Note 20—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 September 30, 2013, the Company has 120.2 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. The Company amortizes the cost of previously granted stock-based awards to compensation expense over the vesting period using the graded vesting method. 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 and directors of the Company. Expense relating to awards is included in Compensation in the consolidated statements of income.

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

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
Stock options	$	593	$	—	$	791	$	—
Performance-based RSUs	464		—		746		—
Time-based RSUs	330		—		395		—

	$	1,387	$	—	$	1,932	$	—

Stock Options

The Stock Option award agreements provide for the award of Stock Options to purchase the optioned common stock. In general, and except as otherwise provided by the agreement, one-third of the optioned common stock will vest in a lump sum on each of the first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary. Each Stock Option will have a term of ten years from the date of grant but will expire (1) immediately upon termination of the holder’s employment or other association with the Company for cause, (2) one year after the holder’s employment or other association is terminated due to death or disability and (3) three months after the holder’s employment or other association is terminated for any other reason.

The fair value of each Stock Option award is estimated on the date of grant using a variant of the Black Scholes model based on the assumptions noted in the following table:

	Quarter ended September 30, 2013	Nine months ended September 30, 2013
Expected volatility (1)	—	45%
Expected dividends	—	0%
Risk-free rate	—	0.03% - 2.30%
Annualized grantee forfeiture rate	—	6.2% - 19.2%

(1) Based on historical volatilities of comparable companies’ common stock.

The Company uses its historical data to estimate employee departure behavior used in the option-pricing model; groups of employees (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes. The expected term of common stock options granted is derived from the option pricing model and represents the period of time that common stock options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the common stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

The table below summarizes stock option award activity and compensation expense for the periods presented:

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Number of Stock Options
Outstanding at beginning of period	423,407		—
Granted	—		423,407
Exercised	—		—
Expired or canceled	253		253
Outstanding at end of period	423,154		423,154
Weighted-average exercise price:
Outstanding at beginning of period	$	21.03	$	—
Granted	—		21.03
Exercised	—		—
Expired or canceled	21.03		21.03
Outstanding at end of period	$	21.03	$	21.03
Exercisable at end of period	—		—
Available for future grant	—		—
Weighted-average remaining contractual term (in years):
Outstanding at end of period	9.7		—
Exercisable at end of period	—		—
Aggregate intrinsic value:
Outstanding at end of period	$	—	$	—
Exercisable at end of period	$	—	$	—

Time-Based RSUs

The RSU grant agreements provide for the award of time-based RSUs, for each RSU, entitling the award recipient to one share of the Company’s Class A common stock. One-third of all time-based RSUs vest in a lump sum on each of the first, second, and third anniversaries of the vesting commencement date, subject to the recipient’s continued service through each anniversary.

Compensation cost relating to time-based RSUs is based on the fair value of PFSI’s common stock and the number of shares expected to vest. For purposes of estimating the cost of the time-based RSUs granted, management assumes turnover rates of 6.2% - 19.2% per year based on the grantees’ employee classification. Compensation cost relating to time-based RSUs is amortized to expense using the graded vesting method and is included in the Compensation expense on the accompanying consolidated statements of income.

Following is a summary of time-based RSU activity for the periods presented:

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Number of units
Outstanding at beginning of period	70,826		—
Granted	27,407		98,233
Vested	—		—
Expired or canceled	126		126
Outstanding at end of period	98,107		98,107
Weighted-average grant date fair value:
Outstanding at beginning of period	$	17.51	$	—
Granted	$	19.37	$	18.03
Vested	$	—	$	—
Expired or canceled	$	17.51	$	17.51
Outstanding at end of period	$	18.03	$	18.03
Compensation expense recorded during the period (in thousands)	$	330	$	395
Period end:
Unamortized compensation cost (in thousands)	$	979

Performance-Based RSUs

The performance-based RSUs provide for the issuance of shares of PFSI Class A common stock based equally on the attainment of earnings per share and total shareholder return goals and are adjusted for grantee performance ratings. The performance period for these grants is from June 13, 2013 through December 31, 2015. The grantees’ satisfaction of the performance goals will be established by review of a committee of PFSI’s board of directors. Shares vested under these grants will be issued to the grantees no later than March 15, 2016.

The performance-based RSUs contain both performance goals (attainment of earnings per share) and market goals (total shareholder return). The Company separately accounts for the performance and market goals when recognizing compensation expense relating to performance-based RSUs.

The fair value of the market goal component of the performance-based RSUs is measured using a variant of the Black-Scholes model. Key inputs are the expected volatility of the Company’s Class A common stock, the risk-free interest rate and expected grantee forfeiture rates.

Following are the inputs for grants made for the periods presented:

Input	Quarter ended September 30, 2013	Nine months ended September 30, 2013
Expected volatility	—	45%
Expected dividends	—	0%
Risk-free interest rate	—	0.3%-2.3%
Annualized grantee forfeiture rate	—	6.2%-19.2%

The fair value of the performance goal component of the performance-based RSUs is measured based on the fair value of the Company’s common shares at the grant date, management’s estimate of to what extent the performance goal will be met and the number of shares to be forfeited during the vesting period. The cost of the performance-based RSUs is amortized to Compensation expense using the straight line method over the performance period.

Following is a summary of performance-based RSU activity for the periods presented:

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Number of units
Outstanding at beginning of period	499,364		—
Granted	—		499,364
Vested	—		—
Expired or canceled	253		253
Outstanding at end of period	499,111		499,111
Weighted-average grant date fair value:
Outstanding at beginning of period	$	11.58	$	—
Granted	$	—	$	11.58
Vested	$	—	$	—
Expired or canceled	$	11.58	$	11.58
Outstanding at end of period	$	11.58	$	11.58
Compensation expense recorded during the period (in thousands)	$	464	$	746
Period end:
Unamortized compensation cost (in thousands)	$	3,816