$76	$76	$76	$75
Effect on fair value of:
5% adverse change	($3,344)	($3,201)	($2,910)	($2,992)
10% adverse change	($6,688)	($6,402)	($5,819)	($5,983)
20% adverse change	($13,377)	($12,803)	($11,638)	($11,967)

(1)

~~June 30, 2014~~

The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of the recognized MSR impairment will depend on the relationship of fair value to the carrying value of such MSRs.

~~December 31, 2013~~(2)
	~~Range~~ ~~(Weighted average)~~
	~~Fair~~ ~~value~~	~~Amortized~~ ~~cost~~	~~Fair~~ ~~value~~	~~Amortized~~ ~~cost~~
	~~(Carrying value, unpaid principal balance~~Pricing spread represents a margin that is applied to a reference interest rate’s forward curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of ~~underlying~~discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and ~~effect on fair~~ ~~value amounts in thousands)~~purchased MSRs not backed by pools of distressed mortgage loans.


~~Carrying value~~(3)	—	—	~~$10,129~~	—
~~Unpaid principal balance of underlying mortgage loans~~	—	—	~~$969,794~~	—
~~Weighted-average note interest rate~~	—	—	~~5.80%~~	—
~~Weighted-average servicing fee rate (in basis points)~~	—	—	50	—
~~Discount rate~~	—	—	~~15.3% – 15.3%~~	—
	—	—	~~(15.3)%~~	—
~~Effect on fair value of:~~
~~5% adverse change~~	—	—	~~$(251)~~	—
~~10% adverse change~~	—	—	~~$(490)~~	—
~~20% adverse change~~	—	—	~~$(937)~~	—
~~Life (in years)~~	—	—	~~5.0 - 5.0~~	—
			~~(5.0)~~
Prepayment speed ~~(1)~~	—	—	~~11.4% – 11.4%~~	—
	—	—	~~(11.4)%~~	—
~~Effect on fair value of:~~
~~5% adverse change~~	—	—	~~$(231)~~	—
~~10% adverse change~~	—	—	~~$(456)~~	—
~~20% adverse change~~	—	—	~~$(898)~~	—
~~Per-loan annual cost of servicing~~	—	—	~~$218 – $218~~	—
	—	—	~~$(218)~~	—
~~Effect on fair value of:~~
~~5% adverse change~~	—	—	~~$(197)~~	—
~~10% adverse change~~	—	—	~~$(393)~~	—
~~20% adverse change~~	—	—	~~$(787)~~	—	is measured using Life Total CPR.

~~(1)Prepayment speed is measured using Life Voluntary CPR.~~

~~Table of Contents~~

~~All Other MSRs~~

June 30, 2014

December 31, 2013

Range
(Weighted average)

Fair
value

Amortized
cost

Fair
value

Amortized
cost

(Carrying value, unpaid principal balance of underlying mortgage loans and effect on fair
value amounts in thousands)

Carrying value

$308,599

$313,082

$214,784

$258,751

Unpaid principal balance of underlying mortgage loans

$29,694,503

$27,356,921

$22,469,179

$22,499,847

Weighted-average note interest rate

4.29%

3.76%

4.48%

3.65%

Weighted-average servicing fee rate (in basis points)

31

29

32

29

Pricing spread (1)

2.9% – 20.3%

6.3% – 15.4%

2.9% – 18.0%

6.3% – 14.5%

(9.0)%

(9.9)%

(7.5)%

(8.7)%

Effect on fair value of:

5% adverse change

$(5,347)

$(7,150)

$(3,551)

$(5,312)

10% adverse change

$(10,506)

$(14,009)

$(6,900)

$(10,395)

20% adverse change

$(20,302)

$(26,920)

$(13,305)

$(20,039)

Average life (in years)

0.1 – 10.8

1.5 – 7.3

0.1 – 14.4

1.5 – 7.3

(5.9)

(6.9)

(6.2)

(7.0)

Prepayment speed (2)

7.6% – 67.0%

7.6% – 45.1%

7.8% – 50.8%

7.6% – 42.5%

(10.2)%

(8.2)%

(9.7)%

(8.0)%

Effect on fair value of:

5% adverse change

$(6,663)

$(5,398)

$(4,622)

$(4,615)

10% adverse change

$(13,082)

$(10,642)

$(9,073)

$(9,097)

20% adverse change

$(25,243)

$(20,696)

$(17,500)

$(17,684)

Per-loan annual cost of servicing

$61 – $115

$61 – $93

$68 – $115

$68 – $100

$(86)

$(92)

$(87)

$(99)

Effect on fair value of:

5% adverse change

$(3,341)

$(2,859)

$(2,817)

$(2,609)

10% adverse change

$(6,682)

$(5,719)

$(5,633)

$(5,217)

20% adverse change

$(13,365)

$(11,437)

$(11,266)

$(10,434)

~~(1)~~Pricing spread represents a margin that is applied to a reference interest rate’s forward curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.

~~(2)Prepayment speed is measured using Life Total CPR.~~

The preceding sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect the Company’s overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Table of Contents

Excess Servicing Spread Financing at Fair Value

The Company categorizes ESS financing as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of ESS financing. The key inputs used in the estimation of ESS ~~financing~~fair value include pricing spread ~~average life,~~ and prepayment speed. Significant changes to ~~any~~either of those inputs in isolation could result in a significant change in the ESS ~~financing~~ fair ~~value measurement.~~value. Changes in these key ~~assumptions~~inputs are not necessarily directly related.

ESS is generally subject to fair value ~~losses~~increases when mortgage interest rates increase. Increasing mortgage interest rates normally slow mortgage refinancing activity. Decreased refinancing activity increases the life of the loans underlying the ESS, thereby increasing ~~ESS financing’s~~ESS’ fair value, ~~and~~which is the liability owed to PMT. Increases in the fair value of ESS ~~financing increase~~ decrease income and are included in Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights.

Interest expense for ESS ~~financing~~ is accrued using the interest method based upon the expected cash flows from the ESS through the expected life of the underlying mortgage loans. Other changes in fair value are recorded in Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights.

Following are the key inputs used in ~~determining~~estimating the fair value of ~~ESS financing:~~ESS:

June 30,
2014

December 31,
2013

Key inputs

Range
(Weighted average)

Unpaid principal balance of underlying loans (in thousands)

$27,445,826

$20,512,659

Average servicing fee rate (in basis points)

31

32

Average excess servicing spread (in basis points)

16

16

Pricing spread (1)

1.7% - 14.6%

2.8% - 14.4%

(5.1)%

(5.4)%

Average life (in years)

0.5 - 7.3

0.9 - 8.0

(5.9)

(6.1)

Annualized prepayment speed (2)

7.6% - 67.0%

7.7% - 48.6%

(10.3)%

(9.7)%


	March 31,	December 31,
Key inputs	2015	2014
Unpaid principal balance of underlying loans (in thousands)	$33,621,619	$28,227,340
Average servicing fee rate (in basis points)	30	31
Average excess servicing spread (in basis points)	16	16
Pricing spread (1)
Range	1.7% - 12.4%	1.7% - 12.0%
Weighted average	5.5%	5.3%
Average life (in years)
Range	0.3 - 7.3	0.4 - 7.3
Weighted average	5.7	5.8
Annualized prepayment speed (2)
Range	7.6% - 77.3%	7.6% - 74.6%
Weighted average	11.6%	11.2%

(1)Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States LIBOR curve for purposes of discounting cash flows relating to ESS.

(2)Prepayment speed is measured using Life Total CPR.

Note 8—Mortgage Loans Held for Sale at Fair Value

Mortgage loans held for sale at fair value include the following:


					March 31,		December 31,
	June 30, 2014		December 31, 2013		2015		2014
	(in thousands)				(in thousands)
Government-insured or guaranteed	$	711,193	$	482,066	$	1,183,544	$	866,148
Conventional conforming	34,566		45,005			86,716		66,229
Mortgage loans purchased from Ginnie Mae pools serviced by the Company	250,848		—
Jumbo						—		5,599
Delinquent mortgage loans purchased from Ginnie Mae pools serviced by the Company						75,569		206,331
Mortgage loans repurchased pursuant to representations and warranties	3,808		3,933			8,115		3,577
	$	1,000,415	$	531,004	$	1,353,944	$	1,147,884
Fair value of mortgage loans pledged to secure mortgage loans sold under agreements to repurchase	$	997,506	$	512,350	$	1,132,568	$	976,772
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreement					$	196,716	$	148,133

Table of Contents

Note 9—Derivative Financial Instruments

The Company is exposed to fair value risk relative to its mortgage loans held for sale as well as to its IRLCs and MSRs. The Company bears fair value risk from the time an IRLC is made to PMT or a loan applicant to the time the mortgage loan is sold. The Company is exposed to loss in fair value of its IRLCs and mortgage loans held for sale when market mortgage interest rates increase. The Company is exposed to loss in fair value of its MSRs when market mortgage interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and MSRs.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the normal course of business when the Company commits to purchase or originate mortgage loans held for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:


															March 31, 2015					December 31, 2014
	June 30, 2014							December 31, 2013								Fair value					Fair value
		Fair value							Fair value						Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	Notional amount	Derivative assets			Derivative liabilities			Notional amount	Derivative assets			Derivative liabilities			amount	assets		liabilities		amount	assets		liabilities
	(in thousands)														(in thousands)
Derivatives not designated as hedging instruments
Free-standing derivatives:
Interest rate lock commitments	1,754,845	$	31,159		$	1,410		971,783	$	8,964		$	2,203		3,123,645	$	55,348	$	956	1,765,597	$	33,353	$	952
Forward purchase contracts	2,789,277	13,601			205			1,418,527	416			6,542			5,124,867		33,048		909	2,634,218		9,060		141
Forward sales contracts	4,617,100	636			24,489			2,659,000	18,762			504			7,464,527		909		46,711	3,901,851		320		16,110
MBS put options	225,000	188			—			185,000	665			—			450,000		449		—	340,000		476		—
MBS call options	95,000	438			—			105,000	91			—
Put options on Eurodollar futures	377,500	256			—				—			—
Call options on Eurodollar futures	170,000	254			—				—			—
Put options on interest rate futures purchase contracts															1,470,500		894		—	755,000		862		—
Call options on interest rate futures purchase contracts															870,000		4,011		—	630,000		2,193		—
Put options on interest rate futures sale contracts															100,000		—		141	50,000		—		8
Total derivatives before netting		46,532			26,104				28,898			9,249					94,659		48,717			46,264		17,211
Netting		(12,230		)	(19,393		)		(7,358		)	(6,787		)			(33,595)		(37,814)			(7,807)		(10,698)
		$	34,302		$	6,711			$	21,540		$	2,462			$	61,064	$	10,903		$	38,457	$	6,513
Margin deposits with (collateral received from) derivative counterparties, net																$	(4,219)				$	(2,891)

Table of Contents

The following table summarizes the notional value activity for derivative contracts used in the Company’s hedging activities:

Quarter ended June 30, 2014

Period/Instrument

Balance
beginning
of period

Additions

Dispositions/
expirations

Balance
end of period

(in thousands)

Forward purchase contracts

1,506,667

10,611,283

(9,328,673
)
2,789,277

Forward sales contracts

2,829,176

15,842,070

(14,054,146
)
4,617,100

MBS put options

175,000

255,000

(205,000
)
225,000

MBS call options

160,000

145,000

(210,000
)
95,000

Put options on Eurodollar futures

325,000

377,500

(325,000
)
377,500

Call options on Eurodollar futures

100,000

205,000

(135,000
)
170,000

Treasury future purchase contracts

—

56,700

(56,700
)
—

Treasury future sale contracts

—

56,700

(56,700
)
—


	Quarter ended March 31, 2015
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	2,634,218	19,635,850	(17,145,201)	5,124,867
Forward sale contracts	3,901,851	26,740,272	(23,177,596)	7,464,527
MBS put options	340,000	785,000	(675,000)	450,000
Put options on interest rate futures purchase contracts	755,000	1,540,500	(825,000)	1,470,500
Call options on interest rate futures purchase contracts	630,000	745,000	(505,000)	870,000
Put options on interest rate futures sale contracts	50,000	50,000	—	100,000
Call options on interest rate futures sale contracts	—	35,100	(35,100)	—


	Quarter ended March 31, 2014
	Balance			Balance
	beginning of		Dispositions/	end of
Period/Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	1,418,527	6,899,388	(6,811,248)	1,506,667
Forward sale contracts	2,659,000	10,540,119	(10,369,943)	2,829,176
MBS put options	185,000	385,000	(395,000)	175,000
MBS call options	105,000	395,000	(340,000)	160,000
Put options on interest rate futures sales contracts	—	325,000	—	325,000
Call options on interest rate futures sales contracts	—	175,000	(75,000)	100,000
Treasury futures purchase contracts	—	21,600	(21,600)	—
Treasury futures sale contracts	—	30,700	(30,700)	—

~~Table of Contents~~

Quarter ended June 30, 2013

Period/Instrument

Balance
beginning
of period

Additions

Dispositions/
expirations

Balance
end
of period

(in thousands)

Forward purchase contracts

1,349,300

11,430,282

(10,707,992
)
2,071,590

Forward sales contracts

3,022,710

17,795,302

(16,591,072
)
4,226,940

MBS put options

325,000

1,195,000

(1,260,000
)
260,000

MBS call options

300,000

950,000

(625,000
)
625,000

Six months ended June 30, 2014

Period/Instrument

Balance
beginning
of period

Additions

Dispositions/
expirations

Balance
end of period

(in thousands)

Forward purchase contracts

1,418,527

17,510,671

(16,139,921
)
2,789,277

Forward sales contracts

2,659,000

26,382,189

(24,424,089
)
4,617,100

MBS put options

185,000

640,000

(600,000
)
225,000

MBS call options

105,000

540,000

(550,000
)
95,000

Put options on Eurodollar futures

—

702,500

(325,000
)
377,500

Call options on Eurodollar futures

—

380,000

(210,000
)
170,000

Treasury future purchase contracts

—

78,300

(78,300
)
—

Treasury future sale contracts

—

87,400

(87,400
)
—

Six months ended June 30, 2013

Period/Instrument

Balance
beginning
of period

Additions

Dispositions/
expirations

Balance
end
of period

(in thousands)

Forward purchase contracts

1,021,981

21,625,832

(20,576,223
)
2,071,590

Forward sales contracts

2,621,948

32,472,558

(30,867,566
)
4,226,940

MBS put options

500,000

2,160,000

(2,400,000
)
260,000

MBS call options

—

1,800,000

(1,175,000
)
625,000

The Company recorded net losses on derivative financial instruments used to hedge IRLCs and mortgage loans held for sale at fair value totaling ~~$38.8~~$25.8 million and ~~$58.8~~$20.1 million for the ~~quarter~~quarters ended March 31, 2015 and ~~six months ended June 30,~~ 2014, ~~respectively. The Company recorded net gains on derivative financial instruments totaling $94.2 million and $106.5 million for the quarter and six months ended June 30, 2013,~~ respectively. Derivative gains and losses used to hedge IRLCs and mortgage loans held for sale at fair value are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

~~Table of Contents~~

The Company recorded net gains on derivatives used to hedge fair value changes of MSRs totaling ~~$9.6 million and $9.2~~$17.1 million for the quarter ended March 31, 2015 and ~~six months~~net losses on derivatives used to hedge fair value changes of MSRs totaling $431,000 for the quarter ended ~~June 30, 2014, respectively.~~March 31, 2014. Gains and losses on derivative financial instruments used to hedge fair value changes of MSRs are included in Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights in the Company’s consolidated statements of income.

Table of Contents

Note 10—Mortgage Servicing ~~Assets and Liabilities~~Rights

~~MSRs~~ Carried at Fair Value:

The activity in MSRs carried at fair value is as follows:

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Balance at beginning of period

$
246,984

$
18,622

$
224,913

$
19,798

Additions:

Purchases

71,778

4,008

97,644

4,008

Mortgage servicing rights received as proceeds from mortgage loan sales

7,333

17

14,266

20

79,111

4,025

111,910

4,028

Sales

(10,881
)
(550
)
(10,881
)
(550
)
Change in fair value due to:

Changes in valuation inputs or assumptions used in valuation model (1)

2,511

1,957

(445
)
(1,524
)
Other changes in fair value (2)

(9,126
)
(984
)
(16,898
)
1,318

Total change in fair value

(6,615
)
973

(17,343
)
(206
)
Balance at end of period

$
308,599

$
23,070

$
308,599

$
23,070


	Quarter ended March 31,
	2015		2014
	(in thousands)
Balance at beginning of period	$	325,383	$	224,913
Additions:
Purchases		63,137		25,866
Mortgage servicing rights resulting from mortgage loan sales		2,675		6,933
		65,812		32,799
Change in fair value due to:
Changes in valuation inputs or assumptions used in valuation model (1)		(17,715)		(2,956)
Other changes in fair value (2)		(12,067)		(7,772)
Total change in fair value		(29,782)		(10,728)
Balance at end of period	$	361,413	$	246,984
Fair value of mortgage servicing rights pledged to secure note payable	$	413,582	$	272,115

(1)

Principally reflects changes in discount rates and prepayment speed inputs, primarily due to changes in market mortgage interest rates.

~~(1)Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.~~

(2)

Represents changes due to realization of cash flows.

~~(2)Represents changes due to realization of cash flows.~~

~~Table of Contents~~

~~MSRs~~ Carried at Lower of Amortized Cost or Fair Value:

The activity in MSRs carried at the lower of amortized cost or fair value is summarized below:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended March 31,
	2014			2013			2014			2013			2015		2014
	(in thousands)												(in thousands)
Amortized cost:
Balance at beginning of period	$	287,187		$	130,793		$	263,373		$	92,155		$	415,245	$	263,373
Mortgage servicing rights resulting from mortgage loan sales	42,327			52,461			72,908			94,194				67,281		30,581
Amortization	(7,603		)	(4,251		)	(14,370		)	(7,346		)		(12,036)		(6,767)
Application of valuation allowance to write down mortgage servicing rights with other-than- temporary impairment	—			—			—			—
Application of valuation allowance to write down mortgage servicing rights with other-than-temporary impairment														—		—
Balance at end of period	321,911			179,003			321,911			179,003				470,490		287,187

Valuation allowance:
Balance at beginning of period	(5,043		)	(2,423		)	(4,622		)	(2,978		)		(9,800)		(4,622)
(Additions) reversals	(3,786		)	88			(4,207		)	643
Application of valuation allowance to write down mortgage servicing rights with other-than- temporary impairment	—			—			—			—
Additions														(31,692)		(421)
Application of valuation allowance to write down mortgage servicing rights with other-than-temporary impairment														—		—
Balance at end of period	(8,829		)	(2,335		)	(8,829		)	(2,335		)		(41,492)		(5,043)
Mortgage servicing rights, net	$	313,082		$	176,668		$	313,082		$	176,668		$	428,998	$	282,144
Fair value of mortgage servicing rights at end of period	$	321,383		$	194,529		$	321,383		$	194,529		$	437,824	$	291,535
Fair value of mortgage servicing rights at beginning of period													$	416,802	$	269,422

Table of Contents

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This projection was developed using the ~~assumptions made by management~~inputs used in ~~its June 30, 2014~~the March 31, 2015 valuation of MSRs. The ~~assumptions~~inputs underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time.

	Estimated MSR
Twelve-month period ending June 30,	amortization
	(in thousands)		Estimated MSR
2015	$	29,778
Twelve month period ending March 31,			amortization
			(in thousands)
2016	29,470		$	49,285
2017	28,727			47,769
2018	27,440			44,250
2019	25,502			40,463
2020				36,640
Thereafter	180,994			252,083
	$	321,911	$	470,490

~~Table of Contents~~

Servicing fees relating to MSRs are recorded in Net servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs are recorded in Net servicing fees—Loan servicing fees—Ancillary and other fees on the consolidated statements of ~~income and~~income. The fees are summarized below:


	Quarter ended June 30,				Six months ended June 30,				Quarter ended March 31,
	2014		2013		2014		2013		2015		2014
	(in thousands)								(in thousands)
Contractual servicing fees	$	43,314	$	11,744	$	79,414	$	20,801	$	50,101	$	36,100
Ancillary and other fees
Ancillary and other fees:
Late charges	963		396		1,850		809			1,651		887
Other	248		132		424		234			711		176
	$	44,525	$	12,272	$	81,688	$	21,844	$	52,463	$	37,163

Mortgage Servicing ~~Liability~~Liabilities Carried at Fair Value:

The activity in mortgage servicing ~~liability~~liabilities carried at fair value is summarized below:

Quarter ended
June 30,

2014

(in thousands)

Amortized cost:

Balance at beginning of period

$
—

Change in fair value due to:

Changes in valuation inputs or assumptions used in valuation model (1)

5,821

Other changes in fair value (2)

—

Total change in fair value

5,821

Balance at end of period

$
5,821


	Quarter ended
	March 31, 2015
	(in thousands)
Amortized cost:
Balance at beginning of period	$	6,306
Mortgage servicing liabilities resulting from mortgage loan sales		2,928
Change in fair value		(2,705)
Balance at end of period	$	6,529

~~(1)Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.~~

~~(2)Represents changes due to realization of cash flows.~~

Note 11—Carried Interest Due from Investment Funds

The activity in the Company’s Carried Interest due from Investment Funds is summarized as follows:


	Quarter ended June 30,				Six months ended June 30,				Quarter ended March 31,
	2014		2013		2014		2013		2015		2014
	(in thousands)								(in thousands)
Balance at beginning of period	$	63,299	$	52,460	$	61,142	$	47,723	$	67,298	$	61,142
Carried Interest recognized during the period	1,834		2,862		3,991		7,599			1,233		2,157
Proceeds received during the period	—		—		—		—			—		—
Balance at end of period	$	65,133	$	55,322	$	65,133	$	55,322	$	68,531	$	63,299

Table of Contents

The amount of the Carried Interest that will be received by the Company depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company ~~at period end~~ is ~~subject to adjustment~~ based on ~~future results~~the cash flows that would be produced assuming termination of the Investment Funds at period end and may be reduced in future ~~years.~~periods based on the performance of the Investment Funds in those periods. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of any reduction to Carried Interest will be limited to the ~~extent of~~ amounts previously recognized.

~~Table of Contents~~

Management expects the Carried Interest to be collected by the Company when the Investment Funds liquidate. The commitment period for the Investment Funds ended on December 31, 2011. The Investment Fund limited liability company and limited partnership agreements specify that the funds will continue in existence through December 31, 2016, subject to three one-year extensions by PCM at its discretion.

Note 12—Investment in PennyMac Mortgage Investment Trust at Fair Value

Following is a summary of Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended March 31,
	2014			2013			2014			2013			2015		2014
	(in thousands)												(in thousands)
Dividends	$	44		$	43		$	88		$	85		$	92	$	44
Change in fair value	(147		)	(363		)	(76		)	(318		)		15		71
	$	(103	)	$	(320	)	$	12		$	(233	)	$	107	$	115

Fair value of PennyMac Mortgage Investment Trust shares at period end	$	1,646		$	1,579								$	1,597	$	1,793

Note 13—Borrowings

As of ~~June 30, 2014,~~March 31, 2015, the Company maintained ~~five~~six borrowing facilities: four facilities that provide funding for sales of mortgage loans under agreements to repurchase; one facility that provides for sale of mortgage loan participation certificates; and one note payable secured by MSRs and servicing advances made relating to certain loans in the Company’s mortgage loan servicing portfolio.

The borrowing facilities contain various covenants, including financial covenants governing PLS’s net worth, debt to equity ratio, profitability and liquidity. Management believes that PLS was in compliance with these requirements as of March 31, 2015.

Mortgage Loans Sold Under Agreement to Repurchase

~~The~~Three of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan sale and repurchase agreements. Eligible mortgage loans are sold at advance rates based on the loan type. Interest is charged at a rate based on the buyer’s overnight ~~cost-of~~cost of funds rate for one agreement and ~~based~~ on LIBOR for the other three agreements. ~~Loans sold~~Mortgage loans financed under these agreements may be re-pledged by the lenders.

Table of Contents

Financial data pertaining to mortgage loans sold under agreements to repurchase are as follows:

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Period end:

��

Balance

$
825,267

$
500,427

Unused amount (1)

$
674,733

$
299,573

Weighted average interest rate

1.85
%
1.93
%

Fair value of loans securing agreements to repurchase

$
997,506

$
646,944

During the period:

Average balance of loans sold under agreements to repurchase

$
527,990

$
412,849

$
410,196

$
344,335

Weighted average interest rate (2)

1.83
%
1.98
%
1.81
%
2.09
%
Total interest expense

$
3,682

$
2,956

$
6,011

$
5,331

Maximum daily amount outstanding

$
873,301

$
623,523

$
873,301

$
623,523


	Quarter ended March 31,
	2015			2014
	(in thousands)
Period end:
Balance	$	992,187		$	567,737
Unused amount (1)	$	307,813		$	432,263
Weighted average interest rate (3)		1.82	%		1.76	%
Fair value of mortgage loans securing agreements to repurchase	$	1,132,568		$	694,028
Margin deposits placed with counterparties (2)	$	1,500		$	1,500
During the period:
Average balance of mortgage loans sold under agreements to repurchase	$	616,896		$	291,093
Weighted average interest rate (3)		1.79	%		1.78	%
Total interest expense	$	3,809		$	2,329
Maximum daily amount outstanding	$	992,187		$	567,737

(1)

The amount the Company is able to borrow under mortgage loan repurchase agreements is tied to the fair value of unencumbered mortgage loans eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the mortgage loans sold.

~~(1)~~The amount the Company is able to borrow under loan repurchase agreements is tied to the fair value of unencumbered mortgage loans eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the mortgage loans sold.

~~(2)~~Excludes the effect of amortization of commitment fees totaling $1.2 million and $891,000 for the quarters ended June 30, 2014 and 2013, respectively, and $2.3 million and $1.7 million for the six month-periods ended June 30, 2014 and 2013, respectively.

~~Table of Contents~~
(2)
Margin deposits are included in Other assets on the consolidated balance sheet.

(3)

Excludes the effect of amortization of commitment fees totaling $980,000 and $1.0 million for the quarters ended March 31, 2015 and 2014, respectively.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:

Remaining maturity at June 30, 2014

Balance

(in thousands)

Within 30 days

$
74,716

Over 30 to 90 days

746,130

Over 90 days

4,421

$
825,267

Weighted average maturity (in months)

2.2


Remaining maturity at March 31, 2015	Balance
	(in thousands)
Within 30 days	$	2,475
Over 30 to 90 days		918,144
Over 90 days to 180 days		—
Over 180 days		71,568
	$	992,187
Weighted average maturity (in months)		2.7

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to the Company’s mortgage loans held for sale sold under agreements to repurchase is summarized by counterparty below as of ~~June 30, 2014:~~March 31, 2015:

Counterparty

Amount at risk

Weighted average
maturity of advances under
repurchase agreement

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC

$
117,085

September 3, 2014

October 31, 2014

Bank of America, N.A.

$
45,620

September 17, 2014

January 30, 2015

Morgan Stanley

$
10,074

August 17, 2014

June 29, 2015

Citibank, N.A.

$
—

—

August 7, 2014


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	77,916	July 8, 2015	October 30, 2015
Bank of America, N.A.	$	36,407	June 17, 2015	January 30, 2016
Morgan Stanley Bank, N.A.	$	10,670	May 17, 2015	June 29, 2015
Citibank, N.A.	$	15,519	May 6, 2015	September 7, 2015

The Company is subject to margin calls during the period the agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the mortgage loans securing those agreements decreases. ~~The Company had $1.5 million on deposit with its~~

Table of Contents

Mortgage Loan Participation and Sale Agreement

One of the borrowing facilities secured by mortgage loans held for sale is in the form of a mortgage loan ~~repurchase agreement counterparties~~participation and sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to the lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at ~~June 30, 2014 and December 31, 2013. Such amounts are included in~~ ~~Other assets~~the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the ~~consolidated balance sheets.~~trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price and is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

The mortgage loan participation and sale agreement is summarized below:


	Quarter ended,
	March 31, 2015
	(in thousands)
Period end:
Mortgage loan participation and sale agreement secured by mortgage loans	$	190,762
Mortgage loans pledged to secure mortgage loan participation and sale agreement	$	196,716
During the period:
Average balance	$	143,638
Weighted average interest rate (1)		1.25	%
Total interest expense	$	519

(1)

Excludes the effect of amortization of commitment fees totaling $98,000 for the quarter ended March 31, 2015.

Note Payable

The note payable is summarized below:


					Quarter ended March 31,
	June 30, 2014		December 31, 2013		2015			2014
	(in thousands)				(in thousands)
Period end:
Note payable secured by:
Mortgage servicing rights	$	115,314	$	48,302	$	134,665		$	48,819
Servicing advances	—		3,852			—			—
	$	115,314	$	52,154	$	134,665		$	48,819
Assets pledged to secure note payable:
Mortgage servicing rights	$	303,831	$	258,241	$	413,582		$	272,115
Servicing advances	$	—	$	5,564	$	—		$	—
During the period:
Average balance					$	141,280		$	52,354
Weighted average interest rate						2.96	%		2.91	%
Total interest expense					$	1,635		$	659

~~The note payable matures on October 31, 2014. Interest is charged at a rate based on the lender’s overnight cost of funds.~~ The note payable is secured by servicing advances and MSRs relating to certain loans in the Company’s servicing portfolio, and currently provides for advance rates ~~ranging from~~of 50% toof the carrying value of MSRs pledged and 85% of the amount of the servicing advances orpledged. Interest is charged at a rate based on the ~~carrying value~~lender’s overnight cost of ~~the MSR pledged.~~funds.

The borrowing facilities contain various covenants, including financial covenants governing the Company’s net worth, debt to equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these requirements as of June 30, 2014.

Table of Contents

Excess Servicing Spread Financing

In conjunction with the Company’s purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has entered into sale and assignment agreements which are treated as financings and are carried at fair value with changes in fair value recognized in current period income. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained a fixed base servicing fee and all ancillary income associated with servicing the ~~loans and a fixed base servicing fee.~~mortgage loans. The Company continues to be the servicer of the mortgage loans and provides all servicing functions, including responsibility to make servicing advances.

Following is a summary of ESS:


	Quarter ended			Six months ended			Quarter ended March 31,
	June 30, 2014						2015		2014
	(in thousands)						(in thousands)
Balance at beginning of period	$	151,019		$	138,723		$	191,166	$	138,723
Purchases	52,867			73,393
Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust	2,362			3,475
Accrual of interest expense	3,139			6,001
Issuances if excess servicing spread to PennyMac Mortgage Investment Trust:
For cash								46,412		20,526
Pursuant to a recapture agreement								1,246		1,113
Accrual of interest								3,752		2,862
Repayments	(9,081		)	(16,494		)		(12,731)		(7,413)
Change in fair value	(10,062		)	(14,854		)		(7,536)		(4,792)
Balance at end of period	$	190,244		$	190,244		$	222,309	$	151,019

Note 14—Liability for Losses Under Representations and Warranties

Following is a summary of activity in the Company’s liability for representations and warranties:


	Quarter ended June 30,					Six months ended June 30,					Quarter ended March 31,
	2014		2013			2014		2013			2015		2014
	(in thousands)										(in thousands)
Balance at beginning of period	$	8,974	$	4,748		$	8,123	$	3,504		$	13,259	$	8,123
Provision for losses on loans sold	1,204		1,453			2,055		2,697				1,495		851
Incurred losses	—		(16		)	—		(16		)		(65)		—
Balance at end of period	$	10,178	$	6,185		$	10,178	$	6,185		$	14,689	$	8,974
Unpaid principal balance of mortgage loans subject to representations and warranties at period end	$	29,882,252	$	16,408,013							$	39,624,553	$	26,304,717

~~Following is a summary of the Company’s repurchase activity:~~

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

During the period:

Unpaid principal balance of mortgage loans repurchased

$
—

$
2,741

$
1,890

$
4,867

Unpaid principal balance of repurchased mortgage loans repurchased by correspondent lenders

$
—

$
574

$
798

$
1,053

Period end:

Unpaid principal balance of mortgage loans subject to pending claims for repurchase

$
5,452

$
296

~~Note 15—Stockholders’ Equity~~

During the quarter and six months ended June 30, 2014, respectively, PennyMac unitholders exchanged 412,500 and 479,209 Class A units for PFSI Class A common stock. The effect of the exchanges reduced the percentage of the ~~Noncontrolling interest in Private National Mortgage Acceptance Company, LLC~~ ~~from 72.6% at December 31, 2013 to 71.9% at June 30, 2014.~~

~~Table of Contents~~

Note ~~16—Net Gains on Mortgage Loans Held for Sale~~

~~Net gains on mortgage loans held for sale at fair value is summarized below:~~

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Cash gain (loss):

Sales proceeds

$
10,241

$
(43,318
)
$
14,722

$
(55,141
)
Hedging activities

(25,549
)
22,260

(35,805
)
39,881

(15,308
)
(21,058
)
(21,083
)
(15,260
)
Non-cash gain:

Mortgage servicing rights received as proceeds from mortgage loan sales

49,660

52,478

87,174

94,214

MSR and ESS recapture payable to PennyMac Mortgage Investment Trust

(2,526
)
(367
)
(4,424
)
(499
)
Provision for losses relating to representations and warranties on loans sold

(1,204
)
(1,453
)
(2,055
)
(2,697
)
Change in fair value relating to loans and hedging derivatives held at period end:

Interest rate lock commitments

15,453

(41,647
)
22,989

(40,150
)
Mortgage loans

6,830

(17,241
)
14,658

(19,634
)
Hedging derivatives

(13,201
)
71,942

(23,017
)
66,637

$
39,704

$
42,654

$
74,242

$
82,611

~~Note 17—Net Interest Expense~~

~~Net interest expense is summarized below:~~

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Interest income:

Short-term investment

$
325

$
162

$
526

$
203

Mortgage loans held for sale at fair value

5,927

4,312

9,836

6,014

6,252

4,474

10,362

6,217

Interest expense:

Mortgage loans sold under agreements to repurchase

3,682

2,956

6,011

5,331

Note payable

861

910

1,520

1,647

Excess servicing spread financing at fair value

3,139

—

6,001

—

Other

1,050

334

1,586

552

8,732

4,200

15,118

7,530

$
(2,480
)
$
274

$
(4,756
)
$
(1,313
)

~~Note 18—Stock-based Compensation~~

The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of June 30, 2014, the Company has 16.7 million units available for future awards. The Company estimates the cost of the stock options, time-based restricted stock units and performance-based restricted stock units awarded with reference to the fair value of PFSI’s underlying common stock on the date of the award. Compensation costs are fixed, except for the performance-based restricted stock units, at the grant’s estimated fair value on the grant date as all grantees are employees of PennyMac and directors of the Company. Expense relating to awards is included in ~~Compensation~~ ~~in the consolidated statements of income.~~

~~Table of Contents~~

~~Following is a summary of the stock-based compensation expense by instrument awarded:~~

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Stock options

$
1,375

$
198

$
2,562

$
198

Performance-based restricted stock units

1,112

282

1,874

282

Time-based restricted stock units

437

65

873

65

$
2,924

$
545

$
5,309

$
545

~~Following is a summary of equity awards:~~

Quarter ended June 30, 2014

Stock
options

Performance-
based RSUs

Time-based
RSUs

(in thousands)

March 31, 2014

1,169

1,102

198

Granted

—

—

38

Vested

(138
)
—

(31
)
Expired or canceled

(7
)
(2
)
(3
)
June 30, 2014

1,024

1,100

202

Six months ended June 30, 2014

Stock
options

Performance-
based RSUs

Time-based
RSUs

(in thousands)

December 31, 2013

422

496

100

Granted

753

614

138

Vested

(138
)
—

(31
)
Expired or canceled

(13
)
(10
)
(5
)
June 30, 2014

1,024

1,100

202

~~Note 19~~—15—Income Taxes

For the ~~quarter~~quarters ended March 31, 2015 and ~~six months ended June 30,~~ 2014, the Company’s effective tax rates were ~~11.4%~~11.5% and 11.3%~~, respectively. For the quarter and six months ended June 30, 2013, the Company’s effective tax rates were 4.1% and 1.9%~~, respectively. The difference between the Company’s effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into the Company’s shares, the portion of the Company’s income that will be subject to corporate federal and state statutory tax rates will increase, which will in turn increase ~~its~~PFSI’s effective income tax rate.

Note 16—Noncontrolling Interest

During the quarter ended March 31, 2015, PennyMac unitholders exchanged 44,000 Class A units for the Company’s Class A common stock. The effect of the exchanges reduced the percentage of the Noncontrolling interest in Private National Mortgage Acceptance Company, LLC from 71.6% at December 31, 2014 to 71.5% at March 31, 2015.

During the quarter ended March 31, 2014, PennyMac unitholders exchanged 66,709 Class A units for the Company’s Class A common stock. The effect of the exchanges reduced the percentage of the Noncontrolling interest in Private National Mortgage Acceptance Company, LLC from 72.6% at December 31, 2013 to 72.5% at March 31, 2014.

Table of Contents

Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac is summarized below:

Quarter ended March 31,


2015

2014

(in thousands, except share amounts)

Net income attributable to PennyMac Financial Services, Inc. common stockholders

$
9,028

$
7,972

Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A stock of PennyMac Financial Services, Inc. (Class A shares issued, 44,000 and 66,709 during the quarters ended March 31, 2015 and 2014, respectively)

$
792

$
563

Note 17—Net Gains on Mortgage Loans Held for Sale

Net gains on mortgage loans held for sale at fair value is summarized below:

Quarter ended March 31,

2015

2014


(in thousands)

Cash (loss) gain:

Sales proceeds

$
2,730

$
4,481

Hedging activities

(18,329)

(10,256)

(15,599)

(5,775)

Non-cash gain:

Mortgage servicing rights resulting from mortgage loan sales

69,956

37,514

Mortgage servicing liabilities resulting from mortgage loan sales

(2,928)

—

Excess servicing spread recapture payable to PennyMac Mortgage Investment Trust

(1,289)

(1,898)

Provision for losses relating to representations and warranties on loans sold

(1,495)

(851)

Change in fair value relating to loans and hedging derivatives held at period end:

Interest rate lock commitments

21,991

7,536

Mortgage loans

12,201

7,828

Hedging derivatives

(7,459)

(9,816)

$
75,378

$
34,538

Note 18—Net Interest Expense

Net interest expense is summarized below:

Quarter ended March 31,


2015

2014


(in thousands)

Interest income:

Short-term investments

$
512

$
201

Mortgage loans held for sale at fair value

8,421

3,909

8,933

4,110

Interest expense:

Mortgage loans sold under agreements to repurchase

3,809

2,329

Mortgage loan participation and sale agreement

519

—

Note payable

1,635

659

Excess servicing spread financing at fair value

3,752

2,862

Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

1,524

218

Interest on mortgage loan impound deposits

590

318

11,829

6,386

$
(2,896)

$
(2,276)

Table of Contents

Note 19—Stock-based Compensation

The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time-based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of March 31, 2015, the Company has 1.9 million units available for future awards. The Company estimates the cost of the stock options, time-based RSUs and performance-based RSUs awarded with reference to the fair value of the Company’s Class A common stock on the date of the grants. Compensation costs are fixed, except for the performance-based RSUs, at the grant’s estimated fair value on the grant date as all grantees are employees of PennyMac or directors of the Company. Expense relating to grants is included in Compensation in the consolidated statements of income.

Following is a summary of the stock-based compensation expense by instrument awarded:

Quarter ended March 31,


2015

2014


(in thousands)

Stock options

$
1,480

$
1,187

Performance-based RSUs

1,871

762

Time-based RSUs

535

436

$
3,886

$
2,385

Following is a summary of equity awards:

Quarter ended March 31, 2015


Stock options

Performance-based RSUs

Time-based RSUs

(in thousands)

December 31, 2014

1,167

1,257

202

Granted

715

1,143

118

Vested

—

—

(31)

Exercised

—

—

—

Forfeited or canceled

(1)

(2)

—

March 31, 2015

1,881

2,398

289

Quarter ended March 31, 2014


Stock options

Performance-based RSUs

Time-based RSUs

(in thousands)

December 31, 2013

419

491

100

Granted

747

609

97

Vested

—

—

—

Exercised

—

—

—

Forfeited or canceled

(5)

(6)

(1)

March 31, 2014

1,161

1,094

196

Table of Contents

Note 20—Supplemental Cash Flow Information


	Six months ended June 30,				Quarter ended March 31,
	2014		2013		2015		2014
					(in thousands)
Cash paid for interest	$	14,243	$	6,594	$	11,606	$	6,223
Cash paid for income taxes	$	1,432	$	7	$	1,902	$	3
Non-cash investing activity:
Receipt of mortgage servicing rights created in loan sales activities	$	87,174	$	94,214
Mortgage servicing rights resulting from mortgage loan sales					$	69,956	$	37,514
Mortgage servicing liabilities resulting from mortgage loan sales					$	2,928	$	—
Non-cash financing activity:
Transfer of excess servicing spread pursuant to recapture agreement with PennyMac Mortgage Investment Trust	$	3,475	$	—	$	1,246	$	1,113
Issuance of common stock in settlement of director fees	$	74	$	—	$	74	$	—

~~Table of Contents~~

Note 21—Regulatory Net Worth and Agency Capital Requirements

The Company, through PLS and PennyMac, is required to maintain specified levels of equity to remain a seller/servicer in good standing with the Agencies. Such equity requirements generally are tied to the size of the Company’s loan servicing portfolio or loan origination volume.

The Agencies’ capital requirements, the calculations of which are specified by each Agency, are summarized below:

June 30, 2014

December 31, 2013

Requirement–company subject to requirement

Net worth (1)

Required

Net worth (1)

Required

(in thousands)

Fannie Mae—PLS

$
492,451

$
87,464

$
409,552

$
83,148

Freddie Mac—PLS

$
492,671

$
3,191

$
409,860

$
3,001

Ginnie Mae:

Issuer—PLS

$
445,815

$
99,986

$
388,125

$
102,619

Issuer’s parent—PennyMac

$
673,390

$
119,983

$
598,198

$
112,881

HUD—PLS

$
445,815

$
2,500

$
388,125

$
2,500


	Agency capital
	March 31, 2015				December 31, 2014
Agency–company subject to requirement	Balance (1)		Requirement		Balance (1)		Requirement
	(in thousands)
Fannie Mae–PLS	$	628,604	$	35,267	$	583,686	$	35,507
Freddie Mac–PLS	$	628,693	$	4,015	$	583,819	$	3,721
Ginnie Mae–PLS	$	581,518	$	130,803	$	536,009	$	111,457
Ginnie Mae–PennyMac	$	815,745	$	156,963	$	763,907	$	133,748
HUD–PLS	$	581,518	$	2,500	$	539,844	$	2,500

(1)

Calculated in compliance with the respective Agency’s requirements.

~~(1)Calculated in compliance with the respective Agency’s requirements.~~

Noncompliance with the respective ~~agencies’~~Agencies’ capital requirements can result in the respective Agency taking various remedial actions up to and including removing PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency. PennyMac and PLS had Agency capital in excess of the respective Agencies’ requirements at ~~June 30, 2014.~~March 31, 2015.

Note 22—Commitments and Contingencies

Litigation

The business of the Company involves the collection of numerous accounts, as well as the validation of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of ~~June 30, 2014,~~March 31, 2015, the Company was not involved in any legal proceedings, claims, or actions that in management’s view would be reasonably likely to have a material adverse effect on the Company.

Table of Contents

Commitments to Fund and Sell Mortgage Loans

June 30, 2014

(in thousands)

Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust

$
1,242,982

Commitments to fund mortgage loans

511,863

$
1,754,845

Commitments to sell mortgage loans

$
4,617,100


	March 31, 2015
	(in thousands)
Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust	$	2,141,582
Commitments to fund mortgage loans		982,063
	$	3,123,645
Commitments to sell mortgage loans	$	7,464,527

Note 23—Segments and Related Information

~~Since the date of the Company’s IPO, the~~The Company ~~has continued its development of internal management reporting. Such development has resulted~~operates in changes in the information that is provided to the Company’s chief operating decision maker. Accordingly, during the quarter ended March 31, 2014, management re-evaluated this new information in relation to its definition of its operating segments.

As a result of the new reporting provided to the chief operating decision maker, management has concluded that its mortgage banking operations should be disclosed as two segments: loan production and loan servicing. Accordingly, the following segment disclosure includes three segments: loan production, loan servicing and investment management. ~~Prior period segment disclosures have been restated to conform segment disclosures for the quarter and six months ended June 30, 2013 to those for the quarter and six months ended June 30, 2014.~~

Two of the segments are in the mortgage banking business: loan production and loan servicing. The loan production segment performs origination, acquisition and sale activities. The loan servicing segment performs servicing of newly originated mortgage loans, execution and management of early buyout loans and servicing of mortgage loans sourced and managed by the investment

~~Table of Contents~~

management segment, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.

The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions, managing correspondent lending activities for PMT and managing the acquired assets for the Advised Entities.

Financial highlights by segment are as follows:

Quarter ended June 30, 2014

Mortgage banking

Investment

Production

Servicing

Total

management

Total

(in thousands)

Revenue

Net gains on mortgage loans held for sale at fair value

$
38,101

$
1,603

$
39,704

$
—

$
39,704

Loan origination fees

10,345

—

10,345

—

10,345

Fulfillment fees from PennyMac Mortgage Investment Trust

12,433

—

12,433

—

12,433

Net servicing fees

—

56,969

56,969

—

56,969

Management fees

—

—

—

10,998

10,998

Carried Interest from Investment Funds

—

—

—

1,834

1,834

Net interest income (expense):

Interest income

5,697

554

6,251

1

6,252

Interest expense

3,072

5,660

8,732

—

8,732

2,625

(5,106
)
(2,481
)
1

(2,480
)
Other

383

265

648

(16
)
632

Total net revenue

63,887

53,731

117,618

12,817

130,435

Expenses

31,126

33,772

64,898

7,490

72,388

Income before provision for income taxes

$
32,761

$
19,959

$
52,720

$
5,327

$
58,047

Segment assets at period end (1)

$
1,117,090

$
895,169

$
2,012,259

$
111,285

$
2,123,544


	Quarter ended March 31, 2015
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenues (1)
Net gains on mortgage loans held for sale at fair value	$	76,979	$	(1,601)	$	75,378	$	—	$	75,378
Loan origination fees		16,682		—		16,682		—		16,682
Fulfillment fees from PennyMac Mortgage Investment Trust		12,866		—		12,866		—		12,866
Net servicing fees		—		26,776		26,776		—		26,776
Management fees		—		—		—		8,489		8,489
Carried Interest from Investment Funds		—		—		—		1,233		1,233
Net interest income (expense):
Interest income		7,016		1,917		8,933		—		8,933
Interest expense		3,641		8,188		11,829		—		11,829
		3,375		(6,271)		(2,896)		—		(2,896)
Other		913		618		1,531		255		1,786
Total net revenue		110,815		19,522		130,337		9,977		140,314
Expenses		40,132		38,067		78,199		8,877		87,076
Income before provision for income taxes	$	70,683	$	(18,545)	$	52,138	$	1,100	$	53,238
Segment assets at period end (2)	$	1,399,817	$	1,322,301	$	2,722,118	$	92,093	$	2,814,211

(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist primarily of deferred tax asset of $42.1 million.

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	Quarter ended March 31, 2014
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenues (1)
Net gains on mortgage loans held for sale at fair value	$	34,538	$	—	$	34,538	$	—	$	34,538
Loan origination fees		6,880		—		6,880		—		6,880
Fulfillment fees from PennyMac Mortgage Investment Trust		8,902		—		8,902		—		8,902
Net servicing fees		—		43,764		43,764		—		43,764
Management fees		—		—		—		10,109		10,109
Carried Interest from Investment Funds		—		—		—		2,157		2,157
Net interest income (expense):
Interest income		4,106		—		4,106		4		4,110
Interest expense		2,329		4,057		6,386		—		6,386
		1,777		(4,057)		(2,280)		4		(2,276)
Other		643		519		1,162		256		1,418
Total net revenue		52,740		40,226		92,966		12,526		105,492
Expenses		26,786		23,113		49,899		6,532		56,431
Income before provision for income taxes	$	25,954	$	17,113	$	43,067	$	5,994	$	49,061
Segment assets at period end (2)	$	790,733	$	807,252	$	1,597,985	$	103,698	$	1,701,683

(1) ~~Amount excludes~~All revenues are from external customers.

(2)Excludes parent Company assets, which consist primarily of deferred tax assets of ~~$55.8~~$58.2 million.

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Quarter ended June 30, 2013

Mortgage banking

Investment

Production

Servicing

Total

management

Total

(in thousands)

Revenue

Net gains on mortgage loans held for sale at fair value

$
42,654

$
—

$
42,654

$
—

$
42,654

Loan origination fees

6,312

—

6,312

—

6,312

Fulfillment fees from PennyMac Mortgage Investment Trust

22,054

—

22,054

—

22,054

Net servicing fees

—

22,069

22,069

—

22,069

Management fees

—

—

—

10,429

10,429

Carried Interest from Investment Funds

—

—

—

2,862

2,862

Net interest income (expense):

Interest income

4,469

—

4,469

5

4,474

Interest expense

2,976

1,224

4,200

—

4,200

1,493

(1,224
)
269

5

274

Other

83

38

121

(198
)
(77
)
Total net revenue

72,596

20,883

93,479

13,098

106,577

Expenses

34,753

16,084

50,837

5,511

56,348

Income before provision for income taxes

$
37,843

$
4,799

$
42,642

$
7,587

$
50,229

Segment assets at period end (1)

$
817,633

$
344,813

$
1,162,446

$
117,676

$
1,280,122

~~(1) Amount excludes parent Company assets, which consist primarily of cash of $714,000.~~

Six months ended June 30, 2014

Mortgage banking

Investment

Production

Servicing

Total

management

Total

(in thousands)

Revenue

Net gains on mortgage loans held for sale at fair value

$
72,639

$
1,603

$
74,242

$
—

$
74,242

Loan origination fees

17,225

—

17,225

—

17,225

Fulfillment fees from PennyMac Mortgage Investment Trust

21,335

—

21,335

—

21,335

Net servicing fees

—

100,733

100,733

—

100,733

Management fees

—

—

—

21,107

21,107

Carried Interest from Investment Funds

—

—

—

3,991

3,991

Net interest income (expense):

Interest income

9,803

554

10,357

5

10,362

Interest expense

5,401

9,717

15,118

—

15,118

4,402

(9,163
)
(4,761
)
5

(4,756
)
Other

1,026

784

1,810

240

2,050

Total net revenue

116,627

93,957

210,584

25,343

235,927

Expenses

57,912

56,885

114,797

14,022

128,819

Income before provision for income taxes

$
58,715

$
37,072

$
95,787

$
11,321

$
107,108

Segment assets at period end (1)

$
1,117,090

$
895,169

$
2,012,259

$
111,285

$
2,123,544

~~(1) Amount excludes parent Company assets, which consist primarily of deferred tax assets of $55.8 million.~~

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Six months ended June 30, 2013

Mortgage banking

Investment

Production

Servicing

Total

management

Total

(in thousands)

Revenue

Net gains on mortgage loans held for sale at fair value

$
82,611

$
—

$
82,611

$
—

$
82,611

Loan origination fees

11,980

—

11,980

—

11,980

Fulfillment fees from PennyMac Mortgage Investment Trust

50,298

—

50,298

—

50,298

Net servicing fees

—

38,111

38,111

—

38,111

Management fees

—

—

—

18,835

18,835

Carried Interest from Investment Funds

—

—

—

7,599

7,599

Net interest income (expense):

Interest income

6,207

—

6,207

10

6,217

Interest expense

5,570

1,960

7,530

—

7,530

637

(1,960
)
(1,323
)
10

(1,313
)
Other

408

119

527

297

824

Total net revenue

145,934

36,270

182,204

26,741

208,945

Expenses

63,745

29,827

93,572

9,851

103,423

Income before provision for income taxes

$
82,189

$
6,443

$
88,632

$
16,890

$
105,522

Segment assets at period end (1)

$
817,633

$
344,813

$
1,162,446

$
117,676

$
1,280,122

~~(1) Amount excludes parent Company assets, which consist primarily of cash of $714,000.~~

Note 24—Recently Issued Accounting Pronouncements

In April of 2015, the FASB issued Accounting ~~Standard~~Standards Update ~~No 2014-04,~~ ~~Receivables: Troubled~~(“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt ~~Restructuring~~Issuance Costs. 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, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ~~Creditors Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure~~ (the amendments in this ASU.ASU ~~2014-04), clarifies when a creditor~~2015-03 should be ~~considered to have received physical possession of residential real estate collateralizing~~applied on a ~~mortgage loan~~retrospective basis and the mortgage loan derecognized in the receivable and recognized as real estate property. This update specifies that an in substance repossession occurs when either the creditor has obtained the legal title to the property after a foreclosure or the borrower has transferred all interest in the property to the creditor through a deed in lieu of foreclosure or similar legal agreement so that at that time the asset should be reclassified from a loan receivable to real estate acquired in settlement of loans. This update also provides that a disclosure of the amount between real estate acquired in settlement of loans and the recorded investment in mortgage loans that are in the process of foreclosure must be included in both interim and annual financial reports. This amendment update is effective for the Company for financial statements issued for fiscal years and interim periods ~~for~~within those fiscal years beginning after December 15, ~~2014.~~2015. The adoption of ASU ~~2014-04~~2015-03 is not expected to have a material effect on the Company’s consolidated financial ~~statements.~~statements

~~Accounting Standards Update No 2014-09,~~ ~~Revenue from Contracts with Customers~~ (ASU 2014-09), was created to standardize revenue recognition process between public and private companies as well as across industries in an effort to more closely align GAAP revenue recognition with international standards to provide a more comparable revenue number for the users of the financial statements. The standard outlines that for all contracts, revenue should be recognized when or as the entity satisfies a performance obligation. Revenue is recognized either over a period or at one point in time in accordance with how the control of the service or good is transferred. This amendment update is for all year-end and interim periods beginning after December 15, 2016 and early application is not permitted. The Company is evaluating the effect of adopting ASU 2014-09 to its consolidated financial statements.

~~In June of 2014, the FASB issued Accounting Standards Update No. 2014-11,~~ ~~Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures~~ (the “Update”) to the Transfers and Servicing topic of its Accounting Standards Codification. The amendments in the Update require two accounting changes. First, the amendments in the Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.

The amendments in the Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The Update also specifies certain disclosure requirements for those transactions outstanding at the reporting date and for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions, the transferor is required to make certain disclosures by type of transaction. The adoption of the Update is not expected to have a material effect on the Company’s consolidated financial statements.

Note 25—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:

On April 28, 2015, the Company entered into a letter of intent with a third party to purchase a $9.3 billion unpaid principal balance portfolio of Agency MSRs. The Company intends to sell to PennyMac Holdings, LLC (“PMH”), a subsidiary of PMT, approximately $74 million of ESS from this MSR portfolio.

·~~All agreements~~

The MSR acquisition by the Company and its sale of ESS to ~~repurchase assets~~PMH are subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions, including required regulatory approvals. There can be no assurance that ~~matured between June 30, 2014 and~~ the ~~date of this Report were extended~~committed amounts will ultimately be acquired or ~~renewed.~~that the transactions will be completed at all.

On April 30, 2015, the Company, through PLS and PennyMac, entered into an amendment to its Third Amended and Restated Loan and Security Agreement, dated as of March 27, 2015, pursuant to which PLS may finance certain of its MSRs and servicing advance receivables with Credit Suisse First Boston Mortgage

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Capital LLC (“CSFB”) (the “Loan and Security Agreement”). The Loan and Security Agreement is guaranteed in full by PennyMac.

Under the terms of the amendment, the maximum loan amount under the Loan and Security Agreement was increased from $257 million to $407 million. The $150 million increase was implemented for the purpose of facilitating the financing of ESS by PMT through one of its subsidiaries, PMH. The ESS is pledged by PMH under an underlying loan and security agreement (as described hereafter) by and between PMH and PLS and then re-pledged to CSFB by PLS under the Loan and Security Agreement. The aggregate loan amount outstanding under the Loan and Security Agreement and relating to re-pledged ESS by PLS is guaranteed in full by PMT.

On April 30, 2015, in connection with the amendment to the Loan and Security Agreement, PLS and PMH entered into an underlying loan and security agreement, pursuant to which PMH may borrow up to $150 million from PLS for the purpose of financing ESS. PLS then re-pledges the ESS to CSFB under the Loan and Security Agreement.

On April 30, 2015, the Company, through PLS, entered into an Amended and Restated Master Spread Acquisition and MSR Servicing Agreement (“Spread Acquisition Agreement”) with PMH. The Spread Acquisition Agreement amends and restates that certain spread acquisition and MSR servicing agreement originally entered into by and between PLS and PMH on December 30, 2013. The primary purpose of the amendment and restatement was to evidence the ownership of the ESS under participation certificates and to otherwise incorporate the terms of previously executed amendments.

On May 1, 2015, the Company completed its sale to PMH of $136 million in ESS relating to the Company’s acquisition of a $15 billion unpaid principal balance portfolio of Agency MSRs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

Overview

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to ~~PennyMac Financial Services, Inc. (“PFSI”).~~PFSI.

~~Initial Public Offering and Recapitalization~~

On May 14, 2013, we completed an initial public offering (“IPO”) in which we sold approximately 12.8 million shares of Class A Common Stock par value $0.0001 per share (“Class A Common Stock”) for cash consideration of $16.875 per share (net of underwriting discounts). With the net proceeds from the IPO, we bought approximately 12.8 million Class A units of Private National Mortgage Acceptance Company, LLC (“PennyMac”) and became its sole managing member. We operate and control all of the business and affairs and consolidate the financial results of PennyMac.

Before the completion of the IPO, the limited liability company agreement of PennyMac was amended and restated to, among other things, change its capital structure by converting the different classes of interests held by its existing unitholders into Class A units. PennyMac and its existing unitholders also entered into an exchange agreement under which (subject to the terms of the exchange agreement) they have the right to exchange their Class A units for shares of our Class A Common Stock on a one for one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and certain other transactions.

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 pursuant to the exchange agreement results in a special adjustment for PFSI that may increase PFSI’s tax basis in certain assets of PennyMac that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that PFSI would otherwise be required to pay in the future and result in increases in investment in PennyMac deferred tax assets net of investment in PennyMac deferred tax liabilities.

As part of the IPO, we entered into a tax receivable agreement with the then existing unitholders of PennyMac that provides for payment to such owners of 85% of the tax benefits, if any, that we are deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of Class A units and (ii) certain other tax benefits related to our tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

Our Company

We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. ~~residential~~ mortgage market. We believe that our operating capabilities, specialized expertise, access to ~~long term~~long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.

We operate and control all of the business and affairs of Private National Mortgage Acceptance Company, LLC (“PennyMac”) and are its sole managing member. PennyMac was founded in 2008 by members of ~~its~~our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC ~~together with its affiliates,~~ and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates.

We conduct our business in three segments: loan production, loan servicing (together, these two activities comprise our mortgage banking activities) and investment management. Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United

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States. Our principal investment management subsidiary, PNMAC Capital Management, LLC (“PCM”), is an SEC registered investment adviser. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust, listed on the New York Stock Exchange under the ticker symbol PMT. PCM also manages PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, ~~LP,~~L.P., both registered under the Investment Company Act of 1940 (“Investment Company Act”), as amended, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.”

Mortgage Banking

Loan Production

~~Our~~Mortgage loans produced through our loan production segment isare sourced through two channels: correspondent production and ~~consumer-direct~~consumer direct lending.

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In our correspondent production channel, we manage, on behalf of PMT and for our own account, the acquisition of newly originated, prime credit quality, ~~first lien~~first-lien residential mortgage loans that have been underwritten to investor guidelines. PMT acquires, from approved correspondent sellers, newly originated loans, including both ~~“conventional”~~conventional and government-insured or guaranteed residential mortgage loans that qualify for inclusion in securitizations that are guaranteed by the ~~Agencies.~~Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”). We refer to each of Fannie Mae, Freddie Mac and Ginnie Mae as an “Agency” and collectively as the “Agencies”. For conventional mortgage loans, we perform fulfillment activities for PMT and earn a fulfillment fee for each mortgage loan purchased by PMT. In the case of ~~government insured~~government-insured or guaranteed mortgage loans, we purchase them from PMT at PMT’s cost plus a sourcing fee and fulfill them for our own account.

Through our ~~consumer-direct~~consumer direct lending channel, we originate new prime credit quality, ~~first lien~~first-lien residential conventional and government-insured or guaranteed mortgage loans on a national basis to allow customers to purchase or refinance their homes. ~~The~~Our consumer direct model relies on the Internet and call ~~center based~~center-based staff to acquire and interact with customers across the country. We do not have a “brick and mortar” branch network and have been developing our consumer direct operations with call centers strategically positioned across the United States.

~~During the quarter and six months ended June 30, 2014, we managed PMT’s acquisition of newly originated, prime credit quality, first lien residential conventional and government-insured~~For mortgage loans ~~with fair values totaling $7.3 billion and $12.3 billion, respectively. We purchased for~~originated through our consumer direct lending channel, we conduct our own ~~account approximately $4.0 billion~~fulfillment, earn interest income and ~~$7.1 billion, respectively, of government-insured loans at fair value from PMT~~gains or losses during the ~~quarter~~holding period and ~~six months ended June 30, 2014. We also originated $410.1 million and $728.4 million, respectively,~~upon the sale or securitization of ~~residential~~these mortgage loans, ~~at fair value through our consumer-direct channel during~~and retain the ~~quarter and six months ended June 30, 2014.~~associated mortgage servicing rights (“MSRs”) (subject to sharing with PMT a portion of such MSRs or cash with respect to certain consumer direct originated mortgage loans that refinance mortgage loans for which the related MSRs or excess servicing spread (“ESS”) was held by PMT).

During the quarter and six months ended June 30, 2013, we managed PMT’s acquisition of newly originated, prime credit quality, first lien residential conventional and government-insured mortgage loans with fair values totaling $8.9 billion and $17.8 billion, respectively. We purchased for our own account approximately $4.7 billion and $8.3 billion, respectively, of government-insured loans at fair value from PMT during the quarter and six months ended June 30, 2013. We also originated $344.8 million and $613.0 million, respectively, of residential mortgage loans at fair value through our consumer-direct channel during the quarter and six months ended June 30, 2013.Our loan production activity is summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Unpaid principal balance of mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust	$	4,735,374	$	2,974,077
Consumer direct		896,998		313,788
	$	5,632,372	$	3,287,865
Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust	$	2,890,132	$	1,919,578

Loan Servicing

Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of mortgage loan payments; response to customer inquiries; accounting for principal and interest; holding custodial ~~(impound)~~(impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions. We service a diverse portfolio of mortgage loans both as the owner of MSRs and on behalf of other MSR or mortgage owners. We provide ~~prime~~ servicing for conventional and ~~government insured~~government-insured or guaranteed loans (“prime servicing”), as well as ~~special~~ servicing for distressed loans that have been acquired as investments by our Advised ~~Entities.~~Entities (“special servicing”). As of ~~June 30, 2014,~~March 31, 2015, the portfolio of mortgage loans that we serviced or subserviced totaled approximately ~~$93.6~~$115.2 billion in ~~UPB.~~unpaid principal balance (“UPB”).

Investment Management

We are an investment manager through ~~an indirect~~our subsidiary, PCM. PCM currently manages PMT and the Investment Funds. PMT and the Investment Funds had combined net assets of approximately $~~2.1~~$2.0 billion as of ~~June 30, 2014.~~March 31, 2015. For these activities, we earn management fees as a percentage of net assets and incentive compensation based on investment performance.

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Observations on Current Market Conditions

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues to grow as reflected in recent economic data. During the ~~second~~first quarter of ~~2014,~~2015, real U.S. gross domestic product expanded at an annual rate of ~~4.0%~~0.2% compared to a ~~revised~~ 2.1% decrease for the first quarter of 2014 and a ~~2.5%~~2.2% increase for the ~~second~~fourth quarter of ~~2013.~~2014. The national unemployment rate was ~~6.1%~~5.5% at ~~June 30,~~March 31, 2015 compared to 5.6% at December 31, 2014 and ~~compares to a revised~~

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~~seasonally adjusted rate of 7.5% at June 30, 2013 and 6.7%~~6.6% at March 31, 2014. ~~While delinquency~~Delinquency rates on residential real estate loans ~~continue to decrease, they~~ remain elevated compared to historical ~~rates.~~rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the ~~first~~fourth quarter of 2014, the delinquency rate on residential real estate loans held by commercial banks was ~~7.8%~~6.6%, a reduction from ~~9.7%~~8.2% during the ~~first~~fourth quarter of 2013.

Residential real estate activity appears to be improving. The seasonally adjusted annual rate of existing home sales for ~~June 2014~~March 2015 was ~~2.3% lower~~10.4% higher than for ~~June 2013~~March 2014, and the national median existing home price for all housing types was ~~$223,300,~~$212,100, a ~~4.3%~~7.8% increase from ~~June 2013.~~March 2014. On a national level, foreclosure filings during the ~~second~~first quarter of ~~2014 decreased~~2015 increased by ~~19%~~4% as compared to the ~~second~~first quarter of ~~2013.~~2014. Foreclosure activity across the country ~~is on a decreasing trend;~~decreased in 2014; however, it is expected to remain above historical average levels through ~~2014~~2015 and beyond.

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Thirty-year fixed mortgage interest rates ranged from a low of ~~4.16%~~3.59% to a high of ~~4.34%~~3.86% during the ~~second~~first quarter of ~~2014. During~~2015 while during the ~~second~~first quarter of ~~2013,~~2014, thirty-year fixed mortgage interest rates ranged from a low of ~~3.45%~~4.23% to a high of ~~4.07%~~4.53% (Source: the Federal Home Loan Mortgage Corporation’s Weekly Primary Mortgage Market Survey).

Changes in fixed rate residential mortgage loan interest rates generally follow changes in long term U.S. Treasury yields. Toward the end of the second quarter of 2013, an increase in these Treasury yields led to an increase in mortgage loan interest rates. As a result of this increase in mortgage loan interest rates, market volumes for mortgage originations have decreased led by a reduction in refinance activity.

Mortgage lenders originated an estimated ~~$295~~$370 billion of home loans during the first quarter ~~ended June 30, 2014, down 52.9%~~of 2015, up 60% from the first quarter ~~ended June 30, 2013.~~of 2014. Although the low interest rate environment in the first quarter of 2015 led to an increase in the volume of borrowers seeking to refinance, we expect purchase-money loans to constitute a greater proportion of mortgage originations in the future. Mortgage originations are forecast to ~~continue to decline,~~remain relatively flat, with current industry estimates for ~~2014~~2015 totaling ~~$1.1~~$1.3 trillion ~~compared to $1.9 trillion for 2013~~ (Source: ~~Average~~average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

We expect efforts to expand GSE product offerings (including 97% loan-to-value loans) and a recent reduction in FHA mortgage insurance premiums to make mortgage credit more affordable. In ~~recent periods,~~our correspondent production business, we ~~have seen~~continue to see increased competition from new and existing market participants in the correspondent production business, as well as reductions in the overall level of refinancing activity. We believe that this change in supply and demand within the marketplace has been driving lower correspondent and retail production margins in recent periods, which is reflected in our results of operations in our gains on mortgage loans acquired for sale. During the first several months of 2013, gains on mortgage loans acquired for sale benefited from wider secondary spreads (the difference between interest rates charged to borrowers and yields on mortgage-backed securities in the secondary market); however, secondary spreads narrowed in subsequent months and we expect them to continue to normalize toward their long-term averages in 2014.

We believe there is significant long-term market opportunity in non-Agency jumbo mortgage loans. Pricing for non-Agency AAA rated bonds has steadily improved since the beginning of the year, however liquidity is fairly limited. During the six months ended June 30, 2014, prime jumbo MBS issuance totaled $2.1 billion in unpaid principal balance (“UPB”) compared to $7.9 billion during the six months ended June 30, 2013. During the six months ended June 30, 2014, we fulfilled for PMT approximately $93.4 million in UPB of jumbo loans, compared to $115.5 million in UPB of jumbo loans fulfilled for PMT during the six months ended June 30, 2013.participants.

In our capacity as an investment manager, we continue to see ~~substantial volumes of~~a robust market for distressed residential mortgage ~~loan sales~~loans (sales of loan pools that consist of either ~~nonperforming~~non-performing loans, troubled but performing loans or a combination thereof) offered for ~~sale by a limited number~~sale. During 2014, the pool of ~~sellers.~~sellers expanded to include new programmatic sellers, such as HUD and Freddie Mac. During the ~~second~~first quarter of ~~2014,~~2015, we reviewed 5730 mortgage loan pools ~~with UPB~~ totaling approximately ~~$18.2 billion.~~$9.8 billion in UPB. This compares to our review of 3625 mortgage loan pools ~~with UPB~~ totaling approximately ~~$11.1~~$7.8 billion ~~and one pool of real estate acquired~~ in ~~settlement of loans totaling approximately $108 million~~UPB during the ~~second~~first quarter of ~~2013. During the quarter and six months ended June 30, 2014, we~~2014. We acquired for PMT distressed loans with fair ~~value~~values totaling ~~$27.2~~$242 million and ~~$287.5~~$261 million ~~respectively, and $242.7 million and $443.2 million, respectively,~~ during the ~~same periods in 2013.~~quarter ended March 31, 2015 and 2014, respectively. While we expect to see a continued supply of distressed whole loans, we believe the pricing for recent transactions has been less attractive for buyers. We remain patient and selective for PMT in making new investments in distressed whole loans and we continue to monitor the market to assess best execution opportunities for distressed portfolio investments held by the Advised Entities.

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Results of Operations

Our results of operations are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013			Quarter ended March 31,
	(in thousands)												2015		2014
Revenue
													(in thousands)
Revenues
Net gains on mortgage loans held for sale at fair value	$	39,704		$	42,654		$	74,242		$	82,611		$	75,378	$	34,538
Loan origination fees	10,345			6,312			17,225			11,980				16,682		6,880
Fulfillment fees from PennyMac Mortgage Investment Trust	12,433			22,054			21,335			50,298				12,866		8,902
Net loan servicing fees	56,969			22,069			100,733			38,111				26,776		43,764
Management fees	10,998			10,429			21,107			18,835				8,489		10,109
Carried Interest from Investment Funds	1,834			2,862			3,991			7,599				1,233		2,157
Net interest expense	(2,480		)	274			(4,756		)	(1,313		)		(2,896)		(2,276)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust	(103		)	(320		)	12			(233		)		107		115
Other	735			243			2,038			1,057				1,679		1,303
Total net revenue	130,435			106,577			235,927			208,945				140,314		105,492
Total expenses	72,388			56,348			128,819			103,423				87,076		56,431
Provision for income taxes	6,630			2,038			12,153			2,038				6,114		5,523
Net income	$	51,417		$	48,191		$	94,955		$	103,484		$	47,124	$	43,538

Income before provision for income taxes by segment:
Mortgage banking:
Production	$	32,761		$	37,843		$	58,715		$	82,189		$	70,683	$	25,954
Servicing	19,959			4,799			37,072			6,443				(18,545)		17,113
Total mortgage banking	52,720			42,642			95,787			88,632				52,138		43,067
Investment management	5,327			7,587			11,321			16,890				1,100		5,994
	$	58,047		$	50,229		$	107,108		$	105,522		$	53,238	$	49,061
During the period:
Interest rate lock commitments issued	$	4,749,012		$	4,883,672		$	8,289,907		$	8,580,236		$	7,793,325	$	3,924,593
Mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust at fair value	$	3,955,329		$	4,733,767		$	7,085,859		$	8,282,163
Retail production at fair value, net	410,125			344,840			728,430			612,966
Fair value of mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust													$	4,989,838	$	3,130,530
Consumer direct														904,213		317,915
	$	4,365,454		$	5,078,607		$	7,814,289		$	8,895,129		$	5,894,051	$	3,448,445
Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust	$	2,991,764		$	4,323,885		$	4,911,342		$	9,110,711		$	2,890,132	$	1,919,578
At period end:
Unpaid principal balance of mortgage loan servicing portfolio:
Mortgage servicing rights owned	$	57,051,424		$	18,242,514
Subserviced	35,554,830			25,509,373
Owned
Mortgage servicing rights													$	71,985,989	$	50,109,643
Mortgage servicing liabilities														421,452		—
Mortgage loans held for sale	959,014			653,789										1,288,744		660,470
	$	93,565,268		$	44,405,676									73,696,185		50,770,113
Net assets of Advised Entities
Subserviced														41,542,426		33,073,476
													$	115,238,611	$	83,843,589
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,577,160		$	1,244,181								$	1,542,159	$	1,543,282
Investment Funds	565,926			561,790										413,155		561,638
	$	2,143,086		$	1,805,971								$	1,955,314	$	2,104,920

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~~Comparison of the quarters and six months ended June 30, 2014 and 2013~~

~~Net income increased by approximately $3.2 million or 7% for~~During the quarter ended ~~June 30,~~March 31, 2015, we recorded net income of $47.1 million. Our net income in the first quarter of 2015 reflects net gains on mortgage loans held for sale at fair value of $75.4 million and loan origination fees of $16.7 million, increases of $40.8 million and $9.8 million, respectively, from the first quarter in 2014 resulting from the growth in volume of mortgage loans we purchased or originated for subsequent sale during the quarter. These revenue increases were partially offset by a $17.0 million decrease in net loan servicing fees, a $1.6 million decrease in management fees, and ~~decreased by approximately $8.5~~a $30.6 million ~~or 8% for the six months ended June 30, 2014 when compared to the same periods in 2013. The~~ increase in ~~net income from~~expenses incurred to accommodate the growth of our mortgage banking segments.

During the quarter ended ~~June 30, 2013 to~~March 31, 2014, we recorded net income of $43.5 million. Our net income in the first quarter ~~ended June 30,~~of 2014 ~~is primarily due to increased~~reflects net loan servicing ~~fee income~~fees of $43.8 million, an increase of $27.7 million from the first quarter of 2013 resulting from the growth in our mortgage loan servicing portfolio. ~~Our~~As of March 31, 2014, our loan servicing portfolio ~~increased~~stood at $83.8 billion in UPB, an increase of approximately $5.7 billion from ~~$44.4 billion at June 30, 2013 to $93.6 billion at June 30, 2014. The~~December 31, 2013. This growth was partially offset by a decrease in ~~net income~~fulfillment fees of $19.3 million resulting from ~~the six months ended June 30, 2013 to the six months ended June 30, 2014 is primarily due to the effects of the~~a contraction in the mortgage loan origination market, ~~partially offset by~~and an increase in expenses incurred to accommodate the growth inof our ~~mortgage loan~~ servicing ~~portfolio. Our mortgage loan production decreased by $1.1 billion or 12% for the six months ended June 30, 2014 when compared to the six months ended June 30, 2013.~~operations.

Net ~~gains~~Gains on ~~mortgage loans held~~Mortgage Loans Held for ~~sale~~Sale at ~~fair value~~Fair Value

~~During the quarter and six months ended June 30, 2014, we~~We recognized net gains on mortgage loans held for sale at fair value totaling ~~$39.7~~$75.4 million ~~and $74.2 million, respectively. This compares to net gains on mortgage loans held for sale at fair value totaling $42.7 million and $82.6 million, respectively, for~~during the quarter ~~and six months~~ ended ~~June 30, 2013.~~ March 31, 2015, compared to $34.5 million during the quarter ended March 31, 2014.

The ~~decrease~~increase in net gains on mortgage loans held for sale at fair value during the first quarter of 2015 was due to ~~the effect of increasing price competition in the mortgage loan origination market, which had a negative effect on our margins, and, to a lesser extent, a reduction~~growth in the volume of mortgage ~~loan sales during~~loans that we purchased and originated and subsequently sold along with improvement in production margins compared to the ~~period.~~first quarter of 2014. The net gain for the ~~quarter~~quarters ended March 31, 2015 and ~~six months ended June 30,~~ 2014 included ~~$49.7~~$67.0 million and ~~$87.2~~$37.5 million, respectively, in fair value of MSRs received as part of proceeds on sales, net of ~~MSR recapture payable~~mortgage servicing liabilities incurred.

In addition to ~~PMT. The~~more favorable market conditions, we have been able to improve our margins through growth in our consumer direct mortgage loan activities, which generally produce higher margins than correspondent activities. Over recent periods, the margins on correspondent government-insured or guaranteed mortgage loans have tended to be higher than those on conventional correspondent production. Government-insured or guaranteed mortgage lending is not as competitive as conventional conforming mortgage lending due to the added complexity involved in the origination and servicing of government-insured or guaranteed mortgage loans.

Our net ~~gain~~gains on mortgage loans held for ~~the quarter~~sale include both cash and ~~six months ended June 30, 2013 included $52.5 million~~non-cash elements. We receive proceeds on sale that include both cash and ~~$94.2 million, respectively, in~~our estimate of the fair value of ~~MSRs received~~the MSRs. We also recognize a liability for our estimate of the losses we expect to incur in the future as ~~part~~a result of ~~proceeds on~~claims against us in connection with the representations and warranties that we made in the loan sales ~~net of MSR recapture payable to PMT.~~transactions.

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Our net gains on mortgage loans held for sale are summarized below:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended March 31,
	2014			2013			2014			2013			2015		2014
	(in thousands)												(in thousands)
Cash (loss) gain:
Sales proceeds	$	10,241		$	(43,318	)	$	14,722		$	(55,141	)	$	2,730	$	4,481
Hedging activities	(25,549		)	22,260			(35,805		)	39,881				(18,329)		(10,256)
	(15,308		)	(21,058		)	(21,083		)	(15,260		)		(15,599)		(5,775)
Non-cash gain:
Mortgage servicing rights received as proceeds from mortgage loan sales	49,660			52,478			87,174			94,214
Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust	(2,526		)	(367		)	(4,424		)	(499		)
Mortgage servicing rights resulting from mortgage loan sales														69,956		37,514
Mortgage servicing liabilities resulting from mortgage loan sales														(2,928)		—
Excess servicing spread recapture payable to PennyMac Mortgage Investment Trust														(1,289)		(1,898)
Provision for losses relating to representations and warranties on loans sold	(1,204		)	(1,453		)	(2,055		)	(2,697		)		(1,495)		(851)
Change in fair value relating to mortgage loans and hedging derivatives held at period end:
Change in fair value relating to loans and hedging derivatives held at period end:
Interest rate lock commitments	15,453			(41,647		)	22,989			(40,150		)		21,991		7,536
Mortgage loans	6,830			(17,241		)	14,658			(19,634		)		12,201		7,828
Hedging derivatives	(13,201		)	71,942			(23,017		)	66,637				(7,459)		(9,816)
	$	39,704		$	42,654		$	74,242		$	82,611		$	75,378	$	34,538
During the period:
Unpaid principal balance of mortgage loans sold	$	4,510,460		$	4,377,043		$	7,654,026		$	8,236,132		$	5,508,868	$	3,143,566
Interest rate lock commitments issued, net of cancellations:
Interest rate lock commitments issued:
Conventional mortgage loans	$	139,871		$	288,020		$	204,915		$	491,766		$	6,009,558	$	120,915
Government-insured or guaranteed loans	4,609,141			4,595,652			8,084,992			8,088,470				1,783,767		3,803,678
	$	4,749,012		$	4,883,672		$	8,289,907		$	8,580,236		$	7,793,325	$	3,924,593
Period end:
Mortgage loans held for sale at fair value	$	1,000,415		$	656,341								$	1,353,944	$	717,476
Commitments to fund and purchase mortgage loans	$	1,754,845		$	1,767,314								$	3,123,645	$	1,202,126

Increase (decrease) in net gains on mortgage loans held for sale at fair value due to:
Net change in fair value of interest rate lock commitments	$	57,099		$	(46,268	)	$	63,138		$	(44,955	)
Volume of mortgage loans sold	2,511			35,344			(8,100		)	83,283
Gain margin	(62,560		)	38,788			(63,407		)	15,556
Total change	$	(2,950	)	$	27,864		$	(8,369	)	$	53,884

~~We recognize a substantial portion of our gain~~Provision for Losses on ~~mortgage loans held for sale at fair value before we fund or purchase the loan. In the course of our loan production activities, we make contractual commitments to PMT~~Representations and to mortgage loan applicants to purchase or fund mortgage loans at specified terms. We call these commitments interest rate lock commitments (“IRLCs”). We recognize the value of IRLCs at the time we make a commitment to PMT or the borrower.Warranties

We estimate the fair value of an IRLC based on quoted Agency MBS prices, our estimate of the fair value of the MSRs we expect to receive upon sale of the loans and the probability that the mortgage loan will fund or be purchased as a percentage of the commitment we have made (the “pull-through rate”). We update our estimates of the value of the IRLCs as the mortgage loans move through the purchase or loan process for changes in our estimate of the probability the loan will fund and for changes in market interest rates.

An active, observable market for IRLCs does not exist. Therefore, we estimate the fair value of IRLCs using methods and assumptions we believe that market participants use in pricing IRLCs. The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the value of the mortgage loans we have committed to purchase. Significant changes in the pull-through rate and the MSR component of the

~~Table of Contents~~

IRLCs, in isolation, could result in a significant change in fair value measurement. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but rising interest rates increase the pull-through rate for loans that have decreased in fair value.

~~Following is a quantitative summary of key unobservable inputs we used in the valuation of IRLCs:~~

June 30, 2014

December 31, 2013

Key inputs

Range
(Weighted average)

Pull-through rate

57.0% - 98.0%

62.1% - 98.1%

(76.1)%

(81.7)%

Mortgage servicing rights value expressed as:

Servicing fee multiple

1.9 - 4.9

2.0 - 5.0

(3.8)

(3.7)

Percentage of unpaid principal balance

0.4% - 2.4%

0.4% - 2.4%

(1.0)%

(0.9)%

We receive non-cash proceeds on sale of mortgage loans in the form of MSRs. MSRs represent the value of a contract that obligates us to service mortgage loans on behalf of the purchaser of the loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We recognize MSRs at our estimate of the fair value of the contract to service the loans.

As economic fundamentals influence the loans we sell with servicing rights retained, our estimate of the fair value of MSRs will also change. As a result, we will record changes in fair value as a component of ~~Net loan servicing fees~~ for the MSRs we carry at fair value, and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the asset’s fair value to its carrying value at the measurement date.

~~Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:~~

Quarter ended June 30,

2014

2013

Range
(Weighted average)

Fair
value

Amortized
cost

Fair
value

Amortized
cost

(Amount recognized and unpaid princiapl balance of underlying mortgage loans in thousands)

Amount recognized

$7,333

$42,327

$17

$52,461

Unpaid principal balance of underlying mortgage loans

$600,196

$3,550,411

$423,031

$4,372,786

Weighted-average servicing fee rate (in basis points)

33

30

25

29

Pricing spread (1)

8.3% - 16.2%

6.8% - 15.2%

6.4% - 9.6%

5.4% - 12.4%

(11.5)%

(10.9)%

(7.2)%

(8.0)%

Annual total prepayment speed (2)

7.6% - 25.0%

7.6% - 43.6%

8.7% - 15.3%

8.5% - 18.5%

(8.8)%

(8.2)%

(9.0)%

(8.8)%

Life (in years)

2.1 – 7.5

1.5 – 7.3

3.0 – 6.9

2.9 – 6.9

(7.0)

(7.1)

(6.7)

(6.7)

Per-loan annual cost of servicing

$53 – $100

$53 – $100

$68 – $68

$68 – $120

$(88)

$(90)

$(68)

$(103)

~~Table of Contents~~

~~(1)~~Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

~~(2)Annual total prepayment speed is measured using Life Total Conditional Prepayment Rate (“CPR”).~~

We also provide for our estimate of the losses that we may be required to incur in the future as a result of our breach of representations and warranties provided to the purchasers of the loans we sold. Our agreements with the Agencies include representations and warranties related to the loans we sell to the Agencies. The representations and warranties require adherence to Agency origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent lenders that sold such mortgage loans and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent lender.

~~Following is a summary of the repurchase activity and unpaid balance of mortgage loans subject to representations and warranties:~~

During the six months ended June 30, 2014, we repurchased mortgage loans with unpaid balances totaling $1.9 million. We recorded no losses as a result of these repurchases. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases and the loans sold begin to season, we expect the level of repurchase activity to increase. As economic fundamentals change and as investor and Agency evaluation of their loss mitigation strategies, including claims under representations and warranties,

~~Table of Contents~~

~~change, and as the mortgage market and general economic changes affect our correspondent lenders, the level of repurchase activity and ensuing losses will change, which may be material to us.~~

We establish a liability at the time loans are sold and periodically update our liability estimate. We evaluate the adequacy of the balance of our recorded liability for losses under representations and warranties based on our loss experience and our assessment of future losses to be incurred relating to loans we have previously sold and which remain outstanding at the balance sheet date. The method used to estimate ~~the liability for~~our losses on representations and warranties is a function of ~~the representations and warranties given and considers a combination~~our estimate of ~~factors, including, but not limited to, estimated~~ future defaults, ~~and~~mortgage loan repurchase rates, ~~and~~ the ~~potential~~ severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. ~~The level of~~We establish a liability at the time loans are sold and review our liability ~~for representations and warranties is approved by our senior management credit committee~~estimate on a ~~quarterly~~periodic basis.

~~Following is a summary of our~~ ~~Liability~~During the quarters ended March 31, 2015 and 2014, we recorded provisions for losses under representations and warranties as a component of Net gains on mortgage loans held for sale at fair value totaling $1.5 million and $851,000, respectively. The increase in the ~~consolidated balance sheets:~~first quarter of 2015 was primarily due to an increase in the volume of loan sales activity during the quarter.

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Balance at beginning of period

$
8,974

$
4,748

$
8,123

$
3,504

Provision for losses on loans sold

1,204

1,453

2,055

2,697

Incurred losses

—

(16
)
—

(16
)
Balance at end of period

$
10,178

$
6,185

$
10,178

$
6,185

Unpaid principal balance of mortgage loans subject to representations and warranties at period end

$
29,882,252

$
16,408,013

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Following is a summary of mortgage loan repurchase activity and the UPB of mortgage loans subject to representations and warranties:


	Quarter ended March 31,
	2015		2014
	(in thousands)
During the period:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of period	$	1,521	$	80
New indemnifications		681		—
Indemnified mortgage loans repurchased		—		—
Less: Indemnified mortgage loans repaid or refinanced		—		—
Mortgage loans indemnified by PFSI at end of period	$	2,202	$	80
Repurchase activity
Total mortgage loans repurchased by PFSI	$	4,490	$	1,890
Less: Mortgage loans repurchased by correspondent lenders		520		798
Less: Mortgage loans repaid by borrowers		373		—
Mortgage loans repurchased by PFSI with losses chargeable to liability for representations and warranties	$	3,597	$	1,092
Losses charged to liability for representations and warranties	$	65	$	—
Period end:
Unpaid principal balance of mortgage loans subject to representations and warranties	$	39,624,553	$	26,304,717
Liability for representations and warranties	$	14,689	$	8,974

During the quarter ended March 31, 2015, we repurchased mortgage loans totaling $4.5 million in UPB. After recovery of repurchase losses from the selling correspondent lenders, we recorded losses of $65,000 as a result of these repurchases. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases and the loans sold continue to season, we expect the level of repurchase activity to increase.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor ~~demand~~loss mitigation strategies, ~~correspondent lender repurchase performance~~ and other external conditions that may change over the lives of the underlying mortgage loans. Our estimate of the liability for representations and warranties is prepared initially by our credit administration staff. The liability estimate is reviewed and approved by our senior management credit committee which includes PFSI’s chief executive, operating, credit and enterprise risk, mortgage fulfillment, institutional mortgage banking and shared services officers. We did not record any adjustments to previously recorded liabilities for representations and warranties during any of the periods presented.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties. We believe the amount and range of reasonably possible losses in relation to the recorded liability is not material to our financial condition or results of operations.

~~Our hedging activities relating to correspondent production and~~ ~~consumer-direct lending primarily involve forward sales of our inventory and IRLCs as well as purchases of options to sell and options to purchase MBS.~~

Other ~~loan production-related revenues~~Loan Production-Related Revenues

Loan origination fees increased ~~$4.0~~$9.8 million ~~and $5.2 million, respectively, in~~during the first quarter ~~and six months ended June 30, 2014~~of 2015 compared to the ~~same periods~~first quarter in ~~2013. The increase was~~2014 primarily due to growth in the volume of consumer direct originations and increases in certain fees we charge in our loan production activities.

~~Loan fulfillment~~

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Fulfillment fees from PMT, which represent fees we collect for services we perform on behalf of PMT in connection with its acquisition, packaging and sale of mortgage loans. Fulfillment fees decreased $9.6 million and $29.0 million, respectively, in the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The decreases are due to decreases in the volume of mortgage loans, ~~we fulfilled on behalf of PMT and strategic reductions in the fulfillment fee rate charged to PMT. The loan fulfillment fees~~ are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT. Fulfillment fees increased $4.0 million in the first quarter of 2015 compared to the first quarter in 2014, primarily due to growth in the volume of Agency-eligible mortgage loans we fulfilled on behalf of PMT. Summarized below are our fulfillment fees:


	Quarter ended June 30,				Six months ended June 30,				Quarter ended March 31,
	2014		2013		2014		2013		2015		2014
	(in thousands)								(in thousands)
Fulfillment fee revenue	$	12,433	$	22,054	$	21,335	$	50,298	$	12,866	$	8,902
Unpaid principal balance of loans fulfilled	$	2,991,764	$	4,323,885	$	4,911,342	$	9,110,711	$	2,890,132	$	1,919,578
Average fulfillment fee rate (in basis points)										45		46

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Net loan servicing fees

Our net loan servicing fees are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013			Quarter ended March 31,
	(in thousands)												2015		2014
Net servicing fees:
													(in thousands)
Net loan servicing fees:
Loan servicing fees
From non-affiliates	$	43,314		$	11,744		$	79,414		$	20,801		$	50,101	$	36,100
From PennyMac Mortgage Investment Trust	14,180			8,787			28,771			16,513				10,670		14,591
From Investment Funds	4,161			2,066			5,638			4,074				968		1,477
Ancillary and other fees	4,838			2,662			9,989			4,923				11,185		5,151
	66,493			25,259			123,812			46,311				72,924		57,319
Amortization, impairment and change in estimated fair value of mortgage servicing rights	(9,524		)	(3,190		)	(23,079		)	(8,200		)
Net servicing fees	$	56,969		$	22,069		$	100,733		$	38,111
Amortization, impairment and change in fair value of mortgage servicing rights														(46,148)		(13,555)
Net loan servicing fees													$	26,776	$	43,764
Average servicing portfolio													$	109,882,352	$	80,446,228

Following is a summary of our mortgage loan servicing portfolio:

	June 30, 2014		December 31, 2013
	(in thousands)
Loans serviced at period end:
					March 31, 2015		December 31, 2014
					(in thousands)
Mortgage loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated					$	39,203,101	$	36,564,434
Acquired						32,782,888		28,126,179
						71,985,989		64,690,613
Mortgage servicing liabilities						421,452		478,581
Mortgage loans held for sale						1,288,744		1,100,910
						73,696,185		66,270,104
Subserviced for Advised Entities	$	31,169,742	$	26,788,479		37,138,595		35,416,466
Owned mortgage servicing rights—Originated	29,546,095		22,499,847
Owned mortgage servicing rights—Acquisitions	27,505,329		22,469,179
Mortgage loans held for sale	959,014		506,540
Total prime servicing	89,180,180		72,264,045			110,834,780		101,686,570
Special servicing:
Subserviced for Advised Entities	4,385,088		4,844,239			4,403,831		4,293,479
Owned mortgage servicing rights—Acquisitions	—		969,794
Subserviced for non-affiliates	—		89,361
Total special servicing	4,385,088		5,903,394			4,403,831		4,293,479
Total loans serviced	$	93,565,268	$	78,167,439
Total mortgage loans serviced					$	115,238,611	$	105,980,049

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During the first quarter ~~and six months ended June 30, 2014, net~~of 2015, loan servicing fees increased ~~$34.9~~$15.6 million ~~and $62.6 million, respectively, when~~ compared to the same ~~periods~~period in ~~2013.~~2014. The increase induring the quarter ~~ended June 30, 2014~~ was primarily due to ana $14.0 million increase ~~of $31.6 million~~ in loan servicing fees from non-affiliates ~~due to~~resulting from growth in our mortgage loan servicing portfolio ~~of loans serviced as a result of our~~due to purchases of MSRs, ~~and~~supplemented with the ongoing sales of mortgage loans with servicing rights retained, and partially offset by the sale of MSRs relating to a portfolio ~~of MSRs~~ backed by distressed mortgage ~~loans; an~~loans. The increase ~~of $5.4~~in loan servicing fees during the first quarter was partially offset by a $4.4 million decrease in loan servicing fees from ~~PMT primarily~~our Advised Entities due to ~~activity-based~~activity fees relating to ~~the~~a sale of reperforming mortgage loans ~~and growth in~~by PMT during the ~~volume~~first quarter of ~~loans we service; an increase in loan servicing fees net~~2014 that did not recur during the first quarter of mortgage servicing rebate from the Investment Funds of $2.1 million due to activity-based fees relating to the sale of mortgage loans from the Investment Funds’ portfolios; and an increase of $2.2 million in ancillary fees due to growth in the portfolios of mortgage loans serviced.

~~Table of Contents~~2015.

Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights are summarized below:

	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)												Quarter ended March 31,
Effect of mortgage servicing rights:
													2015		2014
													(in thousands)
Amortization and realization of cash flows	$	(16,729	)	$	(5,235	)	$	(31,268	)	$	(9,420	)	$	(24,104)	$	(14,539)
Change in fair value and (provision for) reversal of impairment of mortgage servicing rights carried at lower of amortized cost or fair value	(12,474		)	2,045			(15,851		)	2,511
Change in fair value of excess servicing spread financing	10,062			—			14,854			—
Change in fair value and provision for impairment of mortgage servicing rights carried at lower of amortized cost or fair value														(46,701)		(3,377)
														(70,805)		(17,916)
Change in fair value of excess servicing spread														7,536		4,792
Hedging gains (losses)	9,617			—			9,186			(1,291		)		17,121		(431)
Total amortization, impairment and change in estimated fair value of mortgage servicing rights	$	(9,524	)	$	(3,190	)	$	(23,079	)	$	(8,200	)
Ending mortgage servicing rights:
Total amortization, impairment and change in fair value of mortgage servicing rights													$	(46,148)	$	(13,555)
Mortgage servicing rights at period end:
At lower of amortized cost or fair value	$	313,082		$	176,668								$	428,998	$	282,144
At fair value	308,599			23,070									$	361,413		246,984
	$	621,681		$	199,738								$	790,411	$	529,128
Average MSR balances:
At lower of amortized cost or fair value	$	297,663		$	152,009		$	284,241		$	130,594
At fair value	$	263,238		$	19,279		$	244,102		$	19,415

Amortization, impairment and change in ~~estimated~~ fair value of mortgage servicing rights increased ~~$6.3~~$32.6 million ~~and $14.9 million, respectively, for~~during the first quarter ~~and six months ended June 30, 2014~~of 2015 compared to the ~~same periods in 2013. The~~first quarter of 2014. This increase in ~~Amortization, impairment and change in estimated fair value of mortgage servicing rights~~was primarily due to ~~growth in our investment in MSRs, which caused an increase in amortization~~impairment, reflecting lower interest rates throughout most of the ~~asset~~first quarter of 2015 and ~~impairment, and~~a reduction by the FHA of the mortgage insurance premium relating to mortgage loans it insures. These factors combined to increase both actual prepayments during the quarter ended March 31, 2015 as well as expectations for higher prepayment speeds ~~as a result of lower interest rates~~ at ~~quarter end;~~period end. The resulting impairment and fair value change charges were partially offset ~~with the positive change~~by an increase in fair value of ~~the excess servicing spread financing.~~ESS financing and by hedging gains.

Impairment and changes in fair value of MSRs have a significant effect on net servicing fees, driven primarily by our monthly re-estimation of the fair value of MSRs. As our investment in MSRs grows, we expect that the effect of impairment and changes in fair value will have an increasing influence on our net income. MSRs are sensitive to changes in interest rates. Decreasing interest rates encourage increased borrower refinancing activity. Increased borrower refinancing activity shortens the life of our MSR assets, thereby reducing the income we expect to receive from such assets and, by extension, MSR fair value.

The fair value of MSRs is difficult to determine because MSRs are not actively traded in observable markets. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect our income. Our MSR valuation process combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each balance sheet date. The cash flow and prepayment inputs used in our discounted cash flow model are based on market factors and include the historical performance of our MSRs, which we believe are consistent with inputs and data used by market participants valuing similar MSRs.

The key inputs used in the valuation of MSRs include mortgage prepayment and default rates of the underlying loans, the applicable discount rate, and cost to service loans. These inputs can, and generally do, change from period to period as market conditions change. Therefore our estimate of the fair value of MSRs changes from period to period. Our senior management valuation committee reviews and approves the fair value estimates of our MSRs.

We account for MSRs at either our estimate of the asset’s estimated fair value with changes in fair value recorded in current period income or using the amortization method with the MSRs carried at the lower of amortized cost or estimated fair value based on how we finance certain of our MSR purchases and whether we believe the underlying mortgages are sensitive to prepayments resulting from changing market interest rates. We have identified an initial mortgage interest rate of 4.5% for MSRs originated through our lending activities as the threshold for whether such mortgage loans are sensitive to changes in interest rates:

·Our risk management efforts in connection with purchased MSRs and MSRs relating to mortgage loans originated through our loan production activities with initial interest rates of more than 4.5% are aimed at moderating the effects of changes in interest rates on the assets’ values.

·For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5% that were acquired as a result of our lending activities, we have concluded that such assets present different risks than MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Our risk management

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efforts relating to these assets are aimed at moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ values. We have identified these assets for accounting using the amortization method.

·MSRs purchased for which a financing in the form of ESS cash flows has been recorded are accounted for at fair value. The ESS financing at fair value is accounted for at fair value to align the accounting for the MSR with the related liability.

~~Our MSRs are summarized by the basis on which we account for the assets below:~~

Basis of accounting

June 30,
2014

December 31,
2013

(in thousands)

Fair value

$
308,599

$
224,913

Lower of amortized cost or fair value:

Amortized cost

$
321,911

$
263,373

Valuation allowance

(8,829
)
(4,622
)
Carrying value

$
313,082

$
258,751

Fair value

$
321,383

$
269,422

Total mortgage servicing rights:

Carrying value

$
621,681

$
483,664

Fair value

$
629,982

$
494,335

Unpaid principal balance of mortgage loans underlying mortgage servicing rights

$
57,051,424

$
45,938,820

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~~Key assumptions used in determining the fair value of MSR are as follows:~~

~~Purchased MSRs backed by distressed mortgage loans~~

~~During the quarter ended June 30, 2014, the Company sold a portfolio of purchased MSRs backed by distressed mortgage loans to a non-affiliated entity.~~

	~~June 30, 2014~~		~~December 31, 2013~~
	~~Range~~ ~~(Weighted average)~~
	~~Fair~~ ~~value~~	~~Amortized~~ ~~cost~~	~~Fair~~ ~~value~~	~~Amortized~~ ~~cost~~
	~~(Carrying value, unpaid principal balance of underlying mortgage loans and effect on~~ ~~fair value amounts in thousands)~~
~~Carrying value~~	—	—	~~$10,129~~	—
~~Unpaid principal balance of underlying mortgage loans~~	—	—	~~$969,794~~	—
~~Weighted-average note interest rate~~	—	—	~~5.80%~~	—
~~Weighted-average servicing fee rate (in basis points)~~	—	—	50	—

~~Discount rate~~	—	—	~~15.3% – 15.3%~~	—
	—	—	~~(15.3)%~~	—

~~Average life (in years)~~	—	—	~~5.0 - 5.0~~	—
			~~(5.0)~~

~~Prepayment speed (1)~~	—	—	~~11.4% – 11.4%~~	—
	—	—	~~(11.4)%~~	—

~~Per-loan cost of servicing~~	—	—	~~$218 – $218~~	—
	—	—	~~$(218)~~	—

~~(1) Prepayment speed is measured using Life Voluntary CPR.~~

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~~All other MSRs~~

~~(1)~~Pricing spread represents a margin that is applied to a reference interest rate’s forward curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of loans and purchased MSRs not backed by pools of distressed mortgage loans.

~~(2)Prepayment speed is measured using Life Total CPR.~~

Management fees and Carried Interest

Management fees and Carried Interest are summarized below:

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Management fees:

PennyMac Mortgage Investment Trust:

Base management fee

$
5,838

$
4,575

$
11,359

$
8,940

Performance incentive fee

3,074

3,880

5,627

6,007

8,912

8,455

16,986

14,947

Investment Funds

2,086

1,974

4,121

3,888

$
10,998

$
10,429

$
21,107

$
18,835

Carried Interest

$
1,834

$
2,862

$
3,991

$
7,599

Total management fees and Carried Interest

$
12,832

$
13,291

$
25,098

$
26,434

Net assets of Advised Entities at period end:

PennyMac Mortgage Investment Trust

$
1,577,160

$
1,244,181

Investment Funds

565,926

561,790

$
2,143,086

$
1,805,971


	Quarter ended March 31,
	2015		2014
	(in thousands)
Management fees:
PennyMac Mortgage Investment Trust:
Base management fee	$	5,730	$	5,521
Performance incentive fee		1,273		2,553
		7,003		8,074
Investment Funds		1,486		2,035
Total management fees		8,489		10,109
Carried Interest		1,233		2,157
Total management fees and Carried Interest	$	9,722	$	12,266

Net assets of Advised Entities at period end:
PennyMac Mortgage Investment Trust	$	1,542,159	$	1,543,282
Investment Funds		413,155		561,638
	$	1,955,314	$	2,104,920

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Management fees from PMT ~~increased $457,000 and $2.0~~decreased $1.1 million induring the first quarter ~~and six months ended June 30, 2014, respectively,~~of 2015 compared to the ~~same periods~~first quarter of 2014 resulting from a decrease in ~~2013. The increase was~~performance incentive fees of $1.3 million due ~~primarily to:~~to a decrease in PMT’s net income.

·~~Base management fees increased~~Our incentive fee is based on how much PMT’s return on shareholders’ equity exceeds certain thresholds. Therefore, the decrease in profitability reduced PMT’s return on equity and by ~~$1.3 million or 28% and $2.4 million or 27%~~extension the performance incentive fee we earned in the first quarter ~~and six months ended June 30, 2014, respectively,~~of 2015 as compared to the ~~same periods in 2013 due to an increase in PMT’s shareholders’ equity upon which its management fee is based.~~

·~~Performance incentive fees decreased $806,000 and $380,000 in the~~first quarter ~~and six months ended June 30, 2014, respectively, compared to the same periods in 2013. We began to recognize performance incentive fees as a result~~ of the amendment to our management agreement with PMT effective February 1, 2013, which changed the basis on which profitability is measured for incentive fee purposes. Under the amended agreement, profitability is primarily based on net income for a rolling four-quarter period determined in compliance with U.S. GAAP. Previously, the agreement based profitability on U.S. GAAP net income generally excluding non-cash gains and losses.2014.

Management fees from the Investment Funds ~~increased $112,000 and $233,000 in~~decreased $549,000 during the first quarter ~~and six months ended June 30, 2014, respectively,~~of 2015 compared to the ~~same periods in 2013.~~first quarter of 2014. The ~~increase~~decrease was due to ~~an increase~~a reduction in the Investment Funds’ net asset values as a result of continued distributions to the Investment Funds’ investors following the end of the Investment Funds’ commitment periods at December 31, 2011, which ~~increased~~reduced the investment base on which the management fees are computed.

Carried Interest from Investment Funds decreased ~~$1.0 million and $3.6 million in~~$924,000 during the first quarter ~~and six months ended June 30, 2014, respectively,~~of 2015 compared to the ~~same period in 2013. Observed market demand for distressed loans, changes~~first quarter of 2014 primarily due to decreases in the ~~value~~Investment Funds’ returns during the first quarter of 2015 compared to the ~~loans as they proceed through the resolution process and continuing increases in collateral valuations for the properties underlying the Funds’ loans in the~~first quarter ~~and six months ended June 30, 2013 resulted in valuation gains. This was not repeated in the same magnitude in the quarter and six months ended June 30,~~of 2014.

Other revenues

Net interest expense increased $2.8 million and $3.4 million during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013 due to growth in our investments in non-interest earning assets — primarily MSRs which are financed in part with ESS financing. Income from MSRs is included in ~~Net loan servicing fees~~.

The results of our holdings of common shares of PMT, which is included in Changes in fair value of investment in and dividends received from PMT are summarized below:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended March 31,
	2014			2013			2014			2013			2015		2014
	(in thousands)												(in thousands)
Dividends	$	44		$	43		$	88		$	85		$	92	$	44
Change in fair value	(147		)	(363		)	(76		)	(318		)		15		71
	$	(103	)	$	(320	)	$	12		$	(233	)	$	107	$	115

Fair value of PennyMac Mortgage Investment Trust shares at period end	$	1,646		$	1,579								$	1,597	$	1,793

Change in fair value of investment in and dividends received from PMT ~~increased $217,000 and $245,000, respectively, in~~decreased $8,000 during the first quarter ~~and six months ended June 30, 2014~~of 2015 compared to the ~~same periods~~first quarter of 2014 as the increase in ~~2013. The increase~~dividend income was ~~primarily due~~not sufficient to offset a ~~smaller~~ decrease in the ~~fair value of~~gain on our investment in common shares of ~~PMT during the periods ended June 30, 2014 as compared to the periods ended June 30, 2013. During the periods ended June 30, 2014 and 2013, we~~PMT. We held 75,000 common shares of ~~PMT.~~PMT during each of the quarters ended March 31, 2015 and 2014.

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Expenses

Our compensation expense is summarized below:


	Quarter ended June 30,				Six months ended June 30,				Quarter ended March 31,
	2014		2013		2014		2013		2015		2014
	(in thousands)								(in thousands)
Salaries and wages	$	28,202	$	25,231	$	54,561	$	48,248	$	35,442	$	26,359
Incentive compensation	10,340		11,957		18,294		19,704			10,350		7,954
Taxes and benefits	4,689		4,185		9,486		8,112			6,725		4,797
Stock and unit-based compensation	3,740		966		7,516		1,956			5,627		3,776
	$	46,971	$	42,339	$	89,857	$	78,020	$	58,144	$	42,886

Average headcount	1,506		1,246		1,463		1,219			1,907		1,429
Period end headcount	1,589		1,356							2,047		1,451

Compensation expense increased ~~$4.6~~$15.3 million ~~and $11.8 million, respectively, in~~during the first quarter ~~and six months ended June 30, 2014~~of 2015 compared to the ~~same periods in 2013. The increase in compensation expense was due to the development~~first quarter of and growth in our loan servicing segment as well as stock-based compensation reflecting the amortization of equity awards that we granted to our directors and certain officers and employees of PennyMac.

~~Loan origination expense decreased $518,000 and $1.6 million, respectively, in the quarter and six months ended June 30,~~ 2014 ~~compared to the same periods in 2013. The decrease was due to decreased loan production in 2014 compared to 2013.~~

~~Technology expense increased $1.7 million and $2.9 million, respectively, in the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The increase was~~primarily due to growth in ~~loan servicing operations and continued investment in loan production infrastructure.~~our workforce to support the growth of our mortgage banking operations.

Servicing expense increased ~~$10.1~~$6.6 million ~~and $11.6 million, respectively, in~~during the first quarter ~~and six months ended June 30, 2014~~of 2015 compared to the ~~same periods in 2013. The increase was~~first quarter of 2014 primarily due to growth in our purchased mortgage loan servicing portfolio, which includes large purchases of seasoned government-insured or guaranteed mortgage loans that are subject to nonreimbursable servicing advance losses, and ~~approximately $7 million was due to~~ the ~~initiation~~continuation of anour early buyout (“EBO”) program to purchase defaulted loans out of legacy Ginnie Mae pools. ~~The purchase~~

Table of $575 million in UPB of EBOs produced current period expense as accumulated net interest advances are charged to servicing expense when the loans are purchased from the Ginnie Mae pools. The economic benefit of EBO is reduced servicing costs by purchasing and either selling the defaulted loans or otherwise financing them with debt at interest rates below the Ginnie Mae MBS pass-through rates rather than advancing principal and interest on such defaulted loans at the Ginnie Mae MBS pass-through rate until liquidation.Contents

Expenses Allocated to PMT

PMT reimburses us for other expenses, including common overhead expenses incurred on its behalf by us, in accordance with the terms of our management agreement with PMT. The expense amounts presented in our income statement are net of these allocations. ~~Expense amounts allocated to PMT during the periods ended June 30, 2014 and 2013 are summarized below:~~

Quarter ended June 30,

Six months ended June 30,

2014

2013

2014

2013

(in thousands)

Technology

$
1,005

$
1,151

$
2,057

$
1,923

Occupancy

570

633

1,058

1,100

Depreciation and amortization

501

351

990

637

Other

562

840

1,110

1,606

Total expenses

$
2,638

$
2,975

$
5,215

$
5,266

The amount of total expenses that we allocated to PMT during the first quarter of 2015 remained generally consistent ~~in the quarter and six months ended June 30, 2014~~ compared to the same ~~periods~~period in ~~2013.~~2014.

Expense amounts allocated to PMT during the quarters ended March 31, 2015 and 2014 are summarized below:

Quarter ended March 31,


2015

2014


(in thousands)

Technology

$
1,138

$
1,053

Occupancy

479

488

Depreciation and amortization

572

489

Other

540

548

Total expenses

$
2,729

$
2,578

Provision for Income Taxes

For the ~~quarter~~quarters ended March 31, 2015 and ~~six months ended June 30,~~ 2014, our effective tax rates were ~~11.4%~~11.5% and 11.3%~~, respectively. For the quarter and six months ended June 30, 2013, our effective tax rates were 4.1% and 1.9%~~, respectively. The difference between our effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the

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noncontrolling interest unitholders convert their ownership units into our shares, we expect an increase in allocated earnings that will be subject to corporate federal and state statutory tax rates, which will in turn increase our effective income tax rate.

Balance Sheet Analysis

Following is a summary of key balance sheet items as of the dates presented:


					March 31,		December 31,
	June 30, 2014		December 31, 2013		2015		2014
	(in thousands)				(in thousands)
ASSETS
Cash and short-term investments	$	117,201	$	173,221	$	112,307	$	97,943
Mortgage loans held for sale at fair value	1,000,415		531,004			1,353,944		1,147,884
Servicing advances	179,169		154,328
Servicing advances, net						242,397		228,630
Receivable from affiliates	24,290		21,551			21,207		26,162
Carried Interest due from Investment Funds	65,133		61,142			68,531		67,298
Mortgage servicing rights	621,681		483,664			790,411		730,828
Other assets	174,305		159,565			269,204		208,380
Total assets	$	2,182,194	$	1,584,475	$	2,858,001	$	2,507,125

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings	$	940,581	$	523,746	$	1,317,614	$	1,113,114
Payable to affiliates	320,656		256,834			385,190		350,389
Other liabilities	199,264		174,691			302,361		236,356
Total liabilities	1,460,501		955,271			2,005,165		1,699,859
Total stockholders’ equity	721,693		629,204
Total liabilities and stockholders’ equity	$	2,182,194	$	1,584,475
Total stockholders' equity						852,836		807,266
Total liabilities and stockholders' equity					$	2,858,001	$	2,507,125

Total assets increased ~~$597.7~~$350.9 million from ~~$1.6~~$2.5 billion at December 31, ~~2013~~2014 to ~~$2.2~~$2.9 billion at ~~June 30, 2014.~~March 31, 2015. The increase was primarily due to an increase of ~~$469.4~~$206.1 million in mortgage loans held for sale at fair value ~~primarily related to the initiation of the EBO program~~ and an increase of ~~$138.0~~$59.6 million in MSRs, resulting from growth in our mortgage banking operations and purchases of ~~MSRs, partially offset by a decrease in cash and short-term investments of $56.0 million as we deployed cash and proceeds from sales of ESS to fund balance sheet growth.~~MSRs.

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Total liabilities increased by ~~$505.2~~$305.3 million from ~~$955.3 million~~$1.7 billion as of December 31, ~~2013~~2014 to ~~$1.5~~$2.0 billion as of ~~June 30, 2014.~~March 31, 2015. The increase was primarily attributable to an increase of $169.6 million in mortgage loans sold under agreements to repurchase ~~of $353.7 million~~ and an increase of $47.1 million in sales of mortgage loan participation certificates, all to fund growth in our inventory of mortgage loans held for sale at fair value, and an increase of $31.1 million in liabilities relating to the sale of ESS to ~~PMT of $51.5 million.~~PMT.

Cash Flows

~~Comparison of six-month periods~~Our cash flows for the quarters ended ~~June 30,~~March 31, 2015 and 2014 ~~and 2013~~are summarized below:


	Quarter ended March 31,
	2015		2014		Change
	(in thousands)
Cash flow activities:
Operating	$	(168,494)	$	(170,355)	$	1,861
Investing		(58,386)		71,178		(129,564)
Financing		232,656		105,914		126,742
Net cash flows	$	5,776	$	6,737	$	(961)

Our cash flows resulted in a net increase in cash of ~~$40.2~~$5.8 million during the ~~six months~~quarter ended ~~June 30, 2014.~~ March 31, 2015. The increase was due to cash provided by our financing activities exceeding cash used in our operating and investing activities.

Operating activities

Cash used in operating activities totaled ~~$431.4~~$168.5 million and $170.4 million during the ~~six months~~quarters ended ~~June 30, 2014. The cash used in operating activities was~~March 31, 2015 and 2014, respectively, primarily due to the growth of our ~~portfolio~~inventory of mortgage loans held for sale ~~as a result of~~at fair value.

Investing activities

Net cash used in investing activities during the quarter ended March 31, 2015 totaled $58.4 million primarily due to our ~~loan production and EBO~~ purchases of ~~loans exceeded loan sales.~~

MSRs during the period. Net cash provided by investing activities ~~was $5.6 million~~ during the ~~six months~~quarter ended ~~June 30, 2014. The net cash provided by investing activities was~~March 31, 2014 totaled $71.2 million primarily due to the ~~sale of a portfolio of MSRs backed by distressed mortgage loans.~~decrease in short-term investments.

Financing activities

Net cash provided by financing activities ~~was $466.0~~totaled $232.7 million and $105.9 million during the ~~six months~~quarters ended ~~June 30, 2014. Cash provided by financing activities was~~March 31, 2015 and 2014, respectively, primarily due to increased sales of loans under agreements to ~~repurchase.~~repurchase and a mortgage loan participation agreement used to finance the growth in our inventory of mortgage loans held for sale. Cash provided by financing activities also reflects the proceeds received from sales of ESS of $46.4 million and $20.5 million during the quarters ended March 31, 2015 and 2014, respectively, used to finance purchases of government MSRs.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of

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liquidity to be through cash flows from business activities, ~~earnings on our investments and~~ proceeds from bank borrowings, proceeds from and issuance of ESS ~~financing~~ and/or additional equity offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

Our current leverage strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of mortgage loans under agreements to repurchase, sales of mortgage loan participation certificates, ESS financing and a note payable secured by ~~mortgage servicing rights (“MSRs”)~~MSRs and loan servicing advances. All of our borrowings other than ESS have short-term maturities and provide for terms of approximately one year.

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Our repurchase agreements represent the sales of mortgage loans together with agreements for us to buy back the mortgage loans at a later date. ~~During the six months ended June 30, 2014, the average balance outstanding under~~Our repurchase agreements to repurchase mortgage loans totaled $410.2 million, and the maximum daily amount outstanding under such agreements totaled $873.3 million. During the six months ended June 30, 2013, the average balance outstanding under agreements to repurchase mortgage loans totaled $344.3 million, and the maximum daily amount outstanding under such agreements totaled $623.5 million.are summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Repurchase agreements outstanding:
Average balance	$	616,896	$	291,093
Maximum daily balance	$	992,187	$	567,737

The difference between the maximum and average daily amounts outstanding is due to ~~increases~~the effect of variations in the ~~sizes~~timing and ~~utilization~~levels of ~~our existing facilities, all in support of the growth in our~~production and sales on mortgage loan ~~production and investment activities.~~

All of our borrowings discussed above have short-term maturities. The transactions relating to mortgage loans under agreements to repurchase mature between September 8, 2014 and June 29, 2015 and provide forinventories during the repurchase from major financial institution counterparties based on the estimated fair value of the mortgage loans sold. Our note payable secured by MSRs and loan servicing advances at fair value has a maturity date of October 31, 2014.period.

PLS’s debt financing agreements require it to comply with various financial covenants. The most significant financial covenants currently include the following:

·~~positive net income during each calendar quarter;~~

·~~a minimum in unrestricted cash and cash equivalents of $20 million;~~

·~~a minimum tangible net worth of $200 million;~~

·~~a maximum ratio of total liabilities to tangible net worth of 10:1; and~~

·~~at least one other warehouse or repurchase facility that finances amounts and assets similar to those being financed under our existing debt financing agreements.~~

positive net income during each calendar quarter;

a minimum in unrestricted cash and cash equivalents of $20 million;

a minimum tangible net worth of $200 million;

a maximum ratio of total liabilities to tangible net worth of 10:1; and

at least one other warehouse or repurchase facility that finances amounts and assets similar to those being financed under our existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

With respect to servicing ~~that we perform~~performed for PMT, ~~we are~~PLS is also subject to certain covenants under ~~its~~PMT’s debt agreements. ~~These~~Such covenants in PMT’s debt agreements are ~~similar to those~~equally or less restrictive than the covenants described above.

Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The repayment of the ESS financing is based on amounts received on the underlying mortgage loans.

We continue to explore a variety of ~~additional~~ means of financing our continued growth, including debt financing through bank warehouse lines of credit, financing MSR purchases through bank lines of credit, additional repurchase agreements and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of ~~June 30, 2014,~~March 31, 2015, we have not entered into any off-balance sheet arrangements or guarantees.

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Contractual Obligations

As of ~~June 30, 2014,~~March 31, 2015, we had on-balance sheet contractual obligations of ~~$825.3~~$992.2 million to finance assets under agreements to repurchase and $190.8 million to finance assets under ~~facilities with maturities between July 24, 2014~~our mortgage loan participation and ~~June 29, 2015.~~sale agreement. We also had a contractual obligation of ~~$115.3~~$134.7 million relating to a note payable secured by ~~MSRs and loan servicing advances at fair value and with a maturity date of October 31, 2014.~~MSRs. We also lease our primary office facilities under an agreement that expires on February 28, 2017 and we license certain software to support our loan servicing operations.

Payment obligations under these agreements are summarized below:

Payments due by period

Contractual obligations

Total

Less than
1 year

1 - 3
years

3 - 5
years

More than
5 years

(in thousands)

Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust (1)

$
1,242,982

$
1,242,982

$
—

$
—

$
—

Commitments to fund mortgage loans (1)

511,863

511,863

—

—

—

Commitments to sell mortgage loans (1)

4,617,100

4,617,100

—

—

—

Loans sold under agreements to repurchase

825,267

825,267

—

—

—

Note payable

115,314

115,314

—

—

—

Software licenses (2)

18,824

9,412

9,412

—

—

Office leases

14,520

4,554

7,938

2,028

—

Total

$
7,345,870

$
7,326,492

$
17,350

$
2,028

$
—


	Payments due by period
			Less than		1-3		3-5		More than
Contractual obligations	Total		1 year		years		years		5 years
	(in thousands)
Mortgage loans sold under agreements to repurchase	$	992,187	$	992,187	$	—	$	—	$	—
Mortgage loan participation and sale agreement		190,762		190,762		—		—		—
Note payable		134,665		134,665		—		—		—
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust (1)		222,309		—		—		—		222,309
Software licenses (2)		19,634		9,817		9,817		—		—
Office leases		17,242		5,630		6,396		3,012		2,204
Total	$	1,576,799	$	1,333,061	$	16,213	$	3,012	$	224,513

(1)

The ESS payable to PMT does not have a stated contractual maturity. However, its cash flows are not expected to extend beyond the contractual maturities of the mortgage loans underlying these agreements. Such maturities extend beyond five years.

(2)

Software licenses include both volume and activity based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $490,000 per year. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately 567,000 at March 31, 2015. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended March 31, 2015, software license fees totaled $5.1 million. All figures contained in this footnote are in actual amounts and not in thousands (in contrast to the table above).

~~(1)The contractual obligations relate to our mortgage loan acquisition obligations to affiliates and non-affiliates and our obligation to sell mortgage loans.~~

~~(2)~~Software licenses include both volume and activity-based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $490,000 per year. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately 451,000 at June 30, 2014. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. Software license fees totaled $3.8 million and $6.8 million, respectively, for the quarter and six months ended June 30, 2014. All figures contained in this footnote are in actual amounts and not in thousands (in contrast to the table above).

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of ~~June 30, 2014:~~March 31, 2015:

Counterparty

Amount at risk

Weighted-average
maturity of
advances under
repurchase agreement

Facility Maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC

$
117,085

September 3, 2014

October 31, 2014

Bank of America, N.A.

$
45,620

September 17, 2014

January 30, 2015

Morgan Stanley

$
10,074

August 17, 2014

June 29, 2015

Citibank, N.A.

$
—

—

August 7, 2014


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	77,916	July 8, 2015	October 30, 2015
Bank of America, N.A.	$	36,407	June 17, 2015	January 30, 2016
Morgan Stanley Bank, N.A.	$	10,670	May 17, 2015	June 29, 2015
Citibank, N.A.	$	15,519	May 6, 2015	September 7, 2015

Management Agreements

PMT Management Agreement

We externally manage and advise PMT pursuant to a management agreement. Our management agreement with PMT requires us to oversee PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees. We are responsible for PMT’s day-to-day management and perform such services and activities related to PMT’s assets and operations as may be appropriate. Pursuant to our management agreement, we collect a base management fee and may collect a performance incentive fee.

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The management agreement provides that:

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s shareholders’ equity up to $2 billion, (ii) 1.375% per year of shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s shareholders’ equity in excess of $5 billion.

The performance incentive fee is calculated at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four‑quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

The performance incentive fee is calculated quarterly and is equal to the sum of: (a) 10% of the amount by which PMT’s net income for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s net income for the quarter exceeds (i) a 12% return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s net income for the quarter exceeds a 16% return on equity plus the “high watermark.”

For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss computed in accordance with U.S. GAAP and certain other non‑cash charges determined after discussions between us and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the four‑quarter period.

The “high watermark” starts at zero and is adjusted quarterly. The quarterly adjustment reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “target yield”) for the four quarters then ended. If the net income is lower than the target yield, the high watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for us to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s net income over (or under) the target yield, until the net income in excess of the target yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.

The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or in PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

The term of the management agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18‑month periods, unless terminated earlier in accordance with the terms of the management agreement.

In the event of termination by PMT, we 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 us, in each case during the 24-month period before termination.

Investment Funds Management Agreements

We have investment management agreements with the Investment Funds pursuant to which we receive management fees consisting of base management fees and carried interest. The Investment Funds will continue in existence through December 31, 2016, subject to three one-year extensions by PCM at its discretion, in accordance with the terms of the limited liability company and limited partnership agreements that govern the Investment Funds.

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Loan Servicing Agreements

PMT Loan Servicing Agreement

We have a loan servicing agreement with PMT, pursuant to which we provide loan servicing for its portfolio of residential mortgage loans. The servicing agreement provides for servicing fees payable to us based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO.

The base servicing fee rates for distressed whole mortgage loans are charged based on a monthly per‑loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or the related underlying real estate. Presently, the base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $125 per month for mortgage loans that are in foreclosure.

The base servicing fee rates for non‑distressed mortgage loans subserviced by us on PMT’s behalf are also calculated through a monthly per‑loan dollar amount, with the actual dollar amount for each mortgage loan based on whether the mortgage loan is a fixed‑rate or adjustable‑rate loan. The base servicing fee rates for mortgage loans subserviced on PMT’s behalf are $7.50 per month for fixed‑rate mortgage loans and $8.50 per month for adjustable rate mortgage loans. To the extent that these mortgage loans become delinquent, we are entitled to an additional servicing fee per mortgage loan falling within a range of $10 to $75 per month based on the delinquency, bankruptcy and foreclosure status of the mortgage loan or the related underlying real estate.

We are required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement because PMT does not have any employees or infrastructure. For these services, we receive a supplemental fee of $25 per month for each distressed whole mortgage loan and $3.25 per month for each non‑distressed subserviced mortgage loan. With respect to non‑distressed subserviced mortgage loans, the supplemental fee is subject to a cap of $700,000 per quarter. We are also entitled to reimbursement for all customary, good faith reasonable and necessary out‑of‑pocket expenses incurred in performance of its servicing obligations.

We, on behalf of PMT, currently participate in the Home Affordable Modification Program (“HAMP”) of the U.S. Department of the Treasury and U.S. Department of Housing and Urban Development (“HUD”) (and other similar mortgage loan modification programs). HAMP establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including mortgage loan servicers, for achieving modifications and successfully remaining in the program. The mortgage loan servicing agreement entitles us to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to us under HAMP in connection with a mortgage loan modification for which PMT previously paid us a modification fee, we shall reimburse PMT an amount equal to the incentive payments.

We also remain entitled to market‑based fees and charges including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges relating to loans it services for PMT.

Investment Funds Loan Servicing Agreements

We have also entered into loan servicing agreements with the Investment Funds. Our servicing agreements with the Investment Funds generally provide for fee revenue, which varies depending on the type and quality of the loans being serviced. We are also entitled to certain customary market-based fees and charges. This arrangement was modified, effective January 1, 2012, with respect to one of the Investment Funds. At that time, we settled our accrued servicing fee rebate and amended our servicing agreement with such fund to charge scheduled servicing fees in place of the previous “at cost” servicing arrangement.

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Mortgage Banking and Warehouse Services Agreement

We have also entered into a mortgage banking and warehouse services agreement (the “MBWS agreement”), pursuant to which we provide PMT with certain mortgage banking services, including fulfillment and disposition-related services, with respect to loans acquired by PMT from correspondent lenders, and certain warehouse lending services, including fulfillment and administrative services, with respect to loans financed by PMT for its warehouse lending clients.

The MBWS agreement provides for a fulfillment fee paid to us based on the type of mortgage loan that PMT acquires. The fulfillment fee is equal to a percentage of the UPB of mortgage loans purchased by PMT, with the addition of potential fee rate discounts applicable to PMT’s monthly purchase volume in excess of designated thresholds. We have also agreed to provide such services exclusively for PMT’s benefit, and we and our affiliates are prohibited from providing such services for any other third party.

Presently, the applicable fulfillment fee percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans saleable in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, (iii) 0.80% for the U.S. Department of the Treasury and HUD’s Home Affordable Refinance Program (“HARP”) mortgage loans with a loan‑to‑value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan‑to‑value ratio of more than 105%, and (v) 0.50% for all other mortgage loans not contemplated above; provided, however, that we may, in our sole discretion, reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction may only be credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

In the event that PMT purchases mortgage loans with an UPB in any month totaling more than $2.5 billion and less than $5 billion, we have agreed to discount the amount of such fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.025%, (ii) the amount of UPB in excess of $2.5 billion and (iii) the percentage of the total UPB relating to mortgage loans for which we collected fulfillment fees in such month. In the event PMT purchases mortgage loans with an total UPB in any month greater than $5 billion, we have agreed to further discount the amount of fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.05%, (ii) the amount of UPB in excess of $5 billion and (iii) the percentage of the total UPB relating to mortgage loans for which we collected fulfillment fees in such month.

PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the MBWS agreement, we currently purchase loans saleable in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide “as is” and without recourse of any kind to PMT at its cost less fees collected by PMT from the seller, plus accrued interest and a sourcing fee of three basis points.

In consideration for the mortgage banking services provided by us with respect to PMT’s acquisition of mortgage loans under PLS’s early purchase program, we are entitled to fees (i) accruing at a rate equal to $25,000 per year per early purchase facility administered by us, and (ii) in the amount of $50 for each mortgage loan PMT acquires. In consideration for the warehouse services provided by us with respect to mortgage loans that PMT finances for its warehouse lending clients, with respect to each facility, we are entitled to fees (i) accruing at a rate equal to $25,000 per year, and (ii) in the amount of $50 for each mortgage loan that PMT finances thereunder. Where PMT has entered into both an early purchase agreement and a warehouse lending agreement with the same client, we shall only be entitled to one $25,000 per year fee and, with respect to any mortgage loan that becomes subject to both such agreements, only one $50 per mortgage loan fee.

The term of the MBWS agreement expires on February 1, 2017, subject to automatic renewal for additional 18‑month periods, unless terminated earlier in accordance with the terms of the agreement.

MSR Recapture Agreement

Pursuant to the terms of a MSR recapture agreement, as amended, if we refinance through our consumer direct business mortgage loans for which PMT previously held the MSRs, we are generally required to transfer and convey to one of PMT’s wholly‑owned subsidiaries, without cost to PMT, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have a total UPB that is not less than 30% of the total UPB of all the mortgage loans so originated.

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Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, we may, at our option, pay cash to PMT in an amount equal to such fair market value instead of transferring such MSRs. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on February 1, 2017, subject to automatic renewal for additional 18‑month periods.

Spread Acquisition and MSR Servicing Agreements

Effective February 1, 2013, we entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which we may sell to PMT or one of its wholly owned subsidiaries the rights to receive certain ESS from MSRs acquired by us from banks and other third party financial institutions. We are generally required to service or subservice the related mortgage loans for the applicable agency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement are subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

To the extent we refinance any of the mortgage loans relating to the ESS sold to PMT, the 2/1/13 Spread Acquisition Agreement contains recapture provisions requiring that we transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month is less than $200,000, we may, at our option, pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.

On December 30, 2013, we entered into a second master spread acquisition and MSR servicing agreement with PMT (the “12/30/13 Spread Acquisition Agreement”). The terms of the 12/30/13 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only intend to sell ESS relating to Ginnie Mae MSRs under the 12/30/13 Spread Acquisition Agreement.

To the extent we refinance any of the mortgage loans relating to the ESS it sells to PMT, the 12/30/13 Spread Acquisition Agreement also contains recapture provisions requiring that we transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. However, under the 12/30/13 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the UPB of the refinanced mortgage loans, we are also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the UPB of the modified mortgage loans, the 12/30/13 Spread Acquisition Agreement contains provisions that require us to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair value of the aggregate ESS to be transferred for the applicable month is less than $200,000, we may, at our option, pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.

In connection with our entry into the 12/30/13 Spread Acquisition Agreement, we were also required to amend the terms of our loan and security agreement (the “LSA”) with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), pursuant to which we pledged to CSFB all of its rights and interests in the Ginnie Mae MSRs we own or acquire, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and us. Separately, as a condition to permitting us to transfer to PMT the ESS relating to a portion of our pledged Ginnie Mae MSRs, CSFB required PMT to enter into a Security and Subordination Agreement (the “Security Agreement”), pursuant to which PMT pledged to CSFB its rights under the 12/30/13 Spread Acquisition Agreement and its interest in any ESS purchased thereunder. CSFB’s lien on the ESS remains subordinate to the rights and interests of Ginnie Mae pursuant to the provisions of the 12/30/13 Spread Acquisition Agreement and the terms of the acknowledgement agreement.

The Security Agreement permits CSFB to liquidate PMT’s ESS along with the related MSRs to the extent there exists an event of default under the LSA, and it contains certain trigger events, including breaches of representations, warranties or covenants and defaults under other of PMT’s credit facilities, that would require us to either (i) repay in full the outstanding loan amount under the LSA or (ii) repurchase the ESS from PMT at fair value. To the extent we are unable to repay the loan under the LSA or repurchase the ESS, an event of default would exist under the LSA, thereby entitling CSFB to liquidate the ESS and the related MSRs. In the event the ESS is liquidated as a result of certain actions or inactions by us, PMT generally would be entitled to seek indemnity from us under the 12/30/13 Spread Acquisition Agreement.

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On December 19, 2014, we entered into a third master spread acquisition and MSR servicing agreement with PMT (the “12/19/14 Spread Acquisition Agreement”). The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only intend to sell ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.

To the extent we refinance any of the mortgage loans relating to the ESS we sell to PMT, the 12/19/14 Spread Acquisition Agreement also contains recapture provisions requiring that we transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, we may, at our option, pay cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

Reimbursement Agreement

In connection with the IPO of PMT’s common shares on August 4, 2009, we entered into an agreement with PMT pursuant to which PMT agreed to reimburse us 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 us of the Conditional Reimbursement if PMT is required to pay us 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.

In the event the termination fee is payable to us under the management agreement and we have 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.

Debt Obligations

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of mortgage loans under agreements to repurchase, a mortgage loan participation and sale agreement and a note payable secured by MSRs and loan servicing advances. The borrower under each of these facilities is PLS, and all obligations thereunder are guaranteed by Private National Mortgage Acceptance Company, LLC.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of ~~June 30, 2014,~~March 31, 2015, we were in compliance in all material respects with these covenants.

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The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.

Table of Contents

All of PLS’s borrowings discussed above have short-term maturities that expire as ~~follows:~~follows as of March 31, 2015:


						Outstanding		Committed
Counterparty (1)	Outstanding Indebtedness (2)		Committed Amount		Maturity Date	Indebtedness (2)		Facility		Maturity Date (3)
	(in thousands)					(in thousands)
Bank of America, N.A.	$	206,581	$	225,000	January 30, 2015	$	271,868	$	225,000	January 30, 2016
Bank of America, N.A.						$	190,762	$	250,000	January 30, 2016
Credit Suisse First Boston Mortgage Capital LLC	$	505,132	$	800,000	October 31, 2014	$	498,333	$	700,000	October 30, 2015
Credit Suisse First Boston Mortgage Capital LLC	$	115,314	$	117,000	October 31, 2014	$	134,665	$	257,000	October 30, 2015
Morgan Stanley	$	113,554	$	125,000	June 29, 2015
Morgan Stanley Bank, N.A.						$	121,986	$	125,000	June 29, 2015
Citibank, N.A.	$	0	$	50,000	August 7, 2014	$	100,000	$	50,000	September 7, 2015

(1)

The borrowings with Bank of America, N.A. (with a committed amount of $225 million), Citibank, N.A. and Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $700 million) are in the form of sales of mortgage loans under agreements to repurchase. The borrowing with Bank of America, N.A. (with a committed amount of $250 million) is in the form of a mortgage loan participation and sale agreement. The borrowing with Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $257 million) is in the form of a note payable secured by certain MSRs and loan servicing advances.

(2)

Represents outstanding indebtedness reduced by cash collateral as of March 31, 2015.

~~(1)~~The borrowings with Bank of America, N.A., Citibank, N.A. and Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $800 million) are in the form of sales of mortgage loans under agreements to repurchase. The borrowing with Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $117 million) is in the form of a note payable secured by certain MSRs and loan servicing advances.

(3)

Represents maturity date as of March 31, 2015.

~~(2)Represents outstanding indebtedness reduced by cash collateral as of June 30, 2014.~~

Quantitative and Qualitative Disclosures ~~about~~About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other ~~market-based~~market based risks. The primary market risks that we are exposed to are credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.

The following sensitivity analyses are limited in that they were ~~(i)~~ performed at a particular point in ~~time, (ii)~~time; only contemplate ~~certain~~the movements in ~~interest rates, (iii)~~the indicated variables; do not incorporate changes ~~in interest rate volatility or changes in the relationship of one interest rate index~~ to ~~another, (iv)~~other variables; are subject to the accuracy of various models and assumptions ~~used, including prepayment forecasts~~used; and ~~discount rates, and (v)~~ do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as an earnings ~~forecast.~~forecasts.

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of ~~June 30, 2014,~~March 31, 2015, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	353,265		$	336,627		$	328,841		$	314,233		$	307,374		$	294,463		$	476,157		$	456,227		$	446,845		$	429,144		$	420,787		$	404,976
Change in fair value:
$	$	31,882		$	15,244		$	7,458		$	(7,150	)	$	(14,009	)	$	(26,920	)	$	38,333		$	18,403		$	9,021		$	(8,680)		$	(17,037)		$	(32,848)
%	9.92		%	4.74		%	2.32		%	-2.22		%	-4.36		%	-8.38		%		8.76	%		4.20	%		2.06	%		(1.98)	%		(3.89)	%		(7.50)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	475,592		$	456,030		$	446,766		$	429,189		$	420,847		$	404,987
Change in fair value:
$	$	37,768		$	18,206		$	8,942		$	(8,635)		$	(16,977)		$	(32,837)
%		8.63	%		4.16	%		2.04	%		(1.97)	%		(3.88)	%		(7.50)	%

Table of Contents

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
344,637

$
332,663

$
326,940

$
315,985

$
310,741

$
300,687

Change in fair value:

$

$
23,255

$
11,280

$
5,557

$
(5,398
)
$
(10,642
)
$
(20,696
)
%

7.24
%
3.51
%
1.73
%
-1.68
%
-3.31
%
-6.44
%

Per-loan servicing cost shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
332,820

$
327,101

$
324,242

$
318,523

$
315,664

$
309,945

Change in fair value:

$

$
11,437

$
5,719

$
2,859

$
(2,859
)
$
(5,719
)
$
(11,437
)
%

3.56
%
1.78
%
0.89
%
-0.89
%
-1.78
%
-3.56
%


Per-loan servicing cost shift in %	-20%			-10%			-5%		+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	450,627		$	444,226		$	441,025	$	434,623		$	431,422		$	425,021
Change in fair value:
$	$	12,803		$	6,402		$	3,201	$	(3,201)		$	(6,402)		$	(12,803)
%		2.92	%		1.46	%		0.73		(0.73)	%		(1.46)	%		(2.92)	%

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of ~~June 30, 2014,~~March 31, 2015, given several shifts in pricing spreads, prepayment speed and annual ~~per-loan~~per loan cost of servicing:


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	332,078		$	319,897		$	314,144		$	303,253		$	298,093		$	288,298		$	388,455		$	374,433		$	367,805		$	355,246		$	349,293		$	337,984
Change in fair value:
$	$	23,480		$	11,298		$	5,545		$	(5,347	)	$	(10,506	)	$	(20,302	)	$	27,042		$	13,020		$	6,392		$	(6,167)		$	(12,120)		$	(23,429)
%	7.61		%	3.66		%	1.80		%	-1.73		%	-3.40		%	-6.58		%		7.48	%		3.60	%		1.77	%		(1.71)	%		(3.35)	%		(6.48)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	337,985		$	322,713		$	315,520		$	301,937		$	295,517		$	283,357		$	397,461		$	378,654		$	369,851		$	353,319		$	345,547		$	330,894
Change in fair value:
$	$	29,385		$	14,113		$	6,920		$	(6,663	)	$	(13,082	)	$	(25,243	)	$	36,048		$	17,241		$	8,438		$	(8,094)		$	(15,866)		$	(30,519)
%	9.52		%	4.57		%	2.24		%	-2.16		%	-4.24		%	-8.18		%		9.97	%		4.77	%		2.33	%		(2.24)	%		(4.39)	%		(8.44)	%

Per-loan servicing cost shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
321,964

$
315,282

$
311,941

$
305,258

$
301,917

$
295,235

Change in fair value:

$

$
13,365

$
6,682

$
3,341

$
(3,341
)
$
(6,682
)
$
(13,365
)
%

4.33
%
2.17
%
1.08
%
-1.08
%
-2.17
%
-4.33
%


Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	374,790		$	368,102		$	364,757		$	358,069		$	354,725		$	348,036
Change in fair value:
$	$	13,377		$	6,688		$	3,344		$	(3,344)		$	(6,688)		$	(13,377)
%		3.70	%		1.85	%		0.93	%		(0.93)	%		(1.85)	%		(3.70)	%

Excess Servicing Spread Financing

The following tables summarize the estimated change in fair value of our ~~ESS~~excess servicing spread financing accounted for using the fair value method as of ~~June 30, 2014,~~March 31, 2015, given several shifts in pricing spreads and prepayment ~~speed:~~speed (decrease in the liabilities’ values increases net income):

Pricing spread shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
199,426

$
194,727

$
192,459

$
188,079

$
185,963

$
181,870

Change in fair value:

$

$
9,182

$
4,483

$
2,215

$
(2,165
)
$
(4,281
)
$
(8,374
)
%

4.83
%
2.36
%
1.16
%
-1.14
%
-2.25
%
-4.40
%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
209,090

$
199,286

$
194,675

$
185,983

$
181,882

$
174,132

Change in fair value:

$

$
18,847

$
9,043

$
4,431

$
(4,261
)
$
(8,361
)
$
(16,112
)
%

9.91
%
4.75
%
2.33
%
-2.24
%
-4.40
%
-8.47
%


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	233,489		$	227,762		$	225,003		$	219,680		$	217,113		$	212,156
Change in fair value:
$	$	11,180		$	5,453		$	2,693		$	(2,629)		$	(5,196)		$	(10,153)
%		5.03	%		2.45	%		1.21	%		(1.18)	%		(2.34)	%		(4.57)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	246,010		$	233,630		$	227,846		$	217,006		$	211,922		$	202,363
Change in fair value:
$	$	23,700		$	11,320		$	5,536		$	(5,303)		$	(10,387)		$	(19,947)
%		10.66	%		5.09	%		2.49	%		(2.39)	%		(4.67)	%		(8.97)	%

Table of Contents

~~Factors That May Affect Our Future Results~~

This 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 as set forth in Item IA. of Part II hereof and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 14, 2014 .

~~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 recently effective and future rules and the enforcement thereof by the CFPB;~~

·~~Changes in existing U.S. government-sponsored entities, 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;~~

·~~Changes in macroeconomic and U.S. residential 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 and our success in winning bids;~~

·~~Changes in prevailing interest rates;~~

·~~Increases in loan delinquencies and defaults;~~

·~~Our reliance on 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 the Investment Funds if our services fail to meet certain criteria or characteristics or under other circumstances;~~

~~Table of Contents~~

·~~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 our Advised Entities;~~

·The potential damage to our reputation and adverse impact to our business resulting from the ongoing negative publicity focused on Countrywide Financial Corporation, given the former association of certain of our officers with that entity; and

·~~Our recent rapid growth.~~

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk~~Risk

In response to this Item 3, the information set forth on pages 6563 to 6664 of this Report is incorporated herein by reference.

Item 4. Controls and ~~Procedures~~Procedures

Disclosure Controls and Procedures

~~Under the supervision and with the participation of management, we evaluated the effectiveness of the design and operation of our~~We maintain disclosure controls and procedures asthat are designed to ensure that information required ~~by Rules 13a-15 and 15d-15~~to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of ~~June 30, 2014.~~the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based ~~upon~~on our evaluation, ~~the~~our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of ~~June 30, 2014,~~the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. No matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover control issues and instances of fraud, if any, within the Company to disclose material information otherwise required to be set forth

Internal Control over Financial Reporting

There has been no change in our ~~periodic reports.~~internal control over financial reporting during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

68Item 1. Legal Proceedings

~~Table of Contents~~

~~PART II. OTHER INFORMATION~~

~~Item 1.~~ ~~Legal Proceedings~~

From time to time, we may be involved in various legal proceedings, claims and actions arising in the ordinary course of business. As of ~~June 30, 2014,~~March 31, 2015, we were not involved in any such legal proceedings, claims or actions that management believes would be reasonably likely to have a material adverse effect on us.

Item 1A. Risk ~~Factors~~Factors

There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2013,~~2014, filed with the SEC on March ~~14, 2014.~~13, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceed

Effective April 11, 2013, we received a Notice of Election of Exchange under our Exchange Agreement from a unitholder related to the exchange of 100,000 Class A units for an equivalent number of shares of our Class A Common Stock. Effective April 25, 2013, we also received a Notice of Election of Exchange from that same unitholder related to the exchange of 200,000 Class A units for an equivalent number of shares of our Class A Common Stock. In connection with delivering each Notice of Election of Exchange, the unitholder surrendered to us Class A units for cancellation and was issued an equal amount of unregistered shares of Class A Common Stock that qualified for exemption under Section 4(2) of the Securities Act of 1933, as amended.

~~Item 3.~~ s~~Defaults Upon Senior Securities~~

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety ~~Disclosures~~Disclosures

Not applicable.

69Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

~~Item 5.~~ ~~Other Information~~

On August 13, 2014, the Company, through its wholly-owned subsidiary, PennyMac Loan Services, LLC (“PLS”), entered into a mortgage loan participation and sale agreement, by and among Bank of America, N.A. (“BANA”), PLS and Private National Mortgage Acceptance Company, LLC (“PennyMac”) (the “BANA Participation Agreement”).

Pursuant to the terms of the BANA Participation Agreement, PLS may sell to BANA participation certificates, each of which represents an undivided beneficial ownership interest in a pool of mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae and are pending securitization. In connection with its sale of any participation certificate, PLS will also assign to BANA a take-out commitment, which evidences PLS’s right to sell to a third party investor the security backed by the mortgage loans underlying the related participation certificate.

The purchase price paid by BANA for each participation certificate is based on the trade price (expressed as a percentage) of the security multiplied by its principal amount, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment and any related hedging costs. At the time of its purchase of a participation certificate, BANA retains a holdback amount that is based on a percentage of the purchase price and is not required to be paid to PLS until the settlement of the security and its delivery to BANA.

The BANA Participation Agreement requires PLS to maintain various covenants that are customary for this type of transaction, as well as financial covenants that include the following: (i) an adjusted tangible net worth of at least $200 million; (ii) a ratio of total liabilities to adjusted tangible net worth not to exceed 10:1; (iii) liquidity of not less than $20 million; and (iv) quarterly net income of not less than $1.00.

The BANA Participation Agreement also contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of all amounts due under the BANA Participation Agreement and indemnity by PLS, as well as the ability of BANA to possess the mortgage loans and retain any holdback amounts.

The Company, through PLS, is required to pay BANA fees for the structuring of the BANA Participation Agreement, as well as certain other administrative costs and expenses. The BANA Participation Agreement is effective until January 30, 2015, and the obligations of PLS are fully guaranteed by PennyMac.

The foregoing description of the BANA Participation Agreement and the related guaranty by PennyMac do not purport to be complete and are qualified in their entirety by reference to the full text of the BANA Participation Agreement and the related guaranty, which have been filed with this Quarterly Report on Form 10-Q as Exhibits 10.72 and 10.73, respectively.

~~Table of Contents~~

~~Item 6.~~ ~~Exhibits~~

~~Exhibit~~ ~~Number~~
Exhibit Number		Exhibit Description
3.1		Amended and Restated Certificate of Incorporation of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

3.2		Amended and Restated Bylaws of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, 2013).

4.1		Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Amendment No. 4 to Form S-1 Registration Statement as filed with the SEC on April 29, 2013).

10.1		Fourth Amended and Restated Limited Liability Company Agreement of Private National Mortgage Acceptance Company, LLC, dated as of May 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.2		Exchange Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and Private National Mortgage Acceptance Company, LLC and the Company Unitholders (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.3		Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. Private National Mortgage Acceptance Company, LLC and each of the Members (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.4		Registration Rights Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and the Holders (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.5		Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and BlackRock Mortgage Ventures, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.6		Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and HC Partners LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.7†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

10.8†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 16, 2013).

10.9†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive ~~Officers (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).~~Officers.

10.10†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible ~~Participants (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).~~Participants.

10.11†		[Reserved]

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10.12†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).

~~10.12†~~10.13†		Form of PennyMac Financial Services, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Registrant’s Amendment No. 2 to Form S-1 Registration Statement as filed with the SEC on April 5, 2013).

~~10.13†~~10.14†		Employment Agreement, dated as of April 20, 2013, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and Stanford L. Kurland (incorporated by reference to Exhibit 10.34 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.14†~~10.15†		Employment Agreement, dated as of April 20, 2013, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and David A. Spector (incorporated by reference to Exhibit 10.35 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~Table of Contents~~

~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.15~~10.16		Mortgage Banking and Warehouse Services Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.9 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.16~~10.17		Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.31 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

~~10.17~~10.18		Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, ~~2013).~~

~~10.18~~		Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.10 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.19		Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

10.20		Amendment No. 1 to Second Amended and Restated Flow Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 20, 2013).

10.21		Amendment No. 2 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.21 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

10.22		Amendment No. 3 to Second Amended and Restated Flow Servicing Agreement, dated as of December 11, 2014, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

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10.23		Amendment No. 4 to Second Amended and Restated Flow Servicing Agreement, dated as of March 31, 2015, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.

~~10.22~~10.24		MSR Recapture Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.11 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.23~~10.25		Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.24~~10.26		Amended and Restated Management Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.25~~10.27		Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.26~~10.28		Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of February 1, 2013 (incorporated by reference to Exhibit 10.26 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.27~~10.29		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of September 30, 2013 (incorporated by reference to Exhibit 10.25 of the Registrant’s Form S-1/A Registration Statement as filed with the SEC on October 23, 2013).

~~10.28~~10.30		Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.27 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).

~~10.29~~10.31		Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.28 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~Table of Contents~~

~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.30~~10.32		Amendment No. 4 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.

10.33		Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC dated as of December 30, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A as filed with the SEC on March 21, 2014).

~~10.31~~10.34		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.31 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

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10.35		Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.

~~10.32~~10.36		~~Confidentiality~~Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of April 30, 2015, by and between PennyMac ~~Mortgage Investment Trust~~Loan Services, LLC and ~~PNMAC Capital Management,~~PennyMac Holdings, LLC ~~dated as of February 6, 2013 (incorporated~~(incorporated by reference to Exhibit ~~10.28~~10.2 of the Registrant’s Current Report on Form ~~S-1 Registration Statement~~8-K as filed with the SEC on ~~February 7, 2013)~~May 6, 2015).

~~10.33~~10.37		Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2014, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC (incorporated by reference to Exhibit 1.01 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 24, 2014).

10.38		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC.

10.39		Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, by and between PennyMac Mortgage Investment Trust and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.29 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

~~10.34~~10.40		Amended and Restated Flow Servicing Agreement, by and between PNMAC Mortgage Co., LLC and PennyMac Loan Services, LLC, dated August 1, 2010 (incorporated by reference to Exhibit 10.14 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

~~10.35~~10.41		Second Amended and Restated Flow Servicing Agreement, dated as of August 1, 2008, as amended effective as of January 1, 2012, by and between PNMAC Mortgage Opportunity Fund Investors, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.15 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.36~~10.42		Amended and Restated Flow Servicing Agreement, dated as of August 1, 2010, by and between PNMAC Mortgage Opportunity Fund, LP and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.27 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

~~10.37~~10.43		Investment Management Agreement, as amended and restated May 26, 2011, by and between PNMAC Mortgage Opportunity Fund, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.16 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.38~~10.44		Investment Management Agreement, dated as of August 1, 2008, between PNMAC Mortgage Opportunity Fund Investors, LLC and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.17 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.39~~10.45		Master Repurchase Agreement, dated as of March 17, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

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~~10.40~~10.46		Amendment No. 1 to Master Repurchase Agreement, dated as of July 21, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.41~~10.47		Amendment No. 2 to Master Repurchase Agreement, dated as of March 23, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.42~~10.48		Amendment No. 3 to Master Repurchase Agreement, dated as of August 28, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.43~~10.49		Amendment No. 4 to Master Repurchase Agreement, dated as of January 3, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~Table of Contents~~

~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.44~~10.50		Amendment No. 5 to Master Repurchase Agreement, dated as of March 28, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.45~~10.51		Amendment No. 6 to Master Repurchase Agreement, dated as of January 31, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 6, 2014).

~~10.46~~10.52		Amendment No. 7 to Master Repurchase Agreement, dated as of March 27, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.44 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~10.47~~10.53		Amendment No. 8 to Master Repurchase Agreement, dated as of August 13, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.48 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014).

10.54		Amendment No. 9 to Master Repurchase Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.49 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.55		Guaranty, dated as of March 17, 2011, by Private National Mortgage Company, LLC in favor of Bank of America, N.A (incorporated by reference to Exhibit 10.50 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

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10.56		Master Repurchase Agreement, dated as of June 26, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.20 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.48~~10.57		Amendment Number One to the Master Repurchase Agreement, dated as of December 31, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.49~~10.58		Amendment Number Two to the Master Repurchase Agreement, dated April 17, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.40 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.50~~10.59		Amendment Number Three to the Master Repurchase Agreement, dated June 25, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.41 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.51~~10.60		Amendment Number Four to the Master Repurchase Agreement, dated July 25, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.42 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.52~~10.61		Amendment Number Five to the Master Repurchase Agreement, dated February 5, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.50 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~10.53~~10.62		Amendment Number Six to the Master Repurchase Agreement, dated February 25, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.51 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~10.54~~10.63		Amendment Number Seven to the Master Repurchase Agreement, dated July 24, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.54 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.55~~10.64		Amendment Number Eight to the Master Repurchase Agreement, dated August 7, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.55 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.56~~10.65		Amendment Number Nine to the Master Repurchase Agreement, dated September 8, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.58 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014).

10.66		Guaranty Agreement, dated as of June 26, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Citibank, N.A (incorporated by reference to Exhibit 10.61 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.67		Second Amended and Restated Loan and Security Agreement, dated as of March 27, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.22 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

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~~10.57~~10.68		Amendment No. 1 to Second Amended and Restated Loan Security Agreement, dated as of December 12, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.58~~10.69		Amendment No. 2 to Second Amended and Restated Loan Security Agreement, dated as of March 22, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

~~10.59~~10.70		Amendment No. 3 to Second Amended and Restated Loan Security Agreement, dated as of December 30, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on January 3, 2014).

~~Table of Contents~~

~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.60~~10.71		Amendment No. 4 to Second Amended and Restated Loan Security Agreement, dated as of October 31, 2014 among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.66 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.72		Third Amended and Restated Loan and Security Agreement, dated as of March 27, 2015, among Credit Suisse First Boston Mortgage Capital LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on April 2, 2015).

10.73		Master Spread Participation Agreement, dated as of March 27, 2015, by and among PennyMac Loan Services, LLC and PennyMac Loan Services, LLC.

10.74		Loan and Security Agreement, dated as of April 30, 2015, among PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 6, 2015).

10.75		Amended and Restated Guaranty, dated as of March 27, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse AG, New York Branch (incorporated by reference to Exhibit 10.67 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.76		Second Amended and Restated Guaranty, dated as of March 27, 2015, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on April 2, 2015).

10.77		Amended and Restated Master Repurchase Agreement, dated as of May 3, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.36 of the Registrant’s Amendment No. 5 to Form S-1 Registration Statement as filed with the SEC on May 7, 2013).

~~10.61~~10.78		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of September 5, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.47 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

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~~10.62~~10.79		Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.58 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~10.63~~10.80		Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of March 13, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.59 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

~~10.64~~10.81		Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of April 30, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 5, 2014).

~~10.65~~10.82		Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.65 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.66~~10.83		Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of June 3, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.66 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.67~~10.84		Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of October 31, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.75 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.85		Amendment No. 8 to Amended and Restated Master Repurchase Agreement, dated as of December 23, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.76 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.86		Guaranty, dated as of August 14, 2009, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.77 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.87		Master Repurchase Agreement, dated as of July 2, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).

~~10.68~~10.88		Amendment Number One to the Master Repurchase Agreement, dated as of August 26, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.49 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.69~~10.89		Amendment Number Two to the Master Repurchase Agreement, dated as of January 28, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.63 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

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~~10.70~~10.90		Amendment Number Three to the Master Repurchase Agreement, dated as of June 30, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.70 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.71~~10.91		Guaranty Agreement, dated as of July 2, 2013, by Private National Mortgage Acceptance Company, LLC in favor of Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).

~~10.72~~10.92		Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 13, 2014, by and among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Bank of America, N.A. (incorporated by reference to Exhibit 10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

~~10.73~~10.93		Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.94		Amended and Restated Guaranty, dated as of August 13, 2014, by Private National Mortgage Acceptance Company, LLC in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.73 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

31.1		Certification of Stanford L. Kurland pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

31.2		Certification of Anne D. McCallion pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

32.1**		Certification of Stanford L. Kurland pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Anne D. McCallion pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
101***101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013,~~2014 (ii) the Consolidated Statements of Income for the quarters ended ~~June 30,~~March 31, 2015 and March 31, 2014, ~~and 2013,~~ (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended ~~June 30,~~March 31, 2015 and March 31, 2014, ~~and 2013,~~ (iv) the Consolidated Statements of Cash Flows for the quarters ended ~~June 30,~~March 31, 2015 and March 31, 2014 ~~and 2013~~ and (v) the Notes to the Consolidated Financial Statements.

*
*		The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall itthey be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

~~***~~		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not otherwise subject to liability under those sections.

†		Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)

Dated: ~~August 14, 2014~~May 8, 2015	By:	/S/ STANFORD L. KURLAND
		Stanford L. Kurland
		Chairman of the Board of Directors andChief Executive Officer

Dated: ~~August 14, 2014~~May 8, 2015	By:	/S/ ANNE D. MCCALLION
		Anne D. McCallion
		Chief Financial Officer

				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

	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	)

	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

	June 30, 2014
	Servicing rights owned		Contract servicing and subservicing		Total loans serviced
	(in thousands)
Agencies	$	57,051,424	$	—	$	57,051,424
Affiliated entities	—		35,554,830		35,554,830
Mortgage loans held for sale	959,014		—		959,014
	$	58,010,438	$	35,554,830	$	93,565,268
Amount subserviced for the Company	$	5,749,967	$	325,127	$	6,075,094
Delinquent mortgage loans:
30 days	$	4,629,546	$	271,058	$	4,900,604
60 days	1,926,177		121,641		2,047,818
90 days or more	750,546		1,178,449		1,928,995
	7,306,269		1,571,148		8,877,417
Loans pending foreclosure	289,936		1,629,700		1,919,636
	$	7,596,205	$	3,200,848	$	10,797,053
Custodial funds managed by the Company (1)	$	1,181,638	$	353,913	$	1,535,551

	June 30, 2014								December 31, 2013
	Net amount		Gross amount not offset in the consolidated balance sheet						Net amount		Gross amount not offset in the consolidated balance sheet
	of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount		of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	31,159	$	—	$	—	$	31,159	$	8,964	$	—	$	—	$	8,964
Jefferies & Co.	520		—		—		520		627		—		—		627
RJ O’Brien	510		—		—		510		—		—		—		—
RBS Securities	497		—		—		497		—		—		—		—
Royal Bank of Canada	335		—		—		335		—		—		—		—
Citibank, N.A.	318		—		—		318		28		—		—		28
Deutsche Bank	301		—		—		301		50		—		—		50
Nomura	293		—		—		293		839		—		—		839
Daiwa Capital Markets	55		—		—		55		1,190		—		—		1,190
Others	314		—		—		314		9,842		—		—		9,842
	$	34,302	$	—	$	—	$	34,302	$	21,540	$	—	$	—	$	21,540

	Quarter ended June 30, 2014
	Mortgage loans held for sale			Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, March 31, 2014	$	3,985		$	14,297		$	246,984		$	265,266
Repayments	(15,033		)	—			—			(15,033		)
Interest rate lock commitments issued, net	—			46,394			—			46,394
Purchases	679,882			—			71,778			751,660
Mortgage servicing rights received as proceeds from mortgage loan sales	—			—			7,333			7,333
Sales	(407,133		)	—			(10,881		)	(418,014		)
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—									—
Other factors	(2,789		)	14,126			(6,615		)	4,722
	(2,789		)	14,126			(6,615		)	4,722
Transfers to Level 2 mortgage loans held for sale (2)	(4,256		)	—			—			(4,256		)
Transfers of interest rate lock commitments to mortgage loans held for sale	—			(45,067		)	—			(45,067		)
Balance, June 30, 2014	$	254,656		$	29,750		$	308,599		$	593,005
Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	(2,789	)	$	29,750		$	(6,615	)

	Quarter ended June 30, 2014
	Excess servicing spread financing			Mortgage servicing liabilities		Total
	(in thousands)
Liabilities:
Balance, March 31, 2014	$	151,019		$	—	$	151,019
Issuances	52,867			—		52,867
Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust	2,362			—		2,362
Accrual of interest on excess servicing spread financing	3,139			—		3,139
Repayments	(9,081		)	—		(9,081		)
Changes in fair value included in income	(10,062		)	5,821		(4,241		)
Balance, June 30, 2014	$	190,244		$	5,821	$	196,065
Changes in fair value recognized during the period relating to liabilities still held at June 30, 2014	$	(10,062	)	$	5,821

	Six months ended June 30, 2014
	Mortgage loans held for sale			Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2013	$	3,933		$	6,761		$	224,913		$	235,607
Repayments	(15,047		)	—			—			(15,047		)
Interest rate lock commitments issued, net	—			82,832			—			82,832
Purchases	679,882			—			97,644			777,526
Mortgage servicing rights received as proceeds from mortgage loan sales	—			—			14,266			14,266
Sales	(407,133		)	—			(10,881		)	(418,014		)
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—									—
Other factors	(2,723		)	19,479			(17,343		)	(587		)
	(2,723		)	19,479			(17,343		)	(587		)
Transfers to Level 2 mortgage loans held for sale (2)	(4,256		)	—			—			(4,256		)
Transfers of interest rate lock commitments to mortgage loans held for sale	—			(79,322		)	—			(79,322		)
Balance, June 30, 2014	$	254,656		$	29,750		$	308,599		$	593,005
Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	(2,723	)	$	29,750		$	(17,343	)

	Quarter ended June 30, 2014
Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Forward purchase contracts	1,506,667	10,611,283	(9,328,673	)	2,789,277
Forward sales contracts	2,829,176	15,842,070	(14,054,146	)	4,617,100
MBS put options	175,000	255,000	(205,000	)	225,000
MBS call options	160,000	145,000	(210,000	)	95,000
Put options on Eurodollar futures	325,000	377,500	(325,000	)	377,500
Call options on Eurodollar futures	100,000	205,000	(135,000	)	170,000
Treasury future purchase contracts	—	56,700	(56,700	)	—
Treasury future sale contracts	—	56,700	(56,700	)	—

	Quarter ended June 30,
	2014
	(in thousands)
Amortized cost:
Balance at beginning of period	$	—
Change in fair value due to:
Changes in valuation inputs or assumptions used in valuation model (1)	5,821
Other changes in fair value (2)	—
Total change in fair value	5,821
Balance at end of period	$	5,821

Remaining maturity at June 30, 2014	Balance
	(in thousands)
Within 30 days	$	74,716
Over 30 to 90 days	746,130
Over 90 days	4,421
	$	825,267
Weighted average maturity (in months)	2.2

Counterparty	Amount at risk		Weighted average maturity of advances under repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	117,085	September 3, 2014	October 31, 2014
Bank of America, N.A.	$	45,620	September 17, 2014	January 30, 2015
Morgan Stanley	$	10,074	August 17, 2014	June 29, 2015
Citibank, N.A.	$	—	—	August 7, 2014

	Quarter ended June 30, 2014
	Stock options		Performance- based RSUs		Time-based RSUs
	(in thousands)
March 31, 2014	1,169		1,102		198
Granted	—		—		38
Vested	(138	)	—		(31	)
Expired or canceled	(7	)	(2	)	(3	)
June 30, 2014	1,024		1,100		202


	Quarter ended March 31, 2015
	Stock options		Performance-based RSUs		Time-based RSUs
	(in thousands)
December 31, 2014		1,167		1,257		202
Granted		715		1,143		118
Vested		—		—		(31)
Exercised		—		—		—
Forfeited or canceled		(1)		(2)		—
March 31, 2015		1,881		2,398		289

	June 30, 2014				December 31, 2013
Requirement–company subject to requirement	Net worth (1)		Required		Net worth (1)		Required
	(in thousands)
Fannie Mae—PLS	$	492,451	$	87,464	$	409,552	$	83,148
Freddie Mac—PLS	$	492,671	$	3,191	$	409,860	$	3,001
Ginnie Mae:
Issuer—PLS	$	445,815	$	99,986	$	388,125	$	102,619
Issuer’s parent—PennyMac	$	673,390	$	119,983	$	598,198	$	112,881
HUD—PLS	$	445,815	$	2,500	$	388,125	$	2,500

	Quarter ended June 30, 2014
	Mortgage banking								Investment
	Production		Servicing			Total			management			Total
	(in thousands)
Revenue
Net gains on mortgage loans held for sale at fair value	$	38,101	$	1,603		$	39,704		$	—		$	39,704
Loan origination fees	10,345		—			10,345			—			10,345
Fulfillment fees from PennyMac Mortgage Investment Trust	12,433		—			12,433			—			12,433
Net servicing fees	—		56,969			56,969			—			56,969
Management fees	—		—			—			10,998			10,998
Carried Interest from Investment Funds	—		—			—			1,834			1,834
Net interest income (expense):
Interest income	5,697		554			6,251			1			6,252
Interest expense	3,072		5,660			8,732			—			8,732
	2,625		(5,106		)	(2,481		)	1			(2,480		)
Other	383		265			648			(16		)	632
Total net revenue	63,887		53,731			117,618			12,817			130,435
Expenses	31,126		33,772			64,898			7,490			72,388
Income before provision for income taxes	$	32,761	$	19,959		$	52,720		$	5,327		$	58,047
Segment assets at period end (1)	$	1,117,090	$	895,169		$	2,012,259		$	111,285		$	2,123,544

Basis of accounting	June 30, 2014			December 31, 2013
	(in thousands)
Fair value	$	308,599		$	224,913
Lower of amortized cost or fair value:
Amortized cost	$	321,911		$	263,373
Valuation allowance	(8,829		)	(4,622		)
Carrying value	$	313,082		$	258,751
Fair value	$	321,383		$	269,422

Total mortgage servicing rights:
Carrying value	$	621,681		$	483,664
Fair value	$	629,982		$	494,335
Unpaid principal balance of mortgage loans underlying mortgage servicing rights	$	57,051,424		$	45,938,820

	Payments due by period
Contractual obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)
Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust (1)	$	1,242,982	$	1,242,982	$	—	$	—	$	—
Commitments to fund mortgage loans (1)	511,863		511,863		—		—		—
Commitments to sell mortgage loans (1)	4,617,100		4,617,100		—		—		—
Loans sold under agreements to repurchase	825,267		825,267		—		—		—
Note payable	115,314		115,314		—		—		—
Software licenses (2)	18,824		9,412		9,412		—		—
Office leases	14,520		4,554		7,938		2,028		—
Total	$	7,345,870	$	7,326,492	$	17,350	$	2,028	$	—

Counterparty	Amount at risk		Weighted-average maturity of advances under repurchase agreement	Facility Maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	117,085	September 3, 2014	October 31, 2014
Bank of America, N.A.	$	45,620	September 17, 2014	January 30, 2015
Morgan Stanley	$	10,074	August 17, 2014	June 29, 2015
Citibank, N.A.	$	—	—	August 7, 2014

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	332,820		$	327,101		$	324,242		$	318,523		$	315,664		$	309,945
Change in fair value:
$	$	11,437		$	5,719		$	2,859		$	(2,859	)	$	(5,719	)	$	(11,437	)
%	3.56		%	1.78		%	0.89		%	-0.89		%	-1.78		%	-3.56		%