UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, ~~2017~~2018

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

For the transition period from to

Commission file number: 001-35916

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware		80-0882793
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


3043 Townsgate Road, Westlake Village, California		91361
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May ~~5, 2017~~3, 2018
Class A Common Stock, $0.0001 par value		~~23,391,416~~25,094,668
Class B Common Stock, $0.0001 par value		4945

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

March 31, ~~2017~~2018

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements (Unaudited):	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5958
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7472
Item 4.	Controls and Procedures	74

PART II. OTHER INFORMATION		75

Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	76

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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, ~~2016,~~2017, filed with the Securities and Exchange Commission (“SEC”) on March 9, ~~2017.~~2018.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

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

our dependence on U.S. ~~government~~ government‑sponsored entities and changes in their current roles or their guarantees or guidelines;

changes to government mortgage modification programs;

certain banking regulations that may limit our business activities;

foreclosure delays and changes in foreclosure practices;

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

~~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;

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any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

changes in prevailing interest rates;

increases in loan delinquencies and defaults;

our dependence on the success of the ~~small balance~~ multifamily market for future originations of commercial mortgage loans and other commercial real estate-related loans;

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

our obligation to indemnify ~~third~~ 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 ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);

our obligation to indemnify PMT and ~~certain investment funds~~the Investment Funds if our services fail to meet certain criteria or characteristics or under other circumstances;

decreases in the 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;~~our 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.~~incidents;

our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and

our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands, except share amounts)				(in thousands, except share amounts)
ASSETS
Cash (includes $60,835 and $91,788 pledged to creditors)	$	72,767	$	99,367
Cash (includes $116,570 and $20,765 pledged to creditors)					$	137,863	$	37,725
Short-term investments at fair value		116,334		85,964		105,890		170,080
Mortgage loans held for sale at fair value (includes $2,252,717 and $2,125,174 pledged to creditors)		2,277,751		2,172,815
Mortgage loans held for sale at fair value (includes $2,569,189 and $3,081,987 pledged to creditors)						2,584,236		3,099,103
Derivative assets		82,001		82,905		89,469		78,179
Servicing advances, net (includes valuation allowance of $46,804 and $45,425; $66,130 and $81,306 pledged to creditors)		317,513		348,306
Servicing advances, net (includes valuation allowance of $61,670 and $59,958; $104,685 and $114,643 pledged to creditors)						284,145		318,066
Carried Interest due from Investment Funds pledged to creditors		70,778		70,906		538		8,552
Investment in PennyMac Mortgage Investment Trust at fair value		1,331		1,228		1,352		1,205
Mortgage servicing rights (includes $506,916 and $515,925 at fair value; $1,720,117 and $1,617,671 pledged to creditors)		1,725,061		1,627,672
Mortgage servicing rights (includes $2,354,489 and $638,010 at fair value; $2,178,536 and $2,098,067 pledged to creditors)						2,354,489		2,119,588
Real estate acquired in settlement of loans		1,014		1,418		2,338		2,447
Furniture, fixtures, equipment and building improvements, net (includes $29,665 and $25,134 pledged to creditors)		31,568		31,321
Capitalized software, net (includes $1,919 and $515 pledged to creditors)		15,453		11,205
Furniture, fixtures, equipment and building improvements, net (includes $22,250 and $23,915 pledged to creditors)						30,172		29,453
Capitalized software, net (includes $1,457 and $1,568 pledged to creditors)						28,919		25,729
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		150,000		150,000		142,938		144,128
Receivable from PennyMac Mortgage Investment Trust		20,756		16,416		27,356		27,119
Receivable from Investment Funds		998		1,219		460		417
Mortgage loans eligible for repurchase		318,378		382,268		1,018,488		1,208,195
Other		49,674		50,892		94,238		98,107
Total assets	$	5,251,377	$	5,133,902	$	6,902,891	$	7,368,093
LIABILITIES
Assets sold under agreements to repurchase	$	2,034,808	$	1,735,114	$	1,814,282	$	2,381,538
Mortgage loan participation and sale agreements		241,638		671,426
Mortgage loan participation purchase and sale agreements						510,443		527,395
Notes payable		436,725		150,942		1,140,022		891,505
Obligations under capital lease		31,178		23,424		16,435		20,971
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		277,484		288,669		236,002		236,534
Derivative liabilities		15,873		22,362		4,476		5,796
Accounts payable and accrued expenses		108,489		134,611		113,046		106,716
Mortgage servicing liabilities at fair value		15,994		15,192		12,063		14,120
Payable to Investment Funds		18,356		20,393		26		2,427
Payable to PennyMac Mortgage Investment Trust		164,743		170,036		117,987		136,998
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		78,712		75,954		46,037		44,011
Income taxes payable		31,968		25,088		58,956		52,160
Liability for mortgage loans eligible for repurchase		318,378		382,268		1,018,488		1,208,195
Liability for losses under representations and warranties		19,436		19,067		20,429		20,053
Total liabilities		3,793,782		3,734,546		5,108,692		5,648,419

Commitments and contingencies
Commitments and contingencies – Note 14

STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,917,545 and 22,426,779 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49 shares		—		—
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 24,277,768 and 23,529,970 shares, respectively						2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 45 and 46 shares, respectively						—		—
Additional paid-in capital		191,514		182,772		221,495		204,103
Retained earnings		175,428		164,549		282,114		265,306
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		366,944		347,323		503,611		469,411
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		1,090,651		1,052,033		1,290,588		1,250,263
Total stockholders' equity		1,457,595		1,399,356		1,794,199		1,719,674
Total liabilities and stockholders’ equity	$	5,251,377	$	5,133,902	$	6,902,891	$	7,368,093

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands, except earnings per share)				(in thousands, except earnings per share)
Revenues
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	88,651	$	93,476	$	59,028	$	88,651
Recapture payable to PennyMac Mortgage Investment Trust		(1,695)		(1,952)
From PennyMac Mortgage Investment Trust						12,386		(1,695)
		86,956		91,524		71,414		86,956
Mortgage loan origination fees:
From non-affiliates		24,195		21,427		23,355		24,195
From PennyMac Mortgage Investment Trust		1,379		1,007		1,208		1,379
		25,574		22,434		24,563		25,574
Fulfillment fees from PennyMac Mortgage Investment Trust		16,570		12,935		11,944		16,570
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates		106,467		91,327		135,483		106,467
From PennyMac Mortgage Investment Trust		10,486		11,453		11,019		10,486
From Investment Funds		496		701		—		496
Ancillary and other fees		11,866		11,452		14,171		11,866
		129,315		114,933		160,673		129,315
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities		(57,925)		(116,863)		(36,963)		(57,925)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		2,773		19,449		(6,921)		2,773
		(55,152)		(97,414)		(43,884)		(55,152)
Net mortgage loan servicing fees		74,163		17,519		116,789		74,163
Management fees:
From PennyMac Mortgage Investment Trust		5,008		5,352		5,696		5,008
From Investment Funds		366		560		79		366
		5,374		5,912		5,775		5,374
Carried Interest from Investment Funds		(128)		593		(180)		(128)
Net interest expense:
Net interest income (expense):
Interest income:
From non-affiliates		22,054		11,927		40,639		22,054
From PennyMac Mortgage Investment Trust		1,805		1,602		1,976		1,805
		23,859		13,529		42,615		23,859
Interest expense:
To non-affiliates		24,827		13,972		32,811		24,827
To PennyMac Mortgage Investment Trust		4,647		7,015		3,934		4,647
		29,474		20,987		36,745		29,474
Net interest expense		(5,615)		(7,458)
Net interest income (expense)						5,870		(5,615)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		139		(86)		182		139
Results of real estate acquired in settlement of loans		(25)		(435)		(28)		(25)
Other		1,465		463		1,872		1,465
Total net revenues		204,473		143,401		238,201		204,473
Expenses
Compensation		85,240		68,298		102,013		85,240
Servicing		26,843		20,887		26,299		26,843
Technology		11,356		6,847		14,620		11,356
Occupancy and equipment						6,377		5,042
Professional services						5,738		3,818
Marketing						2,161		1,736
Loan origination		4,133		4,186		2,115		4,133
Professional services		3,818		3,733
Other		11,051		9,311		5,882		4,273
Total expenses		142,441		113,262		165,205		142,441
Income before provision for income taxes		62,032		30,139		72,996		62,032
Provision for income taxes		7,646		3,596		6,070		7,646
Net income		54,386		26,543		66,926		54,386
Less: Net income attributable to noncontrolling interest		43,507		21,368		50,307		43,507
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,879	$	5,175	$	16,619	$	10,879

Earnings per common share
Earnings per share
Basic	$	0.48	$	0.24	$	0.70	$	0.48
Diluted	$	0.47	$	0.23	$	0.67	$	0.47
Weighted average common shares outstanding
Weighted average shares outstanding
Basic		22,619		22,006		23,832		22,619
Diluted		77,143		76,194		79,461		77,143

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


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

Balance at December 31, 2015	21,991	$	2	$	172,354	$	98,470	$	791,524	$	1,062,350
Net income	—		—		—		5,175		21,368		26,543
Stock and unit-based compensation	47		—		1,107		—		3,270		4,377
Issuance of common stock in settlement of directors' fees	6		—		74		—		—		74
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	3		—		601		—		(601)		—
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.	—		—		(131)		—		—		(131)
Balance at March 31, 2016	22,047	$	2	$	174,005	$	103,645	$	815,561	$	1,093,213

Balance at December 31, 2016	22,427	$	2	$	182,772	$	164,549	$	1,052,033	$	1,399,356	22,427	$	2	$	182,772	$	164,549	$		1,052,033	$		1,399,356
Net income	—		—		—		10,879		43,507		54,386	—		—		—		10,879			43,507			54,386
Stock and unit-based compensation	157		—		1,903		—		3,874		5,777	157		—		1,903		—			3,874			5,777
Issuance of common stock in settlement of directors' fees	5		—		84		—		—		84
Issuance of Class A common stock in settlement of directors' fees												5		—		84		—			—			84
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	329		—		8,763		—		(8,763)		—	329		—		8,763		—			(8,763)			—
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.	—		—		(2,008)		—		—		(2,008)	—		—		(2,008)		—			—			(2,008)
Balance at March 31, 2017	22,918	$	2	$	191,514	$	175,428	$	1,090,651	$	1,457,595	22,918	$	2	$	191,514	$	175,428	$		1,090,651	$		1,457,595

Balance at December 31, 2017												23,530	$	2	$	204,103	$	265,306	$		1,250,263	$		1,719,674
Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value												—		—		—		189			587			776
Balance at January 1, 2018												23,530		2		204,103		265,495			1,250,850			1,720,450
Net income												—		—		—		16,619			50,307			66,926
Stock and unit-based compensation												—		—		5,191		—			4,235			9,426
Issuance of Class A common stock in settlement of directors' fees												—		—		24		—			55			79
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc. by noncontrolling interest unitholders and issued as equity compensation												748		—		14,859		—			(14,859)			—
Tax effect of exchange and repurchases of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc., net												—		—		(2,682)		—			—			(2,682)
Balance at March 31, 2018												24,278	$	2	$	221,495	$	282,114	$		1,290,588	$		1,794,199

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cash flow from operating activities
Net income	$	54,386	$	26,543	$	66,926	$	54,386
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(86,956)		(91,524)		(71,414)		(86,956)
Accrual of servicing rebate payable to Investment Funds		45		75		—		45
Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		55,152		97,414		43,884		55,152
Carried Interest from Investment Funds		128		(593)		180		128
Capitalization of interest on mortgage loans held for sale at fair value		(8,900)		(5,827)		(14,467)		(8,900)
Accrual of interest on excess servicing spread financing		4,647		7,015		3,934		4,647
Amortization of debt issuance costs		3,269		2,537
Amortization of debt issuance costs and premiums						(3,600)		3,269
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(103)		122		(147)		(103)
Results of real estate acquired in settlement in loans		25		435		28		25
Stock and unit-based compensation expense		5,525		4,377
Stock-based compensation expense						6,171		5,525
Provision for servicing advance losses		9,921		10,562		6,787		9,921
Depreciation and amortization		1,952		1,076		2,592		1,952
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(10,016,788)		(6,854,876)		(9,212,188)		(10,016,788)
Originations of mortgage loans held for sale		(1,061,212)		(1,218,163)		(1,281,302)		(1,061,212)
Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(936,948)		(424,813)		(911,585)		(936,948)
Sale and principal payments of mortgage loans held for sale		11,860,133		7,942,200
Sale and principal payments of mortgage loans held for sale to non-affiliates						11,103,785		11,860,133
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		21,530		4,715		781,326		21,530
Repurchase of mortgage loans subject to representations and warranties		(5,303)		(6,913)		(6,309)		(5,303)
Decrease in servicing advances		21,251		1,897		27,450		21,251
Decrease in receivable from Investment Funds		176		122
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust		(4,206)		1,843
Decrease in deferred tax asset		—		3,570
Collection of Carried Interest						7,834		—
Sale of real estate acquired in settlement of loans						1,230		—
Increase in receivable from PennyMac Mortgage Investment Trust						(955)		(4,206)
(Increase) decrease in receivable from Investment Funds						(43)		176
Increase in other assets		(1,019)		(3,692)		(1,593)		(966)
Decrease in accounts payable and accrued expenses		(28,163)		(3,680)
Increase (decrease) in accounts payable and accrued expenses						4,745		(28,163)
Decrease in payable to Investment Funds		(2,037)		(1,586)		(2,401)		(2,037)
Decrease in payable to PennyMac Mortgage Investment Trust		(5,480)		(9,698)		(19,544)		(5,480)
Increase in income taxes payable		7,630		—		6,068		7,630
Net cash used in operating activities		(111,345)		(516,862)
Net cash provided by (used in) operating activities						537,392		(111,292)
Cash flow from investing activities
(Increase) decrease in short-term investments		(30,370)		18,055
Decrease (increase) in short-term investments						64,190		(30,370)
Net settlement of derivative financial instruments used for hedging		(20,492)		38,579		(128,099)		(20,492)
Purchase of mortgage servicing rights		(203)		(11)		(27,544)		(203)
Purchase of furniture, fixtures, equipment and leasehold improvements		(2,329)		(8,939)		(2,779)		(2,329)
Acquisition of capitalized software		(4,526)		(1,378)		(3,722)		(4,526)
Increase in margin deposits and restricted cash		(2,434)		(4,551)
Net cash (used in) provided by investing activities		(60,354)		41,755
Sale of assets purchased from PMT under agreement to resell						1,190		—
Decrease (increase) in margin deposits						15,501		(2,434)
Net cash used in investing activities						(81,263)		(60,354)
Cash flow from financing activities
Sale of assets under agreements to repurchase		5,815,923		7,614,302		9,771,234		5,815,923
Repurchase of assets sold under agreements to repurchase		(5,516,480)		(7,122,979)		(10,338,629)		(5,516,480)
Issuance of mortgage loan participation certificates		5,302,595		4,838,963		6,155,178		5,302,595
Repayment of mortgage loan participation certificates		(5,732,434)		(4,827,226)		(6,172,301)		(5,732,434)
Advances on notes payable		400,000		68,000		650,000		400,000
Repayment of notes payable		(110,633)		(1,828)		(400,000)		(110,633)
Advances of obligations under capital lease		10,298		—		—		10,298
Repayment of obligations under capital lease		(2,544)		(1,509)		(4,536)		(2,544)
Repayment of excess servicing spread financing		(14,632)		(20,881)		(12,291)		(14,632)
Settlement of excess servicing spread financing		—		(59,045)
Payment of debt issuance costs		(7,246)		(1,602)		(7,891)		(7,246)
Proceeds from common stock options exercised		252		—
Net cash provided by financing activities		145,099		486,195
Net (decrease) increase in cash		(26,600)		11,088
Cash at beginning of period		99,367		105,472
Cash at end of period	$	72,767	$	116,560
Issuance of common stock pursuant to exercise of options						3,255		252
Net cash (used in) provided by financing activities						(355,981)		145,099
Net increase (decrease) in cash and restricted cash						100,148		(26,547)
Cash and restricted cash at beginning of quarter						38,173		99,642
Cash and restricted cash at end of quarter					$	138,321	$	73,095
Cash and restricted cash at end of period are comprised of the following:
Cash					$	137,863	$	72,767
Restricted cash included in Other assets						458		328
					$	138,321	$	73,095

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

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization ~~and Basis of Presentation~~

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac and operates and controls all of the businesses and affairs of PennyMac subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production ~~(including correspondent production and consumer direct lending)~~ and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of ~~entities~~investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

Presently, PCM has management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., (the “Master Fund”), both registered under the Investment Company Act of 1940, as amended, an affiliate of these registered funds, PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”), and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.” In 2017 and through the quarter ended March 31, 2018, the Investment Funds sold or liquidated all of their remaining investments. PCM expects to complete liquidation of the Investment Funds during 2018.

PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and the Advised Entities, purchases, originates and ~~originates~~sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).

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

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Note 2—Basis of Presentation and Accounting Changes

Basis of Presentation

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. ~~The~~This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily

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indicative of income to be anticipated for the full year ending December 31, ~~2017.~~2018. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates 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.

Accounting Changes

During the quarter ended March 31, 2018, the Company adopted changes to the accounting principles used in the preparation of its financial statements summarized below.

Mortgage Servicing Rights

Effective January 1, 2018, the Company has elected to change the accounting for the classes of mortgage servicing rights (“MSRs”) it had accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The Company determined that a single accounting treatment across all MSRs is consistent with lender valuation under its financing arrangements and simplifies the Company’s hedging activities. As the result of this change, the Company recorded an adjustment to increase its investment in MSRs by $848,000, an increase in its liability for income taxes payable of $72,000 and in increase in stockholders’ equity of $776,000.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”), which supersedes the guidance in the Revenue Recognition topic of the ASC. Effective January 1, 2018, the Company adopted ASU 2014-09 as amended using the modified retrospective method. The adoption of ASU 2014-09 did not require the Company to record a cumulative effect adjustment to its beginning retained earnings.

The Company’s revenues from contracts with customers that are subject to ASU 2014-09 include fulfillment fees, management fees, Carried Interest and certain reimbursed overhead costs. Other revenue and income streams are not subject to ASU 2014-09 as they are financial instruments or other contractual rights and obligations accounted for under the Receivables, Investments and Debt and Equity Securities, Topics of the ASC Transfers and Servicing, Topic 825 Financial Instruments and Derivatives and Hedging.

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Fulfillment Fees

Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. Fulfillment fee amounts are based upon a negotiated fee schedule and the unpaid principal balance of the mortgage loans purchased by PMT. The Company’s obligation under the agreement is fulfilled when PMT completes the sale or securitization of a mortgage loan it purchases. Fulfillment fees are generally collected within 30 days of purchase by PMT, although a portion of the fulfillment fees may not be collected until 30 days following sale or securitization to the extent such sale or securitization does not occur in the month of purchase. Fulfillment fee revenue is recognized in the month the fee is earned. Fulfillment fees receivable contract assets are disclosed in Note 2—4—Transactions with Affiliates.

Management fees

Management fees represent compensation to the Company for its management services provided to the Advised Entities. Management fees are earned based on the Investment Funds’ net assets and PMT’s shareholders’ equity amounts and profitability in excess of specified thresholds, and are recognized as services are provided and are paid to the Company on a quarterly basis within 30 days of the end of the quarter. Management fees receivable contract assets are disclosed in Note 4—Transactions with Affiliates.

Carried Interest

The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to the Company. As a result, the Company has concluded as part of its assessment of the effect of the adoption of ASU 2014-09 that its Carried Interest represents an equity method investment subject to the Investments – Equity Method and Joint Ventures topic of the ASC. Therefore, effective January 1, 2018, the Company recharacterized its Carried Interest as financial instruments under the equity method of accounting. Carried Interest balances are disclosed in Note 9—Carried Interest Due from Investment Funds.

Expense reimbursements

Under the Company’s management agreement with PMT, PMT is required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end. Before the adoption of ASU 2014-09, the Company accounted for such reimbursements as reductions to expenses. With the adoption of ASU 2014-09, the Company is required to include such expense reimbursements in its net revenues. As a result of the adoption of ASU 2014-09, certain overhead reimbursement amounts were reclassified from the following expense line items to Other revenue as summarized below:


	Quarter ended
Income statement line	March 31, 2018
	(in thousands)
Compensation	$	120
Occupancy and equipment		589
Technology		220
Other		192
Total expense reimbursements included in Other revenue	$	1,121

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Cash Flows

During the quarter ended March 31, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. Accordingly, the Company retrospectively changed the presentation of its consolidated statements of cash flows to conform to the requirements of ASU 2016-18. For the purpose of reporting statement of cash flows, the Company has identified tenant security deposits relating to rental properties owned by PMT and managed by the Company as restricted cash, which are included in Other asset on the Company’s consolidated balance sheets. As the result of adoption of ASU 2016-18, the Company’s consolidated statements of cash flows for the quarter ended March 31, 2017 changed as follows:


		As previously		Effect of adoption
		reported		of ASU 2016-18		As reported
	(in thousands)
Cash flow from operating activities	$	(111,345)	$	53	$	(111,292)
Cash and restricted cash at quarter end	$	72,767	$	328	$	73,095

Note 3—Concentration of Risk

A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these entities (generally comprised of gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, mortgage loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), management fees, Carried Interest, ~~servicing recapture fees~~ and net interest charged to these entities) totaled ~~16%~~15% and ~~30%~~16% of total net revenue for the quarters ended March 31, ~~2017~~2018 and ~~2016,~~2017, respectively.

Note 3—4—Transactions with Affiliates

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSR”) Recapture

The Company provides fulfillment and other services to PMT under a mortgage banking services agreement. Before September 12, 2016, the Company was entitled to a fulfillment fee based on the type of mortgage loan that PMT acquired and equal to a percentage of the unpaid principal balance (“UPB”) of such mortgage loan. The applicable fulfillment fee percentages were (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, and (iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that the Company was permitted, in its sole discretion, to 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 was only credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

~~Effective September 12, 2016, pursuant to the terms of~~ an amended and restated mortgage banking services agreement for which it receives a fulfillment fee. Pursuant to the ~~applicable~~terms of mortgage banking services agreement, the monthly fulfillment fee ~~percentages are~~is an amount that shall equal (a) no greater than the product of (i) 0.35% ~~for~~and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or ~~delivered to~~securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) ~~0.85% for~~the aggregate Initial UPB of all ~~other~~such mortgage ~~loans;~~loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae ~~guidelines.~~Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae ~~mortgage-backed securities (“MBS”)~~MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae ~~Mortgage-Backed Securities~~MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.

In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under the Company’s early purchase program, the Company is entitled to fees accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $35 for each mortgage loan that PMT acquires thereunder. The mortgage banking services agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods.

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The Company sells newly originated loans to PMT under a mortgage loan purchase agreement and a flow commercial mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. Beginning in the quarter ended September 30, 2017, the Company also sells non-government insured or guaranteed mortgage loans to PMT under the mortgage loan purchase agreement. The Company sells to PMT small balance commercial mortgage loans, including multifamily mortgage loans, originated as part of its commercial lending activities using the flow commercial mortgage loan purchase agreement.

Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if the Company refinances ~~through its consumer direct lending business~~ mortgage loans for which PMT previously held the MSRs, the Company is 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~~cash in ~~those refinancings (or, under certain circumstances, other mortgage loans) that have~~ an ~~aggregate UPB that is not less than~~amount equal to 30% of the ~~aggregate UPB~~fair market value of the MSRs related to 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, the Company may, at its option, pay cash to PMT in an amount equal to such fair value instead of transferring such MSRs. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

Following is a summary of mortgage loan production activities and MSR recapture between the Company and PMT:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Mortgage servicing rights and excess servicing spread recapture incurred included in Net gains on mortgage loans held for sale at fair value	$	1,695	$	1,952
Net gain (loss) on mortgage loans held for sale at fair value:
Net gain on mortgage loans held for sale to PMT					$	13,811	$	—
Mortgage servicing rights and excess servicing spread recapture incurred						(1,425)		(1,695)
					$	12,386	$	(1,695)
Sale of mortgage loans held for sale to PMT					$	781,326		21,530

Fulfillment fee revenue	$	16,570	$	12,935	$	11,944	$	16,570
Unpaid principal balance of mortgage loans fulfilled for PMT	$	4,631,906	$	3,259,363
Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees					$	4,225,631	$	4,631,906

Sourcing fees paid to PMT	$	2,871	$	1,950	$	2,641	$	2,871
Unpaid principal balance of mortgage loans purchased from PMT	$	9,574,717	$	6,495,722	$	8,847,873	$	9,574,717

Proceeds from sale of mortgage loans held for sale to PMT	$	21,530	$	4,715
Tax service fees received from PMT included in Mortgage loan origination fees	$	1,379	$	1,007	$	1,208	$	1,379
Property management fees received from PMT included in Other income					$	99	$	71
Early purchase program fees earned from PMT included in Mortgage loan servicing fees	$	5	$	1	$	—	$	5

Mortgage Loan Servicing

The Company has a mortgage loan servicing agreement with ~~PMT.~~PMT (“Servicing Agreement”). The ~~servicing agreement~~Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the ~~real estate acquired in settlement of loans (“REO”).~~REO. The Company also remains entitled to customary ancillary income and market-based fees and charges ~~including~~relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late ~~charges relating to mortgage loans it services for PMT. The servicing agreement was amended and restated as of September 12, 2016; however, the fee structure was not amended in any material respect.~~charges.

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to ~~$100~~$85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property

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management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month and $8.50 per month for fixed-rate loans and adjustable-rate loans, respectively.

The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from 0.50% for a streamline modification to 1.50% for a liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.

Because PMT has limited employees and infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a

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customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a mortgage loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.

Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification ~~Plan (“HAMP”);~~Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.

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The ~~servicing agreement~~Servicing Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	65	$	56	$	56	$	65
Activity-based		143		115		122		143
		208		171		178		208
Mortgage loans at fair value:
Base and supplemental		1,958		3,359		1,005		1,958
Activity-based		2,390		3,449		2,080		2,390
		4,348		6,808		3,085		4,348
Mortgage servicing rights:
Base and supplemental		5,837		4,385		7,649		5,837
Activity-based		93		89		107		93
		5,930		4,474		7,756		5,930
	$	10,486	$	11,453	$	11,019	$	10,486

Investment Management Activities

The Company has a management agreement with ~~PMT.~~PMT (“Management Agreement”). The ~~management agreement~~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 average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

The performance incentive fee is calculated quarterly 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 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%

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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 attributable to its common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non‑cash charges determined after discussions between the Company 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 rolling four‑quarter period.

The “high watermark” is the quarterly adjustment that 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

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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 the Company 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 a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

The ~~management agreement~~Management Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the ~~management agreement~~Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.

Following is a summary of the base management and performance incentive fees earned from PMT:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Base management	$	5,008	$	5,352	$	5,696	$	5,008
Performance incentive		—		—		—		—
	$	5,008	$	5,352	$	5,696	$	5,008

Expense Reimbursement

Under the ~~management agreement,~~Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel, from and after September 12, 2016, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its

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subsidiaries’ operations. These expenses will be allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

The Company received reimbursements from PMT for expenses as follows:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	1,434	$	2,561
Common overhead and compensation expense incurred by the Company (1)					$	1,121	$	1,434
Expenses incurred on PMT's behalf, net		255		55		573		255
	$	1,689	$	2,616	$	1,694	$	1,689
Payments and settlements during the period (1)	$	24,393	$	27,661
Payments and settlements during the quarter (2)					$	7,658	$	24,393

(1)

The Company adopted ASU 2014-09 using the modified retrospective method effective January 1, 2018. Adoption of ASU 2014-09 using the modified retrospective method required the Company to include those reimbursements from PMT in Other revenue starting January 1, 2018.

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(2)

Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

Conditional Reimbursement of Underwriting Fees

In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. ~~The Company received no reimbursement from PMT during the quarters ended March 31, 2017 and 2016.~~

In the event a termination fee is payable to the Company under the ~~management agreement,~~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. The Company received no reimbursement of underwriting fees from PMT during the quarters ended March 31, 2018 and 2017.

Investing Activities

Master Repurchase Agreement ~~with the Issuer Trust~~

On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1,000,000,000.

The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

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Prior to the Company’s entry into the PMH Repurchase Agreement and PC Repurchase Agreement in connection with the GNMA MSR Facility, the Company was a party to a repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which it financed Ginnie Mae MSRs and servicing advance receivables and pledged to CSFB all of its rights and interests in any Ginnie Mae MSRs it owned or acquired, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and the Company.

In connection with the MSR Repo described above, the Company and PMT entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which PMT was able to borrow up to $150 million from the Company for the purpose of financing ESS (the “Underlying LSA”). In order to secure its borrowings, PMT pledged its ESS to the Company under the Underlying LSA and the Company, in turn, re-pledged such ESS to CSFB under the MSR Repo. The principal amount of the borrowings under the Underlying LSA was based upon a percentage of the market value of the ESS pledged by PMT, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, PMT granted to the Company a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings.

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The Company and PMT agreed in connection with the Underlying LSA that PMT was required to repay the Company the principal amount of borrowings plus accrued interest to the date of such repayment, and the Company was required to repay CSFB the corresponding amount under the MSR Repo. Interest accrued on PMT’s note relating to the Underlying LSA at a rate based on CSFB’s cost of funds under the MSR Repo. PMT was also required to pay the Company a fee for the structuring of the Underlying LSA in an amount equal to the portion of the corresponding fee paid by the Company to CSFB and allocable to the $150 million relating to the ~~ESS financing.~~ESS. The ~~note receivable~~Underlying LSA was replaced by the PMH Repurchase Agreement upon the closing of the GNMA MSR facility.

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.

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

Quarter ended March 31,

2017

2016

(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell:

Interest income

$
1,805

$
—
Note receivable from PennyMac Mortgage Investment Trust:

Interest income

$
—

$
1,602
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

Dividends received from PennyMac Mortgage Investment Trust

$
36

$
35
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

103

(121)

$
139

$
(86)


	Quarter ended March 31,
	2018		2017
	(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	1,976	$	1,805
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received from PennyMac Mortgage Investment Trust	$	35	$	36
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		147		103
	$	182	$	139


	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	150,000	$	150,000	$	142,938	$	144,128
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,331	$	1,228	$	1,352	$	1,205
Number of shares		75		75		75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

Effective February 1, 2013, the Company entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which it sold to PMT or one of its wholly-owned subsidiaries the rights to receive certain ESS from MSRs acquired by the Company from banks and other third party financial institutions. The Company was 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 were

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~~subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.~~

To the extent the Company refinanced any of the mortgage loans relating to the ESS sold to PMT, the 2/1/13 Spread Acquisition Agreement contained recapture provisions requiring that the Company 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 was less than $200,000, the Company was, at its option, permitted to pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.

On February 29, 2016, the parties terminated the 2/1/13 Spread Acquisition Agreement and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, PLS reacquired from PMH all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by PLS to PMH and then subject to such 2/1/13 Spread Acquisition Agreement.

On December 19, ~~2014,~~2016, the Company ~~entered into~~amended and restated a ~~second~~ master spread acquisition and MSR servicing agreement with PMT (the ~~“12/19/14 Spread~~“Spread Acquisition Agreement”)~~. The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar~~, pursuant to ~~the terms of the 2/1/13 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.~~

To the extent the Company refinances any of the mortgage loans relating to the ESS it sells to PMT, the 12/19/14 Spread Acquisition Agreement also contains recapture provisions requiring that the Company 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, the Company may, at its option, pay cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

On February 29, 2016, PLS also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold by PLS to PMT and then subject to such 12/19/14 Spread Acquisition Agreement. The 12/19/14 Spread Acquisition Agreement remains in full force and effect.

On December 19, 2016, the Company amended and restated a third master spread acquisition and MSR servicing agreement with PMT (the “12/19/16 Spread Acquisition Agreement”). The terms of the 12/19/16 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement and the 12/19/14 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Ginnie Mae MSRs under the 12/19/16 Spread Acquisition Agreement. Pursuant to the 12/19/16 Spread Acquisition Agreement,which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.

To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the ~~12/19/16~~ Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the ~~12/19/16~~ 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 unpaid principal balance of the refinanced mortgage loans, the Company is 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 unpaid principal balance of the modified mortgage loans, the ~~12/19/16~~ Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the

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fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, wire cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

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


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Excess servicing spread financing:
Issuance pursuant to recapture agreement	$	1,573	$	1,911	$	904	$	1,573
Repayment	$	14,632	$	20,881	$	12,291	$	14,632
Settlement	$	—	$	59,045
Change in fair value	$	(2,773)	$	(19,449)	$	(6,921)	$	2,773
Interest expense	$	4,647	$	7,015	$	3,934	$	4,647
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on mortgage loans held for sale at fair value	$	1,403	$	1,822	$	830	$	1,403

					March 31,		December 31,
					2018		2017
					(in thousands)
Excess servicing spread financing at fair value					$	236,002	$	236,534

~~Amounts Due~~Receivable from and Payable to PMT

Amounts ~~due~~receivable from and payable to PMT are summarized below:


	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	10,211	$	1,046	$	8,806	$	11,542
Management fees		5,008		5,081		5,696		5,901
Servicing fees		4,149		5,465		5,562		6,583
Fulfillment fees						4,471		346
Correspondent production fees						1,825		1,735
Conditional Reimbursement		900		900		870		870
Fulfillment fees		345		1,300
Interest on assets purchased under agreements to resell		106		253		126		142
Correspondent production fees		37		2,371
	$	20,756	$	16,416	$	27,356	$	27,119
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	153,827	$	162,945	$	117,674	$	132,844
Mortgage servicing rights recapture payable		536		707		207		282
Other		10,380		6,384		106		3,872
	$	164,743	$	170,036	$	117,987	$	136,998

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Investment Funds

Management Agreements

The Company has investment management agreements with the Investment Funds pursuant to which it receives management fees consisting of base management fees and ~~carried interest.~~Carried Interest. The management fees are based on the lesser of the funds’ net asset values or aggregate capital contributions. The base management fees accrue at annual rates ranging from 1.5% to 2.0% of the applicable amounts on which they are based.

The Carried Interest that the Company recognizes from the Investment Funds is determined by the Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the funds’ investors. The Company recognizes Carried Interest as a participation in the profits in the Investment Funds after the investors in the Investment Funds have achieved a preferred return as defined in the fund agreements. After the investors have achieved the preferred returns specified in the respective fund agreements, a “catch up” return accrues to the Company until it receives a specified percentage of the preferred return. Thereafter, the Company participates in future returns in excess of the preferred return at the rates specified in the fund agreements. The Company received $61.3 million in cash in settlement of the majority of its Carried Interest in 2017. During the quarter ended March 31, 2018, the Company received an additional distribution of $7.8 million in cash.

The amount of the Carried Interest that the Company receives 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 of the Investment Funds and may be reduced as a result of subsequent performance. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of Carried Interest will only be reversed to the extent of amounts previously recognized.

The Investment Funds will continue in existence through December 31, 2017, subject to two one-year extensions at the Company’s discretion, in accordance with the terms of the limited liability company and limited partnership agreements that govern the Investment Funds.Mortgage Loan Servicing Agreements

The Company ~~also~~ has loan servicing agreements with the Investment Funds. The loan servicing to be provided by the Company under the loan servicing agreements with the Investment Funds includes collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. The Company may also engage in certain loan origination activities that include refinancing mortgage loans and arranging financings that facilitate sales of REOs.

The loan servicing agreements with the Investment Funds generally provide for fee revenue, which varies depending on the type and quality of the loans being serviced. The Company is also entitled to certain customary market-based fees and charges. ~~This arrangement was modified, effective January 1, 2012, with respect to one~~

In 2017 and through the quarter ended March 31, 2018, the Investment Funds sold or liquidated all of their remaining investment assets. Accordingly, future management and servicing fees from the Investment Funds will be discontinued. The terms of the Investment ~~Funds. At that time,~~Funds currently run through December 31, 2018, subject to a one-year extension at the ~~Company settled its accrued servicing fee rebate and amended its loan servicing agreement~~Company’s discretion, in accordance with ~~such fund to charge scheduled servicing fees in place~~the terms of the ~~previous “at cost” servicing arrangement.~~limited liability company and limited partnership agreements that govern the Investment Funds. The Company expects to complete liquidation of the Investment Funds during 2018.

1820

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Amounts due from and payable to the Investment Funds are summarized below:


	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	42,365	$	42,427	$	290	$	6,389
PNMAC Mortgage Opportunity Fund Investors, LLC		28,413		28,479		248		2,163
	$	70,778	$	70,906	$	538	$	8,552
Receivable from Investment Funds:
Mortgage loan servicing fees	$	299	$	231
Mortgage loan servicing fee rebate deposit		255		250	$	300	$	300
Management fees		232		500		82		88
Expense reimbursements		212		238		78		27
Mortgage loan servicing fees						—		2
	$	998	$	1,219	$	460	$	417
Payable to Investment Funds:
Deposits received to fund servicing advances	$	18,208	$	20,221	$	—	$	2,329
Other		148		172		26		98
	$	18,356	$	20,393	$	26	$	2,427

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company entered into a tax receivable agreement with owners of PennyMac other than the Company on the date of the IPO that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets 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 ~~$78.7~~$46.0 million and ~~$76.0~~$44.0 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The Company ~~made no~~did not make any payments under the tax receivable agreement during the quarters ended March 31, ~~2017~~2018 and ~~2016.~~2017.

~~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 dilutive shares of common stock were issued.

Potentially dilutive shares of common stock include non-vested unit and stock-based compensation awards and PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding represented by the non-vested unit and stock-based compensation awards. The diluted earnings per share calculation assumes the exchange of 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 that would be applicable to such earnings.

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~~The following table summarizes the basic and diluted earnings per share calculations:~~

Quarter ended March 31,


2017

2016

(in thousands, except per share amounts)
Basic earnings per share of common stock:



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

$
10,879

$
5,175
Weighted average shares of common stock outstanding

22,619

22,006
Basic earnings per share of common stock

$
0.48

$
0.24

Diluted earnings per share of common stock:

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

$
10,879

$
5,175
Effect of net income attributable to PennyMac Class A units exchangeable to common stock, net of income taxes

25,550

12,671
Diluted net income attributable to common stockholders

$
36,429

$
17,846
Weighted average shares of common stock outstanding

22,619

22,006
Dilutive shares:

PennyMac Class A units exchangeable to common stock

53,589

54,043
Common shares issuable under stock-based compensation plan

935

145
Diluted weighted average shares of common stock outstanding

77,143

76,194
Diluted earnings per share of common stock

$
0.47

$
0.23

Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded based on whether their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the anti-dilutive weighted-average number of outstanding stock options and performance-based restricted stock units (“RSUs”) excluded from the calculation of diluted earnings per share:

Quarter ended March 31,

2017

2016

(in thousands except for weighted-average exercise price)
Stock options (1)

1,562

2,106
Performance-based RSUs (2)

1,763

2,567
Total anti-dilutive stock-based compensation units

3,325

4,673
Weighted-average exercise price of anti-dilutive stock options (1)

$
18.15

$
15.80

~~(1)~~

~~Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were anti-dilutive.~~

~~(2)~~

~~Certain performance-based RSUs were outstanding but not included in the computation of diluted earnings per share because the performance thresholds included in such RSUs have not been achieved.~~

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 ~~sold~~ in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the mortgage ~~loans sold.~~loans.

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The following table summarizes cash flows between the Company and transferees as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement as servicer with the mortgage loans:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cash flows:
Sales proceeds	$	11,860,133	$	7,942,200	$	11,103,785	$	11,860,133
Servicing fees received (1)	$	84,186	$	58,480	$	113,091	$	84,186
Net servicing advances	$	(10,302)	$	(8,281)	$	(10,637)	$	(10,302)

(1)

Net of guarantee fees paid to the Agencies.

March 31,

December 31,

2017

2016

(in thousands)
Unpaid principal balance of mortgage loans outstanding

$
97,505,384

$
89,516,155
Delinquencies:

30-89 days

$
2,136,516

$
2,545,970
90 days or more:

Not in foreclosure

$
544,717

$
735,263
In foreclosure

$
200,047

$
137,856
Foreclosed

$
2,456

$
2,552
Bankruptcy

$
288,728

$
256,471

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The following table summarizes the UPB of the mortgage loans sold by the Company in which it maintains continuing involvement:


	March 31,		December 31,
	2018		2017
	(in thousands)
Unpaid principal balance of mortgage loans outstanding	$	127,039,741	$	120,853,138
Delinquencies:
30-89 days	$	3,690,693	$	5,097,688
90 days or more:
Not in foreclosure	$	2,523,978	$	2,303,114
In foreclosure	$	670,366	$	606,744
Foreclosed	$	31,673	$	30,310
Bankruptcy	$	718,791	$	657,368

The following tables summarize the UPB of the Company’s mortgage loan servicing ~~portfolio is summarized as follows:~~portfolio:


	March 31, 2017						March 31, 2018
			Contract		Total				Contract		Total
	Servicing		servicing and		mortgage		Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced		rights owned		subservicing		loans serviced
	(in thousands)						(in thousands)
Investor:
Non-affiliated entities	$	137,249,780	$	—	$	137,249,780
Affiliated entities		—		63,452,796		63,452,796
Non-affiliated entities:
Originated							$	127,039,741	$	—	$	127,039,741
Purchased								48,214,146		—		48,214,146
								175,253,887		—		175,253,887
Advised Entities								—		77,539,438		77,539,438
Mortgage loans held for sale		2,180,760		—		2,180,760		2,512,546		—		2,512,546
	$	139,430,540	$	63,452,796	$	202,883,336	$	177,766,433	$	77,539,438	$	255,305,871
Commercial real estate loans subserviced for the Company	$	—	$	42,870	$	42,870
Subserviced for the Company (1)							$	3,213,427	$	—	$	3,213,427
Delinquent mortgage loans:
30 days	$	2,655,089	$	321,926	$	2,977,015	$	6,469,708	$	345,036	$	6,814,744
60 days		817,780		114,676		932,456		1,438,485		124,829		1,563,314
90 days or more:
Not in foreclosure		2,112,358		566,055		2,678,413		3,520,714		448,718		3,969,432
In foreclosure		922,343		573,943		1,496,286		984,228		189,773		1,174,001
Foreclosed		36,383		391,160		427,543		42,960		252,265		295,225
	$	6,543,953	$	1,967,760	$	8,511,713	$	12,456,095	$	1,360,621	$	13,816,716
Bankruptcy	$	842,519	$	264,962	$	1,107,481	$	1,096,679	$	120,942	$	1,217,621
Custodial funds managed by the Company (1)	$	2,732,225	$	779,880	$	3,512,105
Custodial funds managed by the Company (2)							$	3,316,317	$	1,009,182	$	4,325,499

(1)

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

(2)

Custodial funds include borrower and investor custodial cash accounts relating to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which are included in Interest income in the Company’s consolidated statements of income.

Table of Contents


	December 31, 2017
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	120,853,138	$	—	$	120,853,138
Purchased		47,016,708		—		47,016,708
		167,869,846		—		167,869,846
Advised Entities		—		74,980,268		74,980,268
Mortgage loans held for sale		2,998,377		—		2,998,377
	$	170,868,223	$	74,980,268	$	245,848,491
Delinquent mortgage loans:
30 days	$	5,326,710	$	515,922	$	5,842,632
60 days		1,935,216		215,957		2,151,173
90 days or more:
Not in foreclosure		3,690,159		541,945		4,232,104
In foreclosure		916,614		293,835		1,210,449
Foreclosed		41,244		278,890		320,134
	$	11,909,943	$	1,846,549	$	13,756,492
Bankruptcy	$	1,046,969	$	176,324	$	1,223,293
Custodial funds managed by the Company (1)	$	3,267,279	$	901,041	$	4,168,320

(1)

Custodial funds include borrower and investor custodial cash accounts relating to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which ~~is included in~~ ~~Interestincome~~ ~~in the Company’s consolidated statements of income.~~

~~Table of Contents~~

December 31, 2016

Contract

Total

Servicing

servicing and

mortgage


rights owned

subservicing

loans serviced

(in thousands)
Investor:

Non-affiliated entities

$
131,252,002

$
—

$
131,252,002
Affiliated entities

—

60,886,717

60,886,717
Mortgage loans held for sale

2,101,283

—

2,101,283

$
133,353,285

$
60,886,717

$
194,240,002
Commercial real estate loans subserviced for the Company

$
—

$
22,338

$
22,338
Delinquent mortgage loans:

30 days

$
3,240,640

$
407,177

$
3,647,817
60 days

1,035,871

145,720

1,181,591
90 days or more:

Not in foreclosure

2,203,895

566,496

2,770,391
In foreclosure

937,204

685,001

1,622,205
Foreclosed

28,943

448,017

476,960

$
7,446,553

$
2,252,411

$
9,698,964
Bankruptcy

$
793,517

$
280,459

$
1,073,976
Custodial funds managed by the Company (1)

$
3,097,365

$
736,398

$
3,833,763

~~(1)~~

~~Custodial funds include borrower and investor custodial cash accounts relating to mortgage loans serviced under the servicing agreements and~~ are ~~not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on custodial funds it manages on behalf of the mortgage loans’ investors, which is~~ included in Interest income in the Company’s consolidated statements of income.

Following is a summary of the geographical distribution of mortgage loans included in the Company’s mortgage loan servicing portfolio for the top five and all other states as measured by UPB:


	March 31,		December 31,		March 31,		December 31,
State	2017		2016		2018		2017
	(in thousands)				(in thousands)
California	$	43,053,075	$	42,303,952	$	47,802,425	$	45,621,369
Texas		16,717,643		16,037,426		20,275,588		19,741,970
Florida						18,339,719		17,490,194
Virginia		13,873,143		13,143,510		16,725,533		16,210,673
Florida		13,623,881		12,817,627
Maryland		9,155,970		8,564,923		11,900,100		11,350,939
All other states		106,459,624		101,372,564		140,262,506		135,433,346
	$	202,883,336	$	194,240,002	$	255,305,871	$	245,848,491

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 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.

~~Table of Contents~~

~~Offsetting of Derivative Assets~~

~~Following are summaries of derivative assets and related netting amounts.~~

March 31, 2017

December 31, 2016

Gross

Gross amount

Net amount

Gross

Gross amount

Net amount

amount of

offset in the

of assets in the

amount of

offset in the

of assets in the

recognized

consolidated

consolidated

recognized

consolidated

consolidated


assets

balance sheet

balance sheet

assets

balance sheet

balance sheet

(in thousands)
Derivatives not subject to master netting arrangements - IRLCs

$
68,618

$
—

$
68,618

$
65,848

$
—

$
65,848
Derivatives subject to a master netting arrangements:

Forward purchase contracts

69,321

—

69,321

77,905

—

77,905
Forward sale contracts

1,173

—

1,173

28,324

—

28,324
MBS put options

1,541

—

1,541

3,934

—

3,934
MBS call options

—

—

217

217
Put options on interest rate futures purchase contracts

1,630

—

1,630

3,109

—

3,109
Call options on interest rate futures purchase contracts

1,012

—

1,012

203

—

203
Netting

—

(61,294)

(61,294)

—

(96,635)

(96,635)

74,677

(61,294)

13,383

113,692

(96,635)

17,057

$
143,295

$
(61,294)

$
82,001

$
179,540

$
(96,635)

$
82,905

~~Derivative Assets, Financial Instruments, and Cash 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.

March 31, 2017

December 31, 2016

Gross amount not

Gross amount not

offset in the

offset in the

consolidated

consolidated

balance sheet

balance sheet

Net amount

Net amount

of assets in the


Cash

of assets in the

Cash

consolidated

Financial

collateral

Net

consolidated

Financial

collateral

Net


balance sheet

instruments

received

amount

balance sheet

instruments

received

amount

(in thousands)
IRLCs

$
68,618

$
—

$
—

$
68,618

$
65,848

$
—

$
—

$
65,848
Federal National Mortgage Association

4,624

—

—

4,624

—

—

—

—
Barclays Capital

4,181

—

—

4,181

12,002

—

—

12,002
RJ O'Brien

2,642

—

—

2,642

2,750

—

—

2,750
Others

1,936

—

—

1,936

2,305

—

—

2,305

$
82,001

$
—

$
—

$
82,001

$
82,905

$
—

$
—

$
82,905

~~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 sold under agreements to repurchase do not qualify for netting.

March 31, 2017

December 31, 2016

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

recognized

consolidated

consolidated

recognized

consolidated

consolidated


liabilities

balance sheet

balance sheet

liabilities

balance sheet

balance sheet

(in thousands)
Derivatives not subject to master netting arrangements - IRLCs

$
2,611

$
—

$
2,611

$
6,457

$
—

$
6,457
Derivatives subject to a master netting arrangement:

Forward purchase contracts

1,225

—

1,225

16,914

—

16,914
Forward sale contracts

65,843

—

65,843

85,035

—

85,035
Netting

—

(53,806)

(53,806)

—

(86,044)

(86,044)

67,068

(53,806)

13,262

101,949

(86,044)

15,905
Total derivatives

69,679

(53,806)

15,873

108,406

(86,044)

22,362
Mortgage loans sold under agreements to repurchase:

Amount outstanding

2,036,366

—

2,036,366

1,736,922

—

1,736,922
Unamortized debt issuance costs

(1,558)

—

(1,558)

(1,808)

—

(1,808)

2,034,808

—

2,034,808

1,735,114

—

1,735,114

$
2,104,487

$
(53,806)

$
2,050,681

$
1,843,520

$
(86,044)

$
1,757,476

~~Table of Contents~~

~~Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty~~

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

March 31, 2017

December 31, 2016

Gross amounts

Gross amounts

not offset in the

not offset in the

Net amount

consolidated

Net amount

consolidated

of liabilities

balance sheet

of liabilities

balance sheet

in the

Cash

in the

Cash

consolidated

Financial

collateral

Net

consolidated

Financial

collateral

Net

balance sheet

instruments

pledged

amount

balance sheet

instruments

pledged

amount

(in thousands)
IRLCs

$
2,611

$
—

$
—

$
2,611

$
6,457

$
—

$
—

$
6,457
Credit Suisse First Boston Mortgage Capital LLC

882,443

(882,127)

—

316

961,533

(960,988)

—

545
Bank of America, N.A.

452,827

(444,148)

—

8,679

349,638

(342,769)

—

6,869
Morgan Stanley Bank, N.A.

280,735

(280,735)

—

—

189,756

(188,851)

—

905
JP Morgan Chase Bank, N.A.

198,331

(197,692)

—

639

135,322

(135,322)

—

—
Citibank, N.A.

129,814

(127,980)

—

1,834

81,555

(80,525)

—

1,030
Barclays Capital

54,203

(54,203)

—

—

28,467

(28,467)

—

—
Royal Bank of Canada

49,481

(49,481)

—

—

2,937

—

—

2,937
Goldman Sachs

443

—

—

443

823

—

—

823
BNP Paribas

—

—

—

—

1,151

—

—

1,151
Federal National Mortgage Association

—

—

—

—

1,033

—

—

1,033
Others

1,351

—

—

1,351

612

—

—

612

$
2,052,239

$
(2,036,366)

$
—

$
15,873

$
1,759,284

$
(1,736,922)

$
—

$
22,362

~~Note 7—~~Fair Value

~~The~~Most of the Company’s ~~consolidated financial statements include~~ assets and certain of its liabilities ~~that~~ are measured based on their fair values. The application of fair value 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 fair value as discussed in the following paragraphs.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based

Table of Contents

on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

Level 3—Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Likewise, due to the general

~~Table of Contents~~

illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Fair Value Accounting Elections

Management identified all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell~~, as well as its originated MSRs relating to loans with initial interest rates of more than 4.5%, its purchased MSRs~~ and ~~its MSLs~~Mortgage servicing liabilities (“MSLs”) 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 MSRs’ fair value risk. ~~Originated~~Beginning January 1, 2018, the Company accounts for all MSRs at fair value. Before January 1, 2018, originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% ~~are~~were accounted for using the amortization method.

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:


	March 31, 2017								March 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Assets:
Short-term investments	$	116,334	$	—	$	—	$	116,334	$	105,890	$	—	$	—	$	105,890
Mortgage loans held for sale at fair value		—		1,950,069		327,682		2,277,751		—		2,123,837		460,399		2,584,236
Derivative assets:
Interest rate lock commitments		—		—		68,618		68,618		—		—		53,495		53,495
Repurchase agreement derivatives										—		—		20,974		20,974
Forward purchase contracts		—		69,321		—		69,321		—		28,796		—		28,796
Forward sales contracts		—		1,173		—		1,173		—		979		—		979
MBS put options		—		1,541		—		1,541		—		12,878		—		12,878
Put options on interest rate futures purchase contracts		1,630		—		—		1,630		1,039		—		—		1,039
Call options on interest rate futures purchase contracts		1,012		—		—		1,012		715		—		—		715
Total derivative assets before netting		2,642		72,035		68,618		143,295		1,754		42,653		74,469		118,876
Netting		—		—		—		(61,294)		—		—		—		(29,407)
Total derivative assets		2,642		72,035		68,618		82,001		1,754		42,653		74,469		89,469
Investment in PennyMac Mortgage Investment Trust		1,331		—		—		1,331		1,352		—		—		1,352
Mortgage servicing rights at fair value		—		—		506,916		506,916		—		—		2,354,489		2,354,489
	$	120,307	$	2,022,104	$	903,216	$	2,984,333	$	108,996	$	2,166,490	$	2,889,357	$	5,135,436
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	277,484	$	277,484	$	—	$	—	$	236,002	$	236,002
Derivative liabilities:
Interest rate lock commitments		—		—		2,611		2,611		—		—		2,599		2,599
Forward purchase contracts		—		1,225		—		1,225		—		—		—		—
Forward sales contracts		—		65,843		—		65,843		—		19,276		—		19,276
Total derivative liabilities before netting		—		67,068		2,611		69,679		—		19,276		2,599		21,875
Netting		—		—		—		(53,806)		—		—		—		(17,399)
Total derivative liabilities		—		67,068		2,611		15,873		—		19,276		2,599		4,476
Mortgage servicing liabilities at fair value		—		—		15,994		15,994		—		—		12,063		12,063
	$	—	$	67,068	$	296,089	$	309,351	$	—	$	19,276	$	250,664	$	252,541

2625

Table of Contents


	December 31, 2016								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Assets:
Short-term investments	$	85,964	$	—	$	—	$	85,964	$	170,080	$	—	$	—	$	170,080
Mortgage loans held for sale at fair value		—		2,125,544		47,271		2,172,815		—		2,316,892		782,211		3,099,103
Derivative assets:
Interest rate lock commitments		—		—		65,848		65,848		—		—		60,012		60,012
Repurchase agreement derivatives										—		—		10,656		10,656
Forward purchase contracts		—		77,905		—		77,905		—		4,288		—		4,288
Forward sales contracts		—		28,324		—		28,324		—		2,101		—		2,101
MBS put options		—		3,934		—		3,934		—		3,481		—		3,481
MBS call options		—		217		—		217
Put options on interest rate futures purchase contracts		3,109		—		—		3,109		3,570		—		—		3,570
Call options on interest rate futures purchase contracts		203		—		—		203		938		—		—		938
Total derivative assets before netting		3,312		110,380		65,848		179,540		4,508		9,870		70,668		85,046
Netting		—		—		—		(96,635)		—		—		—		(6,867)
Total derivative assets		3,312		110,380		65,848		82,905		4,508		9,870		70,668		78,179
Investment in PennyMac Mortgage Investment Trust		1,228		—		—		1,228		1,205		—		—		1,205
Mortgage servicing rights at fair value		—		—		515,925		515,925		—		—		638,010		638,010
	$	90,504	$	2,235,924	$	629,044	$	2,858,837	$	175,793	$	2,326,762	$	1,490,889	$	3,986,577
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	288,669	$	288,669	$	—	$	—	$	236,534	$	236,534
Derivative liabilities:
Interest rate lock commitments		—		—		6,457		6,457		—		—		1,740		1,740
Forward purchase contracts		—		16,914		—		16,914		—		1,272		—		1,272
Forward sales contracts		—		85,035		—		85,035		—		7,031		—		7,031
Total derivative liabilities before netting		—		101,949		6,457		108,406		—		8,303		1,740		10,043
Netting		—		—		—		(86,044)		—		—		—		(4,247)
Total derivative liabilities		—		101,949		6,457		22,362		—		8,303		1,740		5,796
Mortgage servicing liabilities at fair value		—		—		15,192		15,192		—		—		14,120		14,120
	$	—	$	101,949	$	310,318	$	326,223	$	—	$	8,303	$	252,394	$	256,450

2726

Table of Contents

As shown above, all or a portion of the Company’s mortgage loans held for sale, ~~IRLCs,~~Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs at fair value, ESS at fair value and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for each of the quarters ended March 31, ~~2017~~2018 and ~~2016:~~2017:


	Quarter ended March 31, 2017								Quarter ended March 31, 2018
	Mortgage		Net interest		Mortgage				Mortgage		Net interest		Repurchase		Mortgage
	loans held		rate lock		servicing				loans held		rate lock		agreement		servicing
	for sale		commitments (1)		rights			Total	for sale		commitments (1)		derivatives		rights			Total
	(in thousands)								(in thousands)
Assets:
Balance, December 31, 2016	$	47,271	$	59,391	$	515,925	$	622,587
Purchases		690,472		—		203		690,675
Balance, December 31, 2017									$	782,211	$	58,272	$	10,656	$	638,010	$	1,489,149
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to a change in accounting principle										—		—		—		1,482,426		—
Balance, January 1, 2018										782,211		58,272		10,656		2,120,436		1,489,149
Purchases and issuances, net										647,269		65,598		10,751		27,606		751,224
Sales and repayments		(274,302)		—		—		(274,302)		(604,094)		—		(7)		—		(604,101)
Interest rate lock commitments issued, net		—		71,757		—		71,757
Mortgage servicing rights resulting from mortgage loan sales		—		—		5,984		5,984		—		—		—		143,910		143,910
Changes in fair value included in income arising from:																		—
Changes in instrument-specific credit risk		(1,928)		—		—		(1,928)		(8,755)		—		—		—		(8,755)
Other factors		—		25,119		(15,196)		9,923		—		(44,913)		(426)		62,537		17,198
		(1,928)		25,119		(15,196)		7,995		(8,755)		(44,913)		(426)		62,537		8,443
Transfers from Level 3 to Level 2		(133,831)		—		—		(133,831)		(356,232)		—		—		—		(356,232)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(90,260)		—		(90,260)		—		(28,061)		—		—		(28,061)
Balance, March 31, 2017	$	327,682	$	66,007	$	506,916	$	900,605
Changes in fair value recognized during the period relating to assets still held at March 31, 2017	$	(4,042)	$	25,119	$	(15,196)	$	5,881
Balance, March 31, 2018									$	460,399	$	50,896	$	20,974	$	2,354,489	$	2,886,758
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2018									$	(7,598)	$	50,896	$	(77)	$	62,537	$	105,758

(1)

For the purpose of this table, the IRLC asset and liability positions are shown net.


	Quarter ended March 31, 2017						Quarter ended March 31, 2018
	Excess						Excess
	servicing		Mortgage				servicing		Mortgage
	spread		servicing				spread		servicing
	financing		liabilities		Total		financing		liabilities		Total
	(in thousands)						(in thousands)
Liabilities:
Balance, December 31, 2016	$	288,669	$	15,192	$	303,861
Balance, December 31, 2017							$	236,534	$	14,120	$	250,654
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,573		—		1,573		904		—		904
Accrual of interest		4,647		—		4,647		3,934		—		3,934
Repayments		(14,632)		—		(14,632)		(12,291)		—		(12,291)
Mortgage servicing liabilities resulting from mortgage loan sales		—		4,059		4,059		—		2,037		2,037
Changes in fair value included in income		(2,773)		(3,257)		(6,030)		6,921		(4,094)		2,827
Balance, March 31, 2017	$	277,484	$	15,994	$	293,478
Changes in fair value recognized during the period relating to liabilities still outstanding at March 31, 2017	$	(2,773)	$	(3,257)	$	(6,030)
Balance, March 31, 2018							$	236,002	$	12,063	$	248,065
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2018							$	6,921	$	(4,094)	$	2,827

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	Quarter ended March 31, 2016								Quarter ended March 31, 2017
	Mortgage		Net interest		Mortgage				Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing				loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total		for sale		commitments (1)		rights			Total
	(in thousands)								(in thousands)
Assets:
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Balance, December 31, 2016									$	47,271	$	59,391	$	515,925	$	622,587
Purchases		345,886		—		11		345,897		690,472		—		203		690,675
Sales and repayments		(283,732)		—		—		(283,732)		(274,302)		—		—		(274,302)
Interest rate lock commitments issued, net		—		78,463		—		78,463		—		71,757		—		71,757
Mortgage servicing rights resulting from mortgage loan sales		—		—		4,468		4,468		—		—		5,984		5,984
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		1,769		—		(48,876)		(47,107)		(1,928)		—		—		(1,928)
Other factors		—		71,670		(21,447)		50,223		—		25,119		(15,196)		9,923
		1,769		71,670		(70,323)		3,116		(1,928)		25,119		(15,196)		7,995
Transfers from Level 3 to Level 2		(79,424)		—		—		(79,424)		(133,831)		—		—		(133,831)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(122,021)		—		(122,021)		—		(90,260)		—		(90,260)
Balance, March 31, 2016	$	33,030	$	71,885	$	594,403	$	699,318
Changes in fair value recognized during the period relating to assets still held at March 31, 2016	$	501	$	71,885	$	(21,447)	$	50,939
Balance, March 31, 2017									$	327,682	$	66,007	$	506,916	$	900,605
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2017									$	(4,042)	$	25,119	$	(15,196)	$	5,881

(1)

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


	Quarter ended March 31, 2016						Quarter ended March 31, 2017
	Excess						Excess
	servicing		Mortgage				servicing		Mortgage
	spread		servicing				spread		servicing
	financing		liabilities		Total		financing		liabilities		Total
	(in thousands)						(in thousands)
Liabilities:
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Balance, December 31, 2016							$	288,669	$	15,192	$	303,861
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,911		—		1,911		1,573		—		1,573
Mortgage servicing liabilities resulting from mortgage loan sales		—		5,409		5,409
Accrual of interest		7,015		—		7,015		4,647		—		4,647
Repayments		(20,881)		—		(20,881)		(14,632)		—		(14,632)
Settlement		(59,045)		—		(59,045)
Mortgage servicing liabilities resulting from mortgage loan sales								—		4,059		4,059
Changes in fair value included in income		(19,449)		(61)		(19,510)		(2,773)		(3,257)		(6,030)
Balance, March 31, 2016	$	321,976	$	6,747	$	328,723
Changes in fair value recognized during the period relating to liabilities still outstanding at March 31, 2016	$	(12,239)	$	(61)	$	(12,300)
Balance, March 31, 2017							$	277,484	$	15,994	$	293,478
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2017							$	(2,773)	$	(3,257)	$	(6,030)

The information used in the preceding roll forwards represents activity for ~~any~~ assets and liabilities measured at fair value on a recurring basis and identified as using ~~significant~~ “Level 3” significant fair value inputs at either the beginning or the end of the periods presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return to salability in the active secondary market of certain mortgage loans held for sale.

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Assets and Liabilities Measured at Fair Value under the Fair Value Option

Net changes in fair values included in income for assets and liabilities 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 March 31,												Quarter ended March 31,
	2017						2016						2018						2017
	Net gains on						Net gains on						Net gains on		Net				Net gains on		Net
	mortgage		Net mortgage				mortgage		Net mortgage				mortgage		mortgage				mortgage		mortgage
	loans held		loan				loans held		loan				loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing				for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total		fair value		fees		Total		fair value		fees		Total
	(in thousands)												(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	82,310	$	—	$	82,310	$	136,082	$	—	$	136,082	$	(6,118)	$	—	$	(6,118)	$	82,310	$	—	$	82,310
Mortgage servicing rights at fair value		—		(15,196)		(15,196)		—		(70,323)		(70,323)		—		62,537		62,537		—		(15,196)		(15,196)
	$	82,310	$	(15,196)	$	67,114	$	136,082	$	(70,323)	$	65,759	$	(6,118)	$	62,537	$	56,419	$	82,310	$	(15,196)	$	67,114
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	2,773	$	2,773	$	—	$	19,449	$	19,449	$	—	$	(6,921)	$	(6,921)	$	—	$	2,773	$	2,773
Mortgage servicing liabilities at fair value		—		3,257		3,257		—		61		61		—		4,094		4,094		—		3,257		3,257
	$	—	$	6,030	$	6,030	$	—	$	19,510	$	19,510	$	—	$	(2,827)	$	(2,827)	$	—	$	6,030	$	6,030

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


	March 31, 2017						March 31, 2018						December 31, 2017
			Principal						Principal						Principal
			amount						amount						amount
	Fair		due upon				Fair		due upon				Fair		due upon
	value		maturity		Difference		value		maturity		Difference		value		maturity		Difference
	(in thousands)						(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,013,417	$	1,912,907	$	100,510	$	2,257,840	$	2,177,185	$	80,655	$	2,430,517	$	2,326,772	$	103,745
90 days or more delinquent:
Not in foreclosure		239,165		242,444		(3,279)		269,172		274,615		(5,443)		614,329		614,357		(28)
In foreclosure		25,169		25,409		(240)		57,224		60,746		(3,522)		54,257		57,248		(2,991)
	$	2,277,751	$	2,180,760	$	96,991	$	2,584,236	$	2,512,546	$	71,690	$	3,099,103	$	2,998,377	$	100,726

December 31, 2016

Principal

amount

Fair

due upon


value

maturity

Difference

(in thousands)
Mortgage loans held for sale:

Current through 89 days delinquent

$
2,148,947

$
2,077,034

$
71,913
90 days or more delinquent:

Not in foreclosure

19,227

19,399

(172)
In foreclosure

4,641

4,850

(209)

$
2,172,815

$
2,101,283

$
71,532

~~Table of Contents~~

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets and liabilities that were measured at fair value on a nonrecurring basis during the periods presented:

March 31, 2017


Level 1

Level 2

Level 3

Total

(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value

$
—

$
—

$
1,198,651

$
1,198,651
Real estate acquired in settlement of loans

—

—

888

888

$
—

$
—

$
1,199,539

$
1,199,539


	March 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate acquired in settlement of loans	$	—	$	—	$	1,273	$	1,273


	December 31, 2016								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,093,242	$	1,093,242	$	—	$	—	$	1,463,552	$	1,463,552
Real estate acquired in settlement of loans						1,152		1,152		—		—		2,355		2,355
	$	—	$	—	$	1,094,394	$	1,094,394	$	—	$	—	$	1,465,907	$	1,465,907

Table of Contents

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


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	13,999	$	(77,073)	$	—	$	13,999
Real estate acquired in settlement of loans		(37)		(435)		27		(37)
	$	13,962	$	(77,508)	$	27	$	13,962

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable, and Obligations under capital lease~~and amounts receivable from and payable to the Advised Entities~~ are carried at amortized cost.

~~The Company has concluded that the~~ These assets and liabilities’ fair ~~value of the~~ ~~Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell~~ ~~and the receivables from and payables to the Advised Entities approximate the carrying value due to their short terms and/or variable interest rates.~~

~~The Company’s borrowings carried at amortized cost~~values do not have 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~~Accordingly, the Company has classified these financial instruments as “Level 3” fair value assets and liabilities and has concluded that those assets and liabilities’ fair values approximate the carrying value due to ~~the lack of observable inputs to estimate~~ their ~~fair values.~~short terms and/or variable interest rates.

Valuation Techniques and Inputs

Most of the Company’s financial assets, ~~a portion~~and all of its MSRs, ~~and its~~ ESS ~~financing~~ and MSLs, 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, ESS and MSLs are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, management has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation

~~Table of Contents~~

process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.

With respect to the non-IRLC “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” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s executive chairman, ~~and~~ chief executive, chief financial, chief risk ~~chief enterprise operations~~ and deputy chief financial 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 non-IRLC “Level 3” fair value assets and liabilities, 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.

With respect to IRLCs, the Company has assigned responsibility for developing fair values to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.

Table of Contents

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

Mortgage Loans Held for Sale

Most of the Company’s mortgage loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets and their fair values are determined using their quoted market or contracted selling price or market price equivalent.

Certain of the Company’s mortgage loans held for sale may become non-saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a mortgage loan with an identified defect. The Company may also purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio.

The Company’s right to purchase delinquent government guaranteed or insured 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. Such repurchased mortgage loans may be resold to third-party investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility for resale generally occurs when the repurchased mortgage loans held by the Company that are not saleable into active markets ~~become current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms.~~and are therefore categorized as “Level 3” fair value assets. Mortgage loans held for sale categorized as “Level 3” fair value assets include:

Certain delinquent government guaranteed or insured mortgage loans purchased by the Company from Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio. The Company’s right to purchase delinquent government guaranteed or insured 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. Such repurchased mortgage loans may be resold to third-party investors and thereafter may be repurchased to the extent they become eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility for resale generally occurs when the repurchased mortgage loans become current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms.

Certain of the Company’s mortgage loans held for sale that become non-saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a mortgage loan with an identified defect.

The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value mortgage loans held for sale at fair value. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value mortgage loans held for sale at fair value are discount rates, home price projections, voluntary prepayment/resale speeds and 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” fair value inputs used in the valuation of mortgage loans held for sale at fair value:



Key inputs	March 31, 2017	December 31, 2016	March 31, 2018	December 31, 2017
Discount rate:
Range	2.8% – 8.9%	2.6% – 8.8%	3.2% – 9.8%	2.9% – 10.0%
Weighted average	2.8%	3.0%	3.2%	2.9%
Twelve-month projected housing price index change:
Range	3.0% – 4.0%	2.0% – 4.5%	2.0% – 5.8%	3.1% – 5.6%
Weighted average	3.6%	3.7%	2.6%	3.6%
Voluntary prepayment / resale speed (1):
Range	0.1% – 21.4%	0.1% – 24.4%	0.2% – 66.7%	0.2% – 72.2%
Weighted average	19.8%	20.9%	25.2%	44.6%
Total prepayment speed (2):
Range	0.1% – 40.9%	0.1% – 39.8%	0.2% – 70.2%	0.2% – 75.2%
Weighted average	38.9%	34.3%	42.3%	55.8%

(1)

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

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

Table of Contents

Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective mortgage loan’s delinquency status and performance history 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 valuein the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as a “Level 3” fair value asset or liability. The Company estimates the fair value of an IRLC based on quoted Agency 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 fair 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 the IRLCs’ fair value measurement. The financial effects of changes in these inputs 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 the mortgage loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on mortgage loans acquired for sale at fair value and may be allocated to Net mortgage loan servicing fees –Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities as a hedge of the fair value of MSRs in the consolidated statements of income when it is included as a component of the MSR hedging strategy.

~~Table of Contents~~

Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of IRLCs:



Key inputs	March 31, 2017	December 31, 2016	March 31, 2018	December 31, 2017
Pull-through rate:
Range	43.9% – 100%	35.0% – 100.0%	24.8% – 100%	25.0% – 100%
Weighted average	83.8%	84.9%	83.7%	85.6%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range	1.5 – 5.5	1.2 – 5.9	1.2 – 5.7	1.4 – 5.8
Weighted average	4.0	4.3	3.9	4.0
Percentage of unpaid principal balance:
Range	0.3% – 2.7%	0.3% – 2.8%	0.3% – 3.1%	0.3% – 3.0%
Weighted average	1.2%	1.3%	1.4%	1.4%

Hedging Derivatives

Fair value of exchange-traded hedging derivative financial instruments ~~based on exchange traded market prices~~ are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gains on mortgage loans acquired for sale at fair value, or Net mortgage loan servicing fees – Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.

Table of Contents

Repurchase Agreement Derivatives

The Company has a master repurchase agreement that includes incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are accounted for separate from the master repurchase agreement. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable input into the valuation of these derivative assets is the ratio of derivative value to the outstanding receivable, which represents a discount for the time value of money and the Company’s expected approval rate of the mortgage loans financed under the master repurchase agreement. The ratio included in the Company’s fair value estimate was 97% at March 31, 2018 and December 31, 2017.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. 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 the applicable pricing spread (discount rate), the prepayment rates of the underlying mortgage loans, ~~the applicable pricing spread (discount rate),~~ and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSRs are included in Net mortgage loan servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income. Through December 31, 2017, the Company accounted for certain of its MSRs using the amortization method. Beginning January 1, 2018, the Company accounts for all MSRs at fair value prospectively.

~~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 March 31,								Quarter ended March 31,
	2017				2016				2018		2017
	Fair		Amortized		Fair		Amortized		Fair		Fair		Amortized
	value		cost		value		cost		value		value		cost
	(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)								(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)
MSR and pool characteristics:
Amount recognized	$	5,984	$	130,218	$	4,468	$	96,314	$	143,910	$	5,984	$	130,218
Unpaid principal balance of underlying mortgage loans	$	504,065	$	10,700,600	$	367,807	$	6,984,172	$	10,162,316	$	504,065	$	10,700,600
Weighted average servicing fee rate (in basis points)		31		29		33		33		35		31		29
Key inputs:
Pricing spread (1)
Range		7.6% – 11.0%		7.6% – 14.9%		7.2% – 9.8%		7.2% – 12.8%		7.4% – 14.1%		7.6% – 11.0%		7.6% – 14.9%
Weighted average		10.5%		10.6%		8.7%		8.9%		10.3%		10.5%		10.6%
Annual total prepayment speed (2)
Range		4.2% – 50.5%		3.4% – 45.4%		4.1% – 52.3%		3.8% – 48.0%		3.9% – 49.0%		4.2% – 50.5%		3.4% – 45.4%
Weighted average		10.8%		8.2%		13.2%		11.1%		8.9%		10.8%		8.2%
Life (in years)
Range		0.9 – 11.3		1.6 – 12.2		1.3 – 11.7		1.5 – 11.9		1.1 – 11.6		0.9 – 11.3		1.6 – 12.2
Weighted average		7.2		8.6		6.4		7.2		8.2		7.2		8.6
Per-loan annual cost of servicing
Range		$78 – $101		$79 – $101		$68 – $95		$68 – $95		$78 – $98		$78 – $101		$79 – $101
Weighted average		$90		$91		$82		$82		$89		$90		$91

(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.

(2)

Prepayment speed is measured using Life Total CPR.

3533

Table of Contents

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


	March 31, 2017				December 31, 2016				March 31, 2018	December 31, 2017
	Fair		Amortized		Fair		Amortized		Fair	Fair	Amortized
	value		cost		value		cost		value	value	cost
	(Carrying value, unpaid principal balance of underlying								(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)								mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$	506,916	$	1,218,145	$	515,925	$	1,111,747	$2,354,489	$638,010	$1,481,578
Unpaid principal balance of underlying mortgage loans	$	42,138,932	$	93,210,356	$	43,667,165	$	85,509,941	$173,487,165	$51,883,539	$114,365,698
Weighted average note interest rate		4.1%		3.7%		4.1%		3.7%	3.9%	4.0%	3.8%
Weighted average servicing fee rate (in basis points)		32		31		32		31	32	32	31
Key inputs:
Pricing spread (1):
Range		7.6% – 14.9%		7.6% – 14.9%		7.6% – 14.9%		7.6% – 14.9%	7.4% – 14.4%	7.6% – 14.1%	7.6% – 14.1%
Weighted average		10.1%		10.7%		10.1%		10.7%	10.2%	9.8%	10.3%
Effect on fair value of (2):
5% adverse change	$	(8,913)	$	(24,695)	$	(9,097)	$	(22,382)	($42,903)	($10,760)	($27,700)
10% adverse change	$	(17,510)	$	(48,422)	$	(17,872)	$	(43,889)	($84,255)	($21,155)	($54,376)
20% adverse change	$	(33,818)	$	(93,179)	$	(34,516)	$	(84,464)	($162,614)	($40,916)	($104,869)
Average life (in years):
Prepayment speed (3):
Range		1.1 – 8.6		1.9 – 9.4		1.3 – 8.6		1.6 – 9.4	7.3% – 58.6%	7.9% – 46.2%	7.4% – 44.1%
Weighted average		6.8		8.1		6.7		8.1	8.9%	10.5%	9.7%
Prepayment speed (3):
Average life (in years):
Range		7.0% – 53.4%		6.5% – 40.3%		7.0% – 46.7%		6.6% – 43.9%	0.9 – 8.3	1.2 – 7.8	2.0 – 8.3
Weighted average		10.2%		8.5%		10.3%		8.7%	7.7	6.6	7.5
Effect on fair value of (2):
5% adverse change	$	(8,496)	$	(18,158)	$	(8,818)	$	(16,636)	($33,489)	($10,809)	($23,544)
10% adverse change	$	(16,706)	$	(35,753)	$	(17,336)	$	(32,750)	($65,896)	($21,239)	($46,284)
20% adverse change	$	(32,321)	$	(69,359)	$	(33,533)	$	(63,513)	($127,676)	($41,038)	($89,514)
Annual per-loan cost of servicing:
Range		$78 – $99		$79 – $99		$78 – $101		$79 – $101	$78 – $97	$78 – $97	$79 – $97
Weighted average		$90		$89		$92		$92	$89	$89	$89
Effect on fair value of (2):
5% adverse change	$	(5,370)	$	(9,461)	$	(5,612)	$	(8,890)	($18,880)	($6,247)	($11,216)
10% adverse change	$	(10,740)	$	(18,923)	$	(11,225)	$	(17,781)	($37,760)	($12,494)	($22,431)
20% adverse change	$	(21,479)	$	(37,845)	$	(22,450)	$	(35,562)	($75,520)	($24,987)	($44,863)

(1)

The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs.

(2)

For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in a reduction in fair value which will be recognized in income. For MSRs carried at lower of amortized cost or fair value, an adverse change in one of the above-mentioned key inputs ~~may result~~resulted in recognition of MSR impairment. The extent of the recognized MSR impairment ~~will depend~~depended on the relationship of fair value to the carrying value of such MSRs.

(3)

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 inputs; do not incorporate changes to other inputs; are subject to the accuracy of various models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

3634

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Excess Servicing Spread Financing at Fair Value

The Company categorizes ESS as a “Level 3” fair value liability. Because the ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as used to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS. The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally slow mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing its fair ~~value, which is owed to PMT. Increases~~value. Changes in the fair value of ESS ~~decrease income and~~ are included in Net mortgage loan servicing ~~fees~~—fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage ~~Investment Trust.~~Investment.

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


	March 31,	December 31,	March 31,	December 31,
	2017	2016	2018	2017
Carrying value (in thousands)	$277,484	$288,669	$236,002	$236,534
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$31,154,796	$32,376,359	$26,236,839	$27,217,199
Average servicing fee rate (in basis points)	34	34	34	34
Average excess servicing spread (in basis points)	19	19	19	19
Key inputs:
Pricing spread (1):
Range	3.8% – 4.8%	3.8% – 4.8%	3.6% – 4.1%	3.8% – 4.3%
Weighted average	4.4%	4.4%	3.9%	4.1%
Annualized prepayment speed (2):
Range			8.0% – 52.4%	8.4% – 41.4%
Weighted average			9.9%	10.8%
Average life (in years):
Range	1.3 – 8.6	1.4 – 8.6	1.1 – 7.8	1.4 – 7.7
Weighted average	6.8	6.8	6.8	6.5
Annualized prepayment speed (2):
Range	7.0% – 46.6%	7.0% – 41.3%
Weighted average	10.3%	10.5%

(1)The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to ESS.

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

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. 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 MSLs include the applicable pricing spread (discount rate), the prepayment rates of the underlying mortgage loans, ~~the applicable pricing spread (discount rate),~~ and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSLs are included in Net servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilitiesin the consolidated statements of income.

3735

Table of Contents

Following are the key inputs used in determining the fair value of MSLs:


	March 31,		December 31,			March 31,		December 31,
	2017		2016			2018		2017
MSL and pool characteristics:
Carrying value (in thousands)	$	15,994	$	15,192	$	12,063	$	14,120
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,900,493	$	2,074,896	$	1,766,722	$	1,620,609
Weighted average servicing fee rate (in basis points)		25		25		25		25
Key inputs:
Pricing spread (1)		8.0%		8.0%		8.5%		7.7%
Prepayment speed (2)						29.1%		32.9%
Average life (in years)		3.7		3.7		4.1		3.5
Prepayment speed (2)		31.5%		31.7%
Annual per-loan cost of servicing	$	427	$	497	$	387	$	404

(1)

The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSLs.

(2)

Prepayment speed is measured using Life Total CPR.

Note 8—7—Mortgage Loans Held for Sale at Fair Value

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


	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Government-insured or guaranteed	$	1,857,429	$	1,984,020	$	1,989,293	$	2,085,764
Conventional conforming		92,640		141,524		134,544		231,128
Purchased from Ginnie Mae pools serviced by the Company		321,711		40,437		454,651		777,300
Repurchased pursuant to representations and warranties		5,971		6,834		5,748		4,911
	$	2,277,751	$	2,172,815	$	2,584,236	$	3,099,103
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,000,112	$	1,422,255	$	2,036,895	$	2,530,299
Mortgage loan participation and sale agreements		252,605		702,919
Mortgage loan participation purchase and sale agreements						532,294		551,688
	$	2,252,717	$	2,125,174	$	2,569,189	$	3,081,987

Note 9—8—Derivative ~~Financial Instruments~~Activities

The Company ~~is exposed to fair value risk relative to~~holds and issues derivative financial instruments in connection with its ~~mortgage loans held for sale~~operating activities. Derivative financial instruments are created as ~~well~~a result of certain of the Company’s operations and the Company also enters into derivative transactions 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~~part of its ~~IRLCs and mortgage loans held for sale when market mortgage~~ interest ~~rates increase. The Company is exposed to loss in fair value~~rate risk management activities. Derivative financial instruments created as a result of ~~its MSRs when market mortgage interest rates decrease.~~the Company’s operations include:

IRLCs that are created when the Company commits to purchase or originate a mortgage loan acquired for sale.

Derivatives that are embedded in a master repurchase agreement that provides for the Company to receive incentives for financing mortgage loans that satisfy certain consumer relief characteristics under the master repurchase agreement.

The Company also 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 the portion of its MSRs not financed with ESS.

~~The Company does not use derivative financial instruments for purposes other than in support~~

Table of ~~its risk management activities other than IRLCs, which are generated in the process of purchasing or originating mortgage loans held for sale.~~ Contents

The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

~~Table~~Derivative Notional Amounts and Fair Value of ~~Contents~~

Derivatives

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


	March 31, 2017					December 31, 2016					March 31, 2018					December 31, 2017
		Fair value					Fair value					Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative		Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities		amount	assets		liabilities		amount	assets		liabilities
	(in thousands)										(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,727,441	$	68,618	$	2,611	4,279,611	$	65,848	$	6,457	4,275,126	$	53,495	$	2,599	3,654,955	$	60,012	$	1,740
Repurchase agreement derivatives													20,974		—			10,656		—
Used for hedging purposes:
Forward purchase contracts	9,292,052		69,321		1,225	12,746,191		77,905		16,914	6,543,783		28,796		—	4,920,883		4,288		1,272
Forward sales contracts	11,383,749		1,173		65,843	16,577,942		28,324		85,035	6,924,346		979		19,276	5,204,796		2,101		7,031
MBS put options	2,950,000		1,541		—	1,175,000		3,934		—	3,750,000		12,878		—	4,925,000		3,481		—
MBS call options	—		—		—	1,600,000		217		—
Put options on interest rate futures purchase contracts	1,160,000		1,630		—	1,125,000		3,109		—	2,800,000		1,039		—	2,125,000		3,570		—
Call options on interest rate futures purchase contracts	482,300		1,012		—	900,000		203		—	225,000		715		—	100,000		938		—
Call options on interest rate futures sale contracts	57,300		—		—	—		—		—
Treasury futures purchase contracts											510,000		—		—	100,000		—		—
Treasury futures sale contracts											1,250,000		—		—	—		—		—
Interest rate swap futures purchase contracts	200,000		—		—	200,000		—		—	465,000		—		—	1,400,000		—		—
Total derivatives before netting			143,295		69,679			179,540		108,406			118,876		21,875			85,046		10,043
Netting			(61,294)		(53,806)			(96,635)		(86,044)			(29,407)		(17,399)			(6,867)		(4,247)
		$	82,001	$	15,873		$	82,905	$	22,362		$	89,469	$	4,476		$	78,179	$	5,796
Deposits placed with derivative counterparties included in Other assets, net		$	7,488				$	10,591
Deposits placed with derivative counterparties												$	12,008				$	2,620

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


	Quarter ended March 31, 2017				Quarter ended March 31, 2018
	Balance			Balance	Amount			Amount
	beginning of		Dispositions/	end of	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period	quarter	Additions	expirations	quarter
	(in thousands)				(in thousands)
Forward purchase contracts	12,746,191	42,184,309	(45,638,448)	9,292,052	4,920,883	45,330,785	(43,707,885)	6,543,783
Forward sale contracts	16,577,942	51,649,826	(56,844,019)	11,383,749	5,204,796	56,355,552	(54,636,002)	6,924,346
MBS put options	1,175,000	5,525,000	(3,750,000)	2,950,000	4,925,000	4,500,000	(5,675,000)	3,750,000
MBS call options	1,600,000	—	(1,600,000)	—	—	5,675,000	(5,675,000)	—
Put options on interest rate futures purchase contracts	1,125,000	3,060,000	(3,025,000)	1,160,000	2,125,000	5,525,000	(4,850,000)	2,800,000
Call options on interest rate futures purchase contracts	900,000	955,000	(1,372,700)	482,300	100,000	375,000	(250,000)	225,000
Put options on interest rate futures sale contracts	—	3,025,000	(3,025,000)	—	—	4,850,000	(4,850,000)	—
Call options on interest rate futures sale contracts	—	1,430,000	(1,372,700)	57,300	—	250,000	(250,000)	—
Treasury futures purchase contracts	—	104,800	(104,800)	—	100,000	1,904,900	(1,494,900)	510,000
Treasury futures sale contracts	—	104,800	(104,800)	—	—	3,406,200	(2,156,200)	1,250,000
Interest rate swap futures purchase contracts	200,000	200,000	(200,000)	200,000	1,400,000	465,000	(1,400,000)	465,000
Interest rate swap futures sale contracts	—	200,000	(200,000)	—	—	1,400,000	(1,400,000)	—

Table of Contents


	Quarter ended March 31, 2017
	Amount			Amount
	beginning of		Dispositions/	end of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	12,746,191	42,184,309	(45,638,448)	9,292,052
Forward sale contracts	16,577,942	51,649,826	(56,844,019)	11,383,749
MBS put options	1,175,000	5,525,000	(3,750,000)	2,950,000
MBS call options	1,600,000	—	(1,600,000)	—
Put options on interest rate futures purchase contracts	1,125,000	3,060,000	(3,025,000)	1,160,000
Call options on interest rate futures purchase contracts	900,000	955,000	(1,372,700)	482,300
Put options on interest rate futures sale contracts	—	3,025,000	(3,025,000)	—
Call options on interest rate futures sale contracts	—	1,430,000	(1,372,700)	57,300
Treasury futures purchase contracts	—	104,800	(104,800)	—
Treasury futures sale contracts	—	104,800	(104,800)	—
Interest rate swap futures purchase contracts	200,000	200,000	(200,000)	200,000
Interest rate swap futures sale contracts	—	200,000	(200,000)	—

Derivative Balances and Netting of Financial Instruments

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 and repurchase agreement derivatives.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


	March 31, 2018						December 31, 2017
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements:
Interest rate lock commitments	$	53,495	$	—	$	53,495	$	60,012	$	—	$	60,012
Repurchase agreement derivatives		20,974		—		20,974		10,656		—		10,656
		74,469		—		74,469		70,668		—		70,668
Derivatives subject to master netting arrangements:
Forward purchase contracts		28,796		—		28,796		4,288		—		4,288
Forward sale contracts		979		—		979		2,101		—		2,101
MBS put options		12,878		—		12,878		3,481		—		3,481
Put options on interest rate futures purchase contracts		1,039		—		1,039		3,570		—		3,570
Call options on interest rate futures purchase contracts		715		—		715		938		—		938
Netting		—		(29,407)		(29,407)		—		(6,867)		(6,867)
		44,407		(29,407)		15,000		14,378		(6,867)		7,511
	$	118,876	$	(29,407)	$	89,469	$	85,046	$	(6,867)	$	78,179

Table of Contents

Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty


	March 31, 2018								December 31, 2017
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	53,495	$	—	$	—	$	53,495	$	60,012	$	—	$	—	$	60,012
Deutsche Bank		20,974		—		—		20,974		10,656		—		—		10,656
Bank of America, N.A.		3,317		—		—		3,317		—		—		—		—
JPMorgan Chase Bank, N.A.		2,489		—		—		2,489		267		—		—		267
Goldman Sachs		2,430		—		—		2,430		540		—		—		540
Federal National Mortgage Association		1,997		—		—		1,997		1,092		—		—		1,092
RJ O'Brien		1,754		—		—		1,754		4,508		—		—		4,508
Others		3,013		—		—		3,013		1,104		—		—		1,104
	$	89,469	$	—	$	—	$	89,469	$	78,179	$	—	$	—	$	78,179

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. Assets sold under agreements to repurchase do not qualify for netting.


	March 31, 2018						December 31, 2017
					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
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	2,599	$	—	$	2,599	$	1,740	$	—	$	1,740
Derivatives subject to a master netting arrangement:
Forward purchase contracts		—		—		—		1,272		—		1,272
Forward sale contracts		19,276		—		19,276		7,031		—		7,031
Netting		—		(17,399)		(17,399)		—		(4,247)		(4,247)
		19,276		(17,399)		1,877		8,303		(4,247)		4,056
Total derivatives		21,875		(17,399)		4,476		10,043		(4,247)		5,796
Mortgage loans sold under agreements to repurchase:
Amount outstanding		1,813,463		—		1,813,463		2,380,866		—		2,380,866
Unamortized premiums and debt issuance costs, net		819		—		819		672		—		672
		1,814,282		—		1,814,282		2,381,538		—		2,381,538
	$	1,836,157	$	(17,399)	$	1,818,758	$	2,391,581	$	(4,247)	$	2,387,334

Table of Contents

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

Quarter ended March 31, 2016

Balance

Balance

beginning of

Dispositions/

end of
Instrument

period

Additions

expirations

period

(in thousands)
Forward purchase contracts

5,254,293

30,812,375

(26,602,198)

9,464,470
Forward sale contracts

6,230,811

39,396,426

(35,208,331)

10,418,906
MBS put options

1,275,000

2,700,000

(2,600,000)

1,375,000
Put options on interest rate futures purchase contracts

1,650,000

3,025,000

(2,925,000)

1,750,000
Call options on interest rate futures purchase contracts

600,000

3,637,500

(300,000)

3,937,500


	March 31, 2018								December 31, 2017
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount
	(in thousands)
IRLCs	$	2,599	$	—	$	—	$	2,599	$	1,740	$	—	$	—	$	1,740
Credit Suisse First Boston Mortgage Capital LLC		618,639		(618,639)		—		—		1,010,562		(1,010,320)		—		242
Deutsche Bank		720,504		(720,504)		—		—		593,864		(593,864)		—		—
Bank of America, N.A.		246,356		(246,356)		—		—		406,787		(406,355)		—		432
JPMorgan Chase Bank, N.A.		93,179		(93,179)		—		—		90,442		(90,442)		—		—
Morgan Stanley Bank, N.A.		87,941		(86,880)		—		1,061		139,491		(138,983)		—		508
Royal Bank of Canada		29,489		(29,489)		—		—		24,835		(23,752)		—		1,083
BNP Paribas		13,026		(12,463)		—		563		87,753		(87,753)		—		—
Citibank, N.A.		5,953		(5,953)		—		—		23,010		(23,010)		—		—
Barclays Capital		—		—		—		—		6,387		(6,387)		—		—
Others		253		—		—		253		1,791		—		—		1,791
	$	1,817,939	$	(1,813,463)	$	—	$	4,476	$	2,386,662	$	(2,380,866)	$	—	$	5,796

Following are the gains and (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:


		Quarter ended March 31,					Quarter ended March 31,
Hedged item	Income statement line	2017		2016
Derivative activity						Income statement line	2018		2017
		(in thousands)					(in thousands)
Repurchase agreement derivative						Interest expense	$	(426)	$	—
Hedged item:
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale	$	1,708	$	(69,177)	Net gains on mortgage loans held for sale	$	87,747	$	1,708
Mortgage servicing rights	Net mortgage loan servicing fees - Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(22,166)	$	58,720	Net mortgage loan servicing fees–Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(103,593)	$	(22,166)

~~Note 10—Mortgage Servicing Rights~~

~~Carried at Fair Value~~

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

Quarter ended March 31,

2017

2016

(in thousands)
Balance at beginning of period

$
515,925

$
660,247
Additions:

Purchases

203

11
Mortgage servicing rights resulting from mortgage loan sales

5,984

4,468

6,187

4,479

Change in fair value due to:

Changes in valuation inputs used in valuation model (1)

1,992

(48,876)
Other changes in fair value (2)

(17,188)

(21,447)
Total change in fair value

(15,196)

(70,323)
Balance at end of period

$
506,916

$
594,403

March 31,

December 31,

2017

2016

(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable

$
506,860

$
509,847

~~(1)~~

Principally reflects changes in discount rates and prepayment speed inputs, primarily due to changes in market interest rates and changes in expected borrower performance and servicer losses given default.

~~(2)~~

~~Represents changes due to realization of cash flows.~~

Table of Contents

~~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 March 31,

2017

2016

(in thousands)
Amortized cost:

Balance at beginning of period

$
1,206,694

$
798,925
Mortgage servicing rights resulting from mortgage loan sales

130,218

96,314
Amortization

(37,819)

(28,250)
Balance at end of period

1,299,093

866,989

Valuation allowance:

Balance at beginning of period

(94,947)

(47,237)
Reductions (additions)

13,999

(77,073)
Balance at end of period

(80,948)

(124,310)
Mortgage servicing rights, net at end of period

$
1,218,145

$
742,679

Fair value of mortgage servicing rights at beginning of period

$
1,112,302

$
766,345
Fair value of mortgage servicing rights at end of period

$
1,227,077

$
743,062

March 31,

December 31,

2017

2016

(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable

$
1,213,257

$
1,107,824

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This estimate was developed with the inputs applicable to the March 31, 2017 valuation of MSRs. The 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 March 31,

amortization

(in thousands)
2018

$
144,768
2019

132,343
2020

120,158
2021

108,839
2022

98,127
Thereafter

694,858

$
1,299,093

~~Table of Contents~~

~~Mortgage Servicing Liabilities Carried at Fair Value~~

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

Quarter ended March 31,

2017

2016

(in thousands)
Balance at beginning of period

$
15,192

$
1,399
Mortgage servicing liabilities resulting from mortgage loan sales

4,059

5,409
Changes in fair value due to:

Changes in valuation inputs used in valuation model (1)

3,290

2,960
Other changes in fair value (2)

(6,547)

(3,021)
Total change in fair value

(3,257)

(61)
Balance at end of period

$
15,994

$
6,747

~~(1)~~

~~Principally reflects changes in expected borrower performance and servicer losses given default.~~

~~(2)~~

~~Represents changes due to realization of cash flows.~~

~~Servicing fees relating to MSRs and MSLs are recorded in~~ ~~Net mortgage loan servicing fees—Loan servicing fees—From non-affiliates~~ ~~on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs are recorded in~~ ~~Net servicing fees—Loan servicing fees—Ancillary and other fees~~ ~~on the Company’s consolidated statements of income. Such amounts are summarized below:~~

Quarter ended March 31,

2017

2016

(in thousands)
Contractual servicing fees

$
106,467

$
91,327
Ancillary and other fees:

Late charges

6,684

1,620
Other

925

395

$
114,076

$
93,342

Note ~~11—~~9—Carried Interest Due from Investment Funds

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

Quarter ended March 31,

2017

2016

(in thousands)
Balance at beginning of period

$
70,906

$
69,926
Carried Interest recognized during the period

(128)

593
Balance at end of period

$
70,778

$
70,519


	Quarter ended March 31,
	2018		2017
	(in thousands)
Balance at beginning of quarter	$	8,552	$	70,906
Carried Interest recognized during the quarter		(180)		(128)
Cash received during the quarter		(7,834)		—
Balance at end of quarter	$	538	$	70,778

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 is based on the cash flows that would be produced assuming termination of the Investment Funds at period end and may be reduced in future 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 amounts previously recognized.

~~Management expects~~In 2017 and though the ~~Carried Interest to be collected by the Company when~~quarter ended March 31, 2018, the Investment Funds ~~liquidate.~~sold or liquidated all of their remaining investments. The Company has since collected most of its Carried Interest and expects to collect the remaining balance, adjusted for intervening income or losses through the date of liquidation of the Investment Funds, ~~will continue~~during 2018.

Table of Contents

Note 10—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights Carried at Fair Value

The activity in ~~existence through December 31, 2017,~~MSRs carried at fair value is as ~~a result of PCM’s election to exercise the first of three one-year extensions provided in their limited liability company and limited partnership agreements.~~follows:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Balance at beginning of quarter	$	638,010	$	515,925
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to a change in accounting principle		1,482,426		—
Balance after reclassification		2,120,436		515,925
Additions:
Purchases		27,606		203
Mortgage servicing rights resulting from mortgage loan sales		143,910		5,984
		171,516		6,187
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		130,449		1,992
Other changes in fair value (2)		(67,912)		(17,188)
Total change in fair value		62,537		(15,196)
Balance at end of quarter	$	2,354,489	$	506,916

	March 31,		December 31,
	2018		2017
	(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	2,178,536	$	630,711

(1)

Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

Table of Contents

Mortgage Servicing Rights 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 March 31,
	2018		2017
	(in thousands)
Amortized cost:
Balance at beginning of quarter	$	1,583,378	$	1,206,694
Transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to a change in accounting principle		(1,583,378)		—
Balance after reclassification		—		1,206,694
Mortgage servicing rights resulting from mortgage loan sales		—		130,218
Amortization		—		(37,819)
Balance at end of quarter		—		1,299,093

Valuation allowance:
Balance at beginning of quarter		(101,800)		(94,947)
Reduction resulting from transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to a change in accounting principle		101,800		—
Balance after reclassification		—		(94,947)
Reduction of valuation allowance		—		13,999
Balance at end of quarter		—		(80,948)
Mortgage servicing rights, net at end of quarter	$	—	$	1,218,145
Fair value of mortgage servicing rights at:
Beginning of quarter			$	1,112,302
End of quarter			$	1,227,077

			December 31,
			2017
			(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable			$	1,467,356

Mortgage Servicing Liabilities Carried at Fair Value

The activity in MSLs carried at fair value is summarized below:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Balance at beginning of quarter	$	14,120	$	15,192
Mortgage servicing liabilities resulting from mortgage loan sales		2,037		4,059
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		2,643		3,290
Other changes in fair value (2)		(6,737)		(6,547)
Total change in fair value		(4,094)		(3,257)
Balance at end of quarter	$	12,063	$	15,994

(1)

Principally reflects changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

Table of Contents

Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. Such amounts are summarized below:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Contractual servicing fees	$	135,483	$	106,467
Ancillary and other fees:
Late charges		7,459		6,684
Other		1,562		925
	$	144,504	$	114,076

Note ~~12—~~11—Borrowings

The borrowing facilities described throughout this Note 1211 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 covenants as of March 31, ~~2017.~~2018.

Assets Sold Under Agreement to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale at fair value or participation certificates backed by MSRs. Eligible mortgage loans and participation certificates backed by MSRs ~~and servicing advances~~ are sold at advance rates based on the fair value of the assets sold. Interest is charged at a rate based on the buyer’s overnight cost of funds rate or on LIBOR depending on the terms of the respective ~~agreement.~~agreements. Mortgage loans and MSRs financed under these agreements may be re-pledged by the lenders.

Table of Contents

Assets sold under agreements to repurchase are summarized below:


	Quarter ended March 31,						Quarter ended March 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,516,480		$	1,039,573		$	1,643,443		$	1,516,480
Weighted average interest rate (1)		3.08	%		2.61	%		3.59	%		3.08	%
Total interest expense	$	13,955		$	8,660		$	6,732		$	13,955
Maximum daily amount outstanding	$	2,093,542		$	1,688,605		$	2,380,121		$	2,093,542


		March 31,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Carrying value:
Unpaid principal balance	$	2,036,366		$	1,736,922		$	1,813,463		$	2,380,866
Unamortized debt issuance costs		(1,558)			(1,808)
Unamortized premiums and debt issuance costs, net								819			672
	$	2,034,808		$	1,735,114		$	1,814,282		$	2,381,538
Weighted average interest rate		2.91	%		3.02	%		3.73	%		3.24	%
Available borrowing capacity (2):
Committed	$	97,539		$	347,487		$	536,576		$	316,503
Uncommitted		828,095			857,591			2,434,961			2,257,631
	$	925,634		$	1,205,078		$	2,971,537		$	2,574,134
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	2,000,112		$	1,422,255		$	2,036,895		$	2,530,299
Mortgage servicing rights	$	1,182,293		$	1,479,322
Servicing advances	$	66,130		$	81,306
Servicing advances (3)							$	104,685		$	114,643
Mortgage servicing rights (3)							$	2,178,536		$	2,098,067
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	150,000		$	150,000		$	142,938		$	144,128
Margin deposits placed with counterparties ~~(3)~~(4)	$	3,000		$	3,000		$	3,750		$	3,750

(1)

Excludes the effect of amortization of ~~commitment fees totaling $2.3 million and $1.8~~net premiums of $8.0 million for the ~~quarters~~quarter ended March 31, ~~2017~~2018 and ~~2016, respectively.~~debt issuance costs of $2.3 million for the quarter ended March 31, 2017.

(2)

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

(3)

Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2017-GT2 Notes and 2018-GT1 Notes. Financing of the VFN is included in Assets sold under agreements to repurchase and 2017-GT2 Notes and 2018-GT1 Notes are included in Notes payable on the Company's consolidated balance sheet.

(4)

Margin deposits are included in Other assets on the Company’s consolidated balance sheet.

~~Table of Contents~~

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


Remaining maturity at March 31, 2017	Balance
Remaining maturity at March 31, 2018			Balance
	(dollars in thousands)		(dollars in thousands)
Within 30 days	$	356,154	$	525,442
Over 30 to 90 days		1,448,212		1,288,021
Over 180 days to one year		232,000
Total loans sold under agreements to repurchase	$	2,036,366
Total assets sold under agreements to repurchase			$	1,813,463
Weighted average maturity (in months)		2.6		1.7

Table of Contents

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets ~~sold~~ under agreements to repurchase is summarized by counterparty below as of March 31, ~~2017:~~2018:

Weighted average

maturity of advances

under repurchase

Counterparty

Amount at risk

agreement

Facility maturity

Amount at risk

agreement

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC

87,945

April 28, 2017

266,554

April 27, 2018

Credit Suisse First Boston Mortgage Capital LLC

303,009

December 19, 2017

188,287

April 21, 2018

April 27, 2018

Deutsche Bank AG

99,415

June 18, 2018

September 30, 2018

Bank of America, N.A.

47,347

May 26, 2017

19,246

May 6, 2018

May 25, 2018

JP Morgan Chase Bank, N.A.

7,313

May 21, 2018

October 12, 2018

Morgan Stanley Bank, N.A.

22,255

May 20, 2017

August 25, 2017

5,823

June 15, 2018

August 24, 2018

JP Morgan Chase Bank, N.A.

17,060

May 22, 2017

August 18, 2017

Royal Bank of Canada

1,907

June 13, 2018

June 29, 2018

BNP Paribas

615

May 14, 2018

November 16, 2018

Citibank, N.A.

12,329

June 17, 2017

March 2, 2018

277

April 26, 2018

May 1, 2018

Barclays Bank PLC

96,522

June 17, 2017

December 1, 2017

Royal Bank of Canada

4,011

June 12, 2017

September 18, 2017

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 assets securing those agreements decreases.

Mortgage Loan Participation Purchase and Sale Agreements

Certain of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan participation purchase and sale agreements. 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 the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the 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. The holdback amount 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 purchase and sale agreements are summarized below:


	Quarter ended March 31,						Quarter ended March 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Average balance	$	205,820		$	167,556		$	215,614		$	205,820
Weighted average interest rate (1)		1.95	%		1.66	%		2.89	%		1.95	%
Total interest expense	$	1,132		$	781		$	1,727		$	1,132
Maximum daily amount outstanding	$	719,434		$	246,636		$	527,706		$	719,434

(1)

Excludes the effect of amortization of facility fees totaling ~~$129,000~~$171,000 and ~~$78,000~~$129,000 for the quarters ended March 31, ~~2017~~2018 and ~~2016,~~2017, respectively.

4446

Table of Contents


	March 31,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Carrying value:
Unpaid principal balance	$	241,723		$	671,562		$	510,583		$	527,706
Unamortized debt issuance costs		(85)			(136)			(140)			(311)
	$	241,638		$	671,426		$	510,443		$	527,395
Weighted average interest rate		2.23	%		2.02	%		3.14	%		2.81	%
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreements	$	252,605		$	702,919
Fair value of mortgage loans pledged to secure mortgage loan participation purchase and sale agreements							$	532,294		$	551,688

Notes Payable

Term Notes

On February 16, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $400 million in Term Notes (the “2017-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as ~~amended.~~amended (the “Securities Act”). The ~~Term~~2017-GT1 Notes ~~bear~~bore interest at a rate equal to one-month LIBOR plus 4.75% per annum. The ~~Term~~2017-GT1 Notes ~~will~~were scheduled to mature on February 25, 2020 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2021 (unless earlier redeemed in accordance with their terms).

On August 10, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $500 million in Term Notes (the “2017-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2017-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 4.0% per annum. The 2017-GT2 Notes will mature on August 25, 2022 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2023 (unless earlier redeemed in accordance with their terms).

On February 28, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term ~~Notes)~~Notes (the “2018-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1 Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2025 (unless earlier redeemed in accordance with their terms).

On February 28, 2018, in connection with its issuance of the 2018-GT1 Notes, the Company also redeemed all of the 2017-GT1 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT1 Notes was $400 million plus all accrued and unpaid interest.

All of the Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.

Revolving Credit Agreement

The Company entered into a revolving credit agreement ~~dated as of December 30, 2015,~~ pursuant to which the lenders agreed to make revolving loans in an amount not to exceed $100 million. On November 18, 2016, the credit agreement was amended and restated. Pursuant to the amended and restated credit agreement, the lenders have agreed to make revolving loans in an amount not to exceed $150 million. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Company and its subsidiaries. Interest on the loans ~~shall accrue~~accrues at a per annum rate of interest equal to, at an election of the Company, either LIBOR plus the applicable margin or an alternate base rate (as defined in the credit agreement). During the existence of certain events of default, interest ~~shall accrue~~accrues at a higher rate. The maturity date ~~of the loans~~ is ~~364 days following the date of the credit agreement.~~November 16, 2018.

During December 2015, the Company entered into a note payable which is secured by MSRs relating to certain mortgage loans in the Company’s servicing portfolio. Interest is charged at a rate based on LIBOR plus the applicable contract margin.

Table of Contents

Notes payable are summarized below:


	Quarter ended March 31,						Quarter ended March 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Average balance	$	294,992		$	85,167		$	979,868		$	294,992
Weighted average interest rate (1)		5.51	%		4.40	%		5.63	%		5.51	%
Total interest expense	$	4,930		$	1,598		$	18,222		$	4,930
Maximum daily amount outstanding	$	511,725		$	128,849		$	1,150,000		$	511,725

(1)

Excluding the effect of amortization of debt issuance costs totaling $~~865,000~~4.2 million and ~~$654,000 during~~$0.9 million for the quarters ended March 31, ~~2017~~2018 and ~~2016,~~2017, respectively.


	March 31,			December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,150,000		$	900,006
Unamortized debt issuance costs		(9,978)			(8,501)
	$	1,140,022		$	891,505
Weighted average interest rate		4.97	%		5.66	%
Unused amount	$	150,000		$	280,000
Assets pledged to secure notes payable:
Cash	$	116,570		$	20,765
Carried Interest	$	538		$	8,552
Servicing advances (1)	$	104,685		$	114,643
Mortgage servicing rights (1)	$	2,178,536		$	2,098,067

~~Table of Contents~~

(1)

March 31,

December 31,


2017

2016

(dollars in thousands)

Carrying value:

Unpaid principal balance

$
441,302

$
151,935

Unamortized debt issuance costs

(4,577)

(993)

$
436,725

$
150,942

Weighted average interest rate

4.86
%

4.67
%
Unused amount

$
188,698

$
98,065

Assets pledged to secure notes payable:

Cash

$
60,835

$
91,788

Carried Interest

$
70,778

$
70,906

Mortgage servicing rights

$
537,824

$
138,349

Obligations under Capital Lease

In December 2015, the Company entered into a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on ~~November 3, 2019~~March 23, 2020 and bears interest at a spread over ~~one month~~one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended March 31,						Quarter ended March 31,
	2017			2016			2018			2017
	(dollars in thousands)						(dollars in thousands)
Average balance	$	24,176		$	12,825		$	18,703		$	24,176
Weighted average interest rate		2.81	%		2.44	%		3.64	%		2.81	%
Total interest expense	$	159		$	63		$	170		$	159
Maximum daily amount outstanding	$	31,178		$	13,596		$	20,971		$	31,178


	March 31,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Unpaid principal balance	$	31,178		$	23,424		$	16,435		$	20,971
Weighted average interest rate		2.82	%		2.48	%		3.79	%		3.26	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	29,665		$	25,134		$	22,250		$	23,915
Capitalized software	$	1,919		$	515		$	1,457		$	1,568

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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 with PMT. 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.~~loans. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances. ~~The agreements are treated as financings and are carried at fair value with changes in fair value recognized in current period income.~~

~~Table of Contents~~

Following is a summary of ESS:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Balance at beginning of period	$	288,669	$	412,425
Balance at beginning of quarter					$	236,534	$	288,669
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust		1,573		1,911		904		1,573
Accrual of interest		4,647		7,015		3,934		4,647
Repayment		(14,632)		(20,881)		(12,291)		(14,632)
Settlement (1)		—		(59,045)
Change in fair value		(2,773)		(19,449)		6,921		(2,773)
Balance at end of period	$	277,484	$	321,976
Balance at end of quarter					$	236,002	$	277,484

~~(1)~~

On February 29, 2016, the Company and PMT terminated the 2/1/13 Spread Acquisition Agreement and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, the Company reacquired from PMT all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by the Company to PMT under the 2/1/13 Spread Acquisition Agreement and then subject to such 2/1/13 Spread Acquisition Agreement. On February 29, 2016, the Company also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold to PMT by the Company.

Note ~~13—~~12—Liability for Losses Under Representations and Warranties

Following is a summary of the Company’s liability for losses under representations and warranties:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Balance at beginning of period	$	19,067	$	20,611
Balance at beginning of quarter					$	20,053	$	19,067
Provision for losses on mortgage loans sold:
Resulting from sales of mortgage loans		1,402		2,082		1,492		1,402
Reduction in liability due to change in estimate		(872)		—		(1,113)		(872)
Incurred losses		(161)		(484)		(3)		(161)
Balance at end of period	$	19,436	$	22,209
Unpaid principal balance of mortgage loans subject to representations and warranties at end of period	$	98,569,346	$	63,806,614
Balance at end of quarter					$	20,429	$	19,436
Unpaid principal balance of mortgage loans subject to representations and warranties at end of quarter					$	127,056,220	$	98,569,346

Note ~~14—~~13—Income Taxes

The Company’s effective income tax rates were ~~12.3%~~8.3% and ~~11.9%~~12.3% for the quarters ended March 31, 2018 and 2017, respectively. The lower effective tax rate for 2018 reflects the effect of the change in the federal statutory tax rate from 35% to 21%, resulting from the December 22, 2017 enactment of H.R.1, known as the Tax Cuts and ~~2016, respectively.~~Jobs Act (the “Tax Act”). 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,~~Class A common stock and the Company’s ownership units in PennyMac is increased through vesting of equity awards, 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 the Company’s effective income tax rate. The repurchase of Company shares under the Repurchase Program as described in Note 15–Stockholders’ Equity has the opposite effect and results in a corresponding redemption of PennyMac units from the Company pursuant to the PennyMac Limited Liability Agreement.

~~Table of Contents~~

~~Note 15—Noncontrolling Interest~~

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

Quarter ended March 31,


2017

2016

(in thousands)

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

$
10,879

$
5,175

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 common stock of PennyMac Financial Services, Inc.

$
8,763

$
601

Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC

329

3

March 31,

December 31,


2017

2016

Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC

70.0
%

70.6
%

~~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 March 31,

2017

2016

(in thousands)

Cash (loss) gain:

Mortgage loans

$
(58,681)

$
21,401

Hedging activities

1,107

(72,541)

(57,574)

(51,140)

Non-cash gain:

From non-affiliates:

Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales

132,143

95,373

Provision for losses relating to representations and warranties:

Pursuant to mortgage loan sales

(1,402)

(2,082)

Reduction in liability due to change in estimate

872

—

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

Interest rate lock commitments

6,615

28,112

Mortgage loans

7,396

19,848

Hedging derivatives

601

3,365

88,651

93,476

Recapture payable to PennyMac Mortgage Investment Trust

(1,695)

(1,952)

$
86,956

$
91,524

~~Table of Contents~~

~~Note 17—Net Interest Expense~~

~~Net interest expense is summarized below:~~

Quarter ended March 31,

2017

2016

(in thousands)

Interest income:

From non-affiliates:

Short-term investments

$
337

$
172

Mortgage loans held for sale at fair value

16,615

10,481

Placement fees relating to custodial funds

5,102

1,274

22,054

11,927

From PennyMac Mortgage Investment Trust—Financings receivable

1,805

1,602

23,859

13,529

Interest expense:

To non-affiliates:

Assets sold under agreements to repurchase

13,955

8,660

Mortgage loan participation and sale agreements

1,132

781

Notes payable

4,930

1,598

Obligations under capital lease

159

63

Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

3,623

2,105

Interest on mortgage loan impound deposits

1,028

765

24,827

13,972

To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value

4,647

7,015

29,474

20,987

$
(5,615)

$
(7,458)

~~Note 18—Stock-based Compensation~~

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

Quarter ended March 31,

2017

2016

(in thousands)

Performance-based RSUs

$
3,304

$
2,788

Stock options

1,276

1,080

Time-based RSUs

945

708

Exchangeable PNMAC units

—

25

$
5,525

$
4,601

~~Following is a summary of equity award activity:~~

Quarter ended March 31, 2017


Performance-

Stock

Time-based


based RSUs

options

RSUs


(in thousands)

December 31, 2016

2,475

2,738

382

Granted

694

861

405

Vested units and exercised options

—

(20)

(139)

Forfeited or canceled

(9)

(8)

(2)

March 31, 2017

3,160

3,571

646

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Quarter ended March 31, 2016


Performance-

Stock

Time-based

Exchangeable

based RSUs

options

RSUs

PNMAC units

(in thousands)

December 31, 2015

2,351

1,845

271

132

Granted

813

962

251

—

Vested units and exercised options

—

—

(66)

(132)

Forfeited or canceled

(478)

(8)

(2)

—

March 31, 2016

2,686

2,799

454

—

~~Note 19—Supplemental Cash Flow Information~~

Quarter ended March 31,


2017

2016

(in thousands)

Cash paid for interest

$
34,050

$
21,781

Cash paid for income taxes

$
16

$
25

Non-cash investing activity:

Mortgage servicing rights resulting from mortgage loan sales

$
136,202

$
100,782

Mortgage servicing liabilities resulting from mortgage loan sales

$
4,059

$
5,409

Non-cash financing activity:

Transfer of excess servicing spread pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

$
1,573

$
1,911

Issuance of common stock in settlement of director fees

$
84

$
74

~~Note 20—Regulatory Capital and Liquidity Requirements~~

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

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

March 31, 2017

December 31, 2016

Agency–company subject to requirement

Actual (1)

Requirement

Actual (1)

Requirement

(dollars in thousands)

Capital

Fannie Mae & Freddie Mac - PLS

$
1,345,228

$
351,076

$
1,289,464

$
335,883

Ginnie Mae - PLS

$
1,137,321

$
523,879

$
1,085,549

$
455,542

Ginnie Mae - PennyMac

$
1,322,056

$
576,266

$
1,261,565

$
501,097

HUD - PLS

$
1,137,321

$
2,500

$
1,085,549

$
2,500

Liquidity

Fannie Mae & Freddie Mac - PLS

$
178,336

$
48,037

$
179,230

$
45,930

Ginnie Mae - PLS

$
178,336

$
121,561

$
179,230

$
115,304

Tangible net worth / Total assets ratio

Fannie Mae and Freddie Mac – PLS

26
%

6
%

26
%

6
%

~~(1)~~

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

Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.

~~Table of Contents~~

Note ~~21—~~14—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 March 31, ~~2017,~~2018, 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.

Regulatory Matters

The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations, as well as regulations by various federal agencies, such as the Bureau of Consumer Financial Protection (“BCFP”), HUD, and the Federal Housing Administration. The Company and/or its subsidiaries are also subject to certain requirements by the Agencies to which it sells loans and for which it performs loan servicing activities. As the result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by the various federal, state and local regulatory bodies.

Commitments to Purchase and Fund Mortgage Loans

March 31, 2017

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

$
2,036,646
Commitments to fund mortgage loans

1,690,795

$
3,727,441

The Company’s commitments to purchase and fund mortgage loans totaled $4.3 billion as of March 31, 2018.

Leases

The Company leases office facilities. Rent expense ~~during~~was $4.3 million and $3.4 million for the quarters ended March 31, 2018 and 2017, ~~and 2016 was $3.4 million and $1.6 million,~~ respectively.

The following table provides a summary of future minimum lease payments required under lease agreements ~~which may also contain renewal options~~ as of March 31, ~~2017:~~2018:


Twelve months ended March 31:	Future minimum lease payments
Twelve months ended March 31,			Future minimum lease payments
	(in thousands)		(in thousands)
2018	$	10,782
2019		13,296	$	14,029
2020		13,766		14,879
2021		13,210		14,111
2022		11,325		11,635
2023				10,251
Thereafter		39,496		30,011
	$	101,875	$	94,916

Commitment to Make Distributions to PennyMac Owners

Under the terms of its Limited Liability Company Agreement, PennyMac is required to make cash distributions to the Company’s noncontrolling interest holders in amounts sufficient to allow such noncontrolling interest holders to pay federal and state taxes on their allocable share of PennyMac taxable income. Such distributions are calculated and, if required, made quarterly.

Note 15—Stockholders’ Equity

In June 2017, the Company’s board of directors authorized a stock repurchase program (“Repurchase Program”) under which the Company may repurchase up to $50 million of its outstanding Class A common stock. As of December 31, 2017, the Company had repurchased approximately 505,000 shares of Class A common stock at a cost of approximately $8.6 million. The shares of repurchased Class A common stock were canceled upon settlement of the

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repurchase transactions and returned to the authorized but unissued common stock pool. The Company did not repurchase any Class A common stock during the quarter ended March 31, 2018.

Note 16—Noncontrolling Interest

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


	Quarter ended March 31,
	2018		2017

Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	16,619	$	10,879
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 common stock of PennyMac Financial Services, Inc.	$	14,859	$	8,763
Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC		748		329


	March 31,			December 31,
	2018			2017
Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC		68.4	%		69.2	%

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,
	2018		2017
	(in thousands)
From non-affiliates:
Cash (loss) gain:
Mortgage loans	$	(181,801)	$	(58,681)
Hedging activities		104,396		1,107
		(77,405)		(57,574)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		141,873		132,143
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(1,492)		(1,402)
Reduction in liability due to change in estimate		1,113		872
Change in fair value relating to mortgage loans and hedging derivatives held at quarter end:
Interest rate lock commitments		(7,376)		6,615
Mortgage loans		18,964		7,396
Hedging derivatives		(16,649)		601
		59,028		88,651
From PennyMac Mortgage Investment Trust		12,386		(1,695)
	$	71,414	$	86,956

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Note 18—Net Interest Income (Expense)

Net interest expense is summarized below:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Interest income:
From non-affiliates:
Short-term investments	$	608	$	337
Mortgage loans held for sale at fair value		26,607		16,615
Placement fees relating to custodial funds		13,424		5,102
		40,639		22,054
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell		1,976		1,805
		42,615		23,859

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase (1)		6,732		13,955
Mortgage loan participation purchase and sale agreements		1,727		1,132
Notes payable		18,222		4,930
Obligations under capital lease		170		159
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		4,830		3,623
Interest on mortgage loan impound deposits		1,130		1,028
		32,811		24,827
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		3,934		4,647
		36,745		29,474
	$	5,870	$	(5,615)

(1)

In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarter ended March 31, 2018, the Company included $10.2 million of such incentives as a reduction in Interest expense. The master repurchase agreement has an initial term of six months and is renewable for three additional six-month terms at the option of the lender. On April 18, 2018, the Company renewed the master repurchase agreement for a six-month term. There can be no assurance that the lender will continue to renew this agreement upon its maturity.

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Note 19—Stock-based Compensation

As of March 31, 2018 and December 31, 2017, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Grants:
Units:
Performance-based RSUs		524		694
Stock options		674		861
Time-based RSUs		316		405
Grant date fair value:
Performance-based RSUs	$	12,791	$	12,512
Stock options		6,147		5,772
Time-based RSUs		7,703		7,302
Total	$	26,641	$	25,586
Vestings and exercises:
Performance-based RSUs vested		—		—
Stock options exercised		196		20
Time-based RSUs vested		234		139
Compensation expense	$	6,171	$	5,525

The performance-based RSUs provide for the issuance of shares of the Company’s Class A common stock based on the attainment of earnings per share and/or return on equity target performance goals and are subject to adjustment based on individual performance of the grantees. The satisfaction of the performance goals and issuance of shares are approved by the compensation committee of the Company’s board of directors. On April 2, 2018, the compensation committee of the board of directors determined that the performance goals for certain performance-based RSU awards with a performance period ended December 31, 2017 were satisfied, and 774,000 shares vested and were issued to the grantees pursuant to such performance-based RSUs.

Note 20—Earnings Per Share of Common Stock

Potentially dilutive shares of common stock include non-vested stock-based compensation awards and PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding represented by the non-vested stock-based compensation awards. The diluted earnings per share calculation includes an evaluation of whether the exchange of PennyMac Class A units for shares of common stock is dilutive. Accordingly, in this evaluation, 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 that would be applicable to such earnings.

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The following table summarizes the basic and diluted earnings per share calculations:


	Quarter ended March 31,
	2018		2017
	(in thousands, except per share amounts)
Basic earnings per share of common stock:
Net income attributable to common stockholders	$	16,619	$	10,879
Weighted average shares of common stock outstanding		23,832		22,619
Basic earnings per share of common stock	$	0.70	$	0.48

Diluted earnings per share of common stock:
Net income attributable to common stockholders	$	16,619	$	10,879
Net income attributable to dilutive stock-based compensation units		1,400		244
Effect of net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes		35,449		25,306
Net income attributable to common stockholders for diluted earnings per share	$	53,468	$	36,429
Weighted average shares of common stock outstanding applicable to basic earnings per share		23,832		22,619
Effect of dilutive shares:
Common shares issuable under stock-based compensation plan		2,947		935
PennyMac Class A units exchangeable to Class A common stock		52,682		53,589
Weighted average shares of common stock applicable to diluted earnings per share		79,461		77,143
Diluted earnings per share of common stock	$	0.67	$	0.47

Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes weighted-average number of the anti-dilutive stock options, restricted stock units (“RSUs”) and exchangeable PennyMac Class A units excluded from the calculation of diluted earnings per share:


	Quarter ended March 31,
	2018		2017
	(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)		134		1,763
Stock options (2)		172		1,562
Total anti-dilutive stock-based compensation units		306		3,325
Weighted average exercise price of anti-dilutive stock options (2)	$	24.40	$	18.15

(1)

Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved.

(2)

Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock price during the quarter.

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Note 21—Supplemental Cash Flow Information


	Quarter ended March 31,
	2018		2017
	(in thousands)
Cash paid for interest	$	40,227	$	34,050
Cash paid for income taxes, net	$	2	$	16
Non-cash investing activity:
Mortgage servicing rights resulting from mortgage loan sales	$	143,910	$	136,202
Mortgage servicing liabilities resulting from mortgage loan sales	$	2,037	$	4,059
Unsettled portion of MSR acquisitions	$	62	$	—
Non-cash financing activity:
Transfer of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	904	$	1,573
Issuance of Class A common stock in settlement of director fees	$	79	$	84

Note 22—Regulatory Capital and Liquidity Requirements

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

The Company is subject to financial eligibility requirements for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include tangible net worth of $2.5 million plus 25 basis points of the Company’s total 1-4 unit mortgage loan servicing portfolio, excluding mortgage loans subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB in excess of 6.0%.

The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.

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



	March 31, 2018						December 31, 2017
Agency–company subject to requirement	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)
	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS	$	1,626,355		$	446,916		$	1,561,977		$	429,671
Ginnie Mae – PLS	$	1,376,610		$	698,890		$	1,307,580		$	674,133
Ginnie Mae – PennyMac	$	1,592,883		$	768,779		$	1,511,201		$	741,574
HUD – PLS	$	1,376,610		$	2,500		$	1,307,580		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	228,961		$	61,339		$	196,415		$	58,754
Ginnie Mae – PLS	$	228,961		$	160,856		$	196,415		$	153,431
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		24	%		6	%		21	%		6	%

(1)

Calculated in compliance with the respective Agency’s requirements.

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Note 23—Segments and Related Information

The Company operates in three segments: ~~loan~~ production, ~~loan~~ servicing and investment management.

Two of the segments are in the mortgage banking business: ~~loan~~ production and ~~loan~~ servicing. The ~~loan~~ production segment performs mortgage loan origination, acquisition and sale activities. The ~~loan~~ servicing segment performs servicing of newly originated mortgage loans, execution and management of early buyout transactions and servicing of mortgage loans sourced and managed by the investment management segment for the Advised Entities, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.

~~Table of Contents~~

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 production activities for PMT and managing the acquired assets for the Advised Entities.

Financial performance and results by segment are as follows:


	Quarter ended March 31, 2017										Quarter ended March 31, 2018
	Mortgage Banking						Investment				Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total		Production		Servicing		Total		Management		Total
	(in thousands)										(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	62,837	$	24,119	$	86,956	$	—	$	86,956	$	36,198	$	35,216	$	71,414	$	—	$	71,414
Mortgage loan origination fees		25,574		—		25,574		—		25,574		24,563		—		24,563		—		24,563
Fulfillment fees from PennyMac Mortgage Investment Trust		16,570		—		16,570		—		16,570		11,944		—		11,944		—		11,944
Net mortgage loan servicing fees		—		74,163		74,163		—		74,163		—		116,789		116,789		—		116,789
Management fees		—		—		—		5,374		5,374		—		—		—		5,775		5,775
Carried Interest from Investment Funds		—		—		—		(128)		(128)		—		—		—		(180)		(180)
Net interest income (expense):		—		—		—
Interest income		12,936		10,923		23,859		—		23,859		14,248		28,367		42,615		—		42,615
Interest expense		8,822		20,641		29,463		11		29,474		2,102		34,627		36,729		16		36,745
		4,114		(9,718)		(5,604)		(11)		(5,615)		12,146		(6,260)		5,886		(16)		5,870
Other		945		471		1,416		163		1,579		316		395		711		1,315		2,026
Total net revenue		110,040		89,035		199,075		5,398		204,473		85,167		146,140		231,307		6,894		238,201
Expenses		62,536		75,619		138,155		4,286		142,441		67,997		91,265		159,262		5,943		165,205
Income before provision for income taxes	$	47,504	$	13,416	$	60,920	$	1,112	$	62,032	$	17,170	$	54,875	$	72,045	$	951	$	72,996
Segment assets at period end (2)	$	2,054,302	$	3,096,709	$	5,151,011	$	91,316	$	5,242,327
Segment assets at quarter end (2)											$	2,251,354	$	4,630,946	$	6,882,300	$	11,877	$	6,894,177

(1)

All revenues are from external customers.

(2)

Excludes parent ~~company~~Company assets, which consist primarily of working capital of ~~$9.0~~$8.7 million.

5256

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	Quarter ended March 31, 2016										Quarter ended March 31, 2017
	Mortgage Banking						Investment				Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total		Production		Servicing		Total		Management		Total
	(in thousands)										(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	78,214	$	13,310	$	91,524	$	—	$	91,524	$	62,837	$	24,119	$	86,956	$	—	$	86,956
Mortgage loan origination fees		22,434		—		22,434		—		22,434		25,574		—		25,574		—		25,574
Fulfillment fees from PennyMac Mortgage Investment Trust		12,935		—		12,935		—		12,935		16,570		—		16,570		—		16,570
Net mortgage loan servicing fees		—		17,519		17,519		—		17,519		—		74,163		74,163		—		74,163
Management fees		—		—		—		5,912		5,912		—		—		—		5,374		5,374
Carried Interest from Investment Funds		—		—		—		593		593		—		—		—		(128)		(128)
Net interest income (expense):
Interest income		8,377		5,151		13,528		1		13,529		12,936		10,923		23,859		—		23,859
Interest expense		4,883		16,144		21,027		10		21,037		8,822		20,641		29,463		11		29,474
		3,494		(10,993)		(7,499)		(9)		(7,508)		4,114		(9,718)		(5,604)		(11)		(5,615)
Other		239		(232)		7		(64)		(57)		945		471		1,416		163		1,579
Total net revenue		117,316		19,604		136,920		6,432		143,352		110,040		89,035		199,075		5,398		204,473
Expenses		48,908		59,066		107,974		5,288		113,262		62,536		75,619		138,155		4,286		142,441
Income (loss) before provision for income taxes		68,408		(39,462)		28,946		1,144		30,090	$	47,504	$	13,416	$	60,920	$	1,112	$	62,032
Non-segment activities (2)		—		—		—		—		49
Income (loss) before provision for income taxes	$	68,408	$	(39,462)	$	28,946	$	1,144	$	30,139
Segment assets at period end (3)	$	1,751,604	$	2,118,587	$	3,870,191	$	91,980	$	3,962,171
Segment assets at quarter end (2)											$	2,054,302	$	3,096,709	$	5,151,011	$	91,316	$	5,242,327

(1)

All revenues are from external ~~customers~~customers.

(2)

~~Relates to~~Excludes parent ~~company interest expense eliminated in consolidation.~~Company assets, which consist primarily of working capital of $9.0 million.

~~(3)Excludes parent company assets, which consist primarily of~~ ~~Deferred tax asset~~ ~~of $14.6 million and working capital of $4.5 million.~~

Note ~~23—~~24—Recently Issued Accounting Pronouncements

~~In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue from Contracts with Customers (Subtopic 606)~~ ~~(“ASU 2014-09”), which supersedes the guidance in the~~ ~~Revenue Recognition~~ topic of the ASC. ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

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~~The FASB has issued several amendments to the new revenue standard ASU 2014-09, including:~~

~~In August 2015, ASU 2015-14,~~ ~~Revenue From Contracts With Customers~~ (“ASU 2015-14”). This update deferred the initial effective date of ASU 2014-09. As a result of the issuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

~~In March 2016, ASU 2016-08,~~ ~~Principal Versus Agent Considerations (Reporting Revenue Gross versus Net)~~. The amendments to this update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of accounting (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

~~In May 2016, ASU 2016-12,~~ ~~Narrow-Scope Improvements and Practical Expedients~~. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

~~In December 2016, ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments to this update:~~

~~Clarify that guarantee fees within the scope of the~~ ~~Guarantees~~ ~~topic of the ASC (other than product or service warranties) are not within the scope of the~~ ~~Revenue from Contracts with Customers~~ ~~topic of the ASC. Entities should see the~~ ~~Derivatives and Hedging~~ ~~topic, for guarantees accounted for as derivatives.~~

~~Clarify guidance contained in the~~ ~~Other Assets and Deferred Costs—Contracts with Customers~~ subtopic of the ASC that when performing impairment testing an entity should (a) consider expected contract renewals and extensions and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount it expects to receive in the future.

~~Clarify the interaction of impairment testing with guidance in other ASC topics that impairment testing first should be performed on assets not within the scope of the~~ ~~Other Assets and Deferred Costs, Intangibles-Goodwill~~ ~~andOther~~ ~~or the~~ ~~Property, Plant, and Equipment~~ ~~topics of the ASC (such as assets within the~~ ~~Inventory~~ ~~topic of the ASC), then assets within the scope of the~~ ~~Other Assets and Deferred Costs~~ ~~topic of the ASC, then asset groups and reporting units within the scope of the~~ ~~Other Assets and Deferred Costs, Intangibles-Goodwill~~ ~~and~~ ~~Other~~ ~~and the~~ ~~Property, Plant, and Equipment~~ ~~topics of the ASC.~~

~~Clarify that all contracts within the scope of the~~ ~~Financial Services – Insurance~~ ~~topic are of the ASC excluded from the scope of the Revenue from Contracts with Customers topic.~~

Provide optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue and expands the information that is required to be disclosed when an entity applies one of the optional exemptions.

Clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.

~~Align the cost-capitalization guidance for advisors to both public funds and private funds in the~~ ~~Financial Services— Investment Companies—Other Expenses~~ ~~subtopic of the ASC.~~

In February 2017, ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) (“ASU 2017-05”). The amendments to this update clarify the scope of the ~~Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets~~ ~~subtopic of the ASC, and add guidance for partial sales of nonfinancial assets. ASU 2017-05 clarifies that:~~

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~~A financial asset is within the scope of the~~ ~~Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets~~ subtopic of the ASC if it meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets.

~~It excludes all businesses and nonprofit activities from the scope of the~~ ~~Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets~~ ~~subtopic of the ASC. Derecognition of all businesses and nonprofit activities should be accounted for in accordance with the~~ ~~Consolidation—Overall~~ ~~subtopic of the ASC.~~

~~An entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it.~~

~~An entity should allocate consideration to each distinct asset by applying the guidance in the~~ ~~Revenue from Contracts with Customers~~ ~~topic of the ASC on allocating the transaction price to performance obligations.~~

An entity must derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with the ~~Consolidations~~ ~~topic of the ASC and (2) transfers control of the asset in accordance with the~~ ~~Revenue from Contracts with Customers~~ topic of the ASC. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value.

The Company expects that upon adoption, the guidance currently applied by the Company to its Carried Interest may be affected. The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to the Company. The Company is currently evaluating whether the nature and substance of its Carried Interest arrangements are within the scope of ASU 2014-09, or whether such Carried Interest should be accounted for under the equity method of accounting under the ~~Investments~~ – ~~Equity Method and Joint Ventures~~ ~~topic of the ASC.~~

If the Company concludes the Carried Interest should be accounted for under the equity method of accounting, Carried Interest would be accounted for as a financial instrument and the amount recognized by the Company would not change significantly. The Company is still determining the potential additional effects of ASU 2014-09 on its financial statements for other arrangements that may be within the scope of ASU 2014-09.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities~~ (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

~~ASU 2016-01 requires that:~~

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) with readily determinable fair values will generally be measured at fair value through earnings.

When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses due to these changes will be reclassified from accumulated other comprehensive income to earnings if the financial liability is settled before maturity.

~~For financial instruments measured at amortized cost, public business entities will be required to use the exit price when measuring the fair value of financial instruments for disclosure purposes.~~

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Financial assets and financial liabilities shall be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or fair value) and form of financial asset (e.g., loans, securities).

~~Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost.~~

~~Entities will have to assess the realizability of a deferred tax asset related to a debt security classified as available for sale in combination with the entity’s other deferred tax assets.~~

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The adoption of ASU 2016-01 had no effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,, Leases (Topic 842)(“ (“ASU 2016-02”). ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential ~~impact~~effect that the adoption of ASU 2016-02 will have on its consolidated financial statements. As shown in Note ~~21 -~~14 –Commitments and Contingencies, the Company had approximately ~~$101.9~~$94.9 million in future minimum lease payment commitments as of March 31, ~~2017.~~2018. Were the Company to adopt ASU 2016-02 as of March 31, ~~2017,~~2018, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of March 31, ~~2017.~~2018. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

Note 25—Subsequent Events

~~In March 2016,~~Management has evaluated all events and transactions through the ~~FASB~~date the Company issued ~~ASU 2016-09,~~ ~~Compensation—Stock Compensation(Topic 718)~~: ~~Improvements to Employee Share-Based Payment Accounting~~ ~~(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:~~these consolidated financial statements. During this period:

~~Modifies~~All agreements to repurchase assets that matured between March 31, 2018 and the ~~accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits~~date of ~~dividends on share-based payment awards) will be recognized as income tax expense~~this Report were extended or benefit in the consolidated income statement. The tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current GAAP, excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated income statement in the period they reduce income taxes payable.renewed.

Changes the classification of excess tax benefits on the consolidated statement of cash flows. In the consolidated statement of cash flows, excess tax benefits will be classified along with other income tax cash flows as an operating activity. Under current GAAP, excess tax benefits are separated from other income tax cash flows and classified as a financing activity.

Changes the requirement to estimate the number of awards that are expected to vest. Under ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest as presently required or account for forfeitures when they occur. Under current GAAP, accruals of compensation cost are based on the number of awards that are expected to vest.

~~Changes the tax withholding requirements for share-based payment awards to qualify for equity accounting. The threshold to qualify for equity classification permits withholding up to the maximum~~

~~Table of Contents~~

statutory tax rates in the applicable jurisdictions. Under current GAAP, for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements.

Establishes GAAP for the classification of employee taxes paid when an employer withholds shares for tax withholding purposes. Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a financing activity. This guidance establishes GAAP related to the classification of withholding taxes in the statement of cash flows as there is no such guidance under current GAAP.

ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The adoption of ASU 2016-09 did not have a significant effect on the Company’s consolidated financial statements.

~~Note 24—Subsequent Events~~

~~On May 1, 2017, the Company acquired from a third party a bulk portfolio of Ginnie Mae MSRs with a UPB of approximately $4.3 billion.~~

On April 28, 2017, the Company, through PLS and PennyMac, entered into a Third Amended and Restated Master Repurchase Agreement with CSFB, as administrative agent to the buyers (“CSFB”), Credit Suisse AG, Cayman Islands Branch, as a buyer (“CS Cayman”), and Alpine Securitization LTD, as a buyer (the “CS Repurchase Agreement”), pursuant to which PLS finances (i) certain newly originated residential and small balance multifamily mortgage loans and recently acquired Ginnie Mae early buyout mortgage loans, and (ii) mortgage servicing advances made by PLS in connection with certain Ginnie Mae early buyout mortgage loans. The CS Repurchase Agreement, together with that certain master repurchase agreement dated as of December 19, 2016 with CSFB, as administrative agent, and CS Cayman, as purchaser (the “VFN Repurchase Agreement”), pursuant to which PLS sold to CS Cayman that certain Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, provides for a maximum combined purchase price of $1.5 billion, the amount of which was increased from $1.207 billion in connection with the amendment and restatement. The maximum combined committed purchase price under the CS Repurchase Agreement and the VFN Repurchase Agreement is $700 million, all of which is committed and available for purchases under the CS Repurchase Agreement to the extent not reduced by purchased amounts outstanding under the VFN Repurchase Agreement.

On May 3, 2017, the Company, through PLS and PennyMac, entered into an amendment (the “Repurchase Amendment”) to its Master Repurchase Agreement, dated as of December 4, 2015, by and among Barclays Bank PLC (“Barclays”), PLS and PNMAC (the “Barclays Repurchase Agreement”), pursuant to which PLS finances newly originated mortgage loans. Under the terms of the Repurchase Amendment, the maximum aggregate purchase price provided for in the Repurchase Agreement was temporarily increased from $300 million to $500 million, the available amount of which is reduced by any outstanding purchase amounts under the Participation Agreement (as defined below) and any borrowed amounts under a loan and security agreement by and among PLS, the Company and Barclays dated December 4, 2015. The period of the increase runs from May 15, 2017 to and including September 30, 2017.

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On May 3, 2017, the Company, through PLS, also entered into an amendment (the “Participation Amendment) to its Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 4, 2015, by and between Barclays and PLS (the “Participation Agreement”), pursuant to which PLS may sell to Barclays participation certificates, each of which represents an undivided beneficial ownership interest in a pool of mortgage loans that have been pooled with Fannie Mae or Freddie Mac and are pending securitization. Under the terms of the Participation Amendment, the maximum aggregate purchase price provided for in the Participation Agreement was temporarily increased from $300 million to $500 million, the available amount of which is reduced by any outstanding repurchase amounts under the Barclays Repurchase Agreement and any borrowed amounts under a loan and security agreement by and among PLS, the Company and Barclays dated December 4, 2015. The period of the increase runs from May 15, 2017 to and including September 30, 2017.

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

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. mortgage market. We believe that our operating capabilities, specialized expertise, access to 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 our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC 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 States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a ~~government-sponsored~~government sponsored entity (“GSE”). ItPLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”), and a servicer for the Home Affordable Modification ~~Program (“HAMP”).~~Program. We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), is a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment ~~Advisors~~Advisers Act of 1940, as amended. 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,~~PMT. PCM also manages PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment

~~Table of Contents~~

Company Act of 1940 (“Investment Company Act”), as amended, an affiliate of these ~~Funds~~funds and

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PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.” In 2017 through the quarter ended March 31, 2018, the Investment Funds sold or liquidated all of their remaining investments. We expect to complete liquidation of the Investment Funds during 2018.

We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.

The production segment performs mortgage loan origination, acquisition and sale activities.

The servicing segment performs mortgage loan servicing for both newly originated loans and loans we service for others, including for the Advised Entities.

The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement; managing correspondent production activities for PMT; and managing the acquired investments for the Advised Entities.

Results of Operations

Our results of operations are summarized below:

Quarter ended March 31,

2017

2016

(in thousands)

Revenues:

Net gains on mortgage loans held for sale at fair value

$
86,956

$
91,524

Mortgage loan origination fees

25,574

22,434

Fulfillment fees from PennyMac Mortgage Investment Trust

16,570

12,935

Net mortgage loan servicing fees

74,163

17,519

Management fees & Carried Interest

5,246

6,505

Net interest expense

(5,615)

(7,458)

Other

1,579

(58)

Total net revenue

204,473

143,401

Expenses

142,441

113,262

Provision for income taxes

7,646

3,596

Net income

$
54,386

$
26,543

Income before provision for income taxes by segment:

Mortgage banking:

Production

$
47,504

$
68,408

Servicing

13,416

(39,462)

Total mortgage banking

60,920

28,946

Investment management

1,112

1,144

Non-segment activities (1)

—

49

$
62,032

$
30,139

During the period:

Interest rate lock commitments issued

$
11,105,899

$
8,740,418

Fair value of mortgage loans purchased and originated for sale:

Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust

$
10,016,788

$
6,850,276

Mortgage loans originated through consumer direct channel

1,061,212

1,222,763

$
11,078,000

$
8,073,039

Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust

$
4,631,906

$
3,259,363

Unpaid principal balance of mortgage loan servicing portfolio:

Owned:

Mortgage servicing rights

$
135,349,287

$
112,836,878

Mortgage servicing liabilities

1,900,493

926,756

Mortgage loans held for sale

2,180,760

1,561,006

139,430,540

115,324,640

Subserviced for Advised Entities

63,452,796

49,581,955

$
202,883,336

$
164,906,595

Net assets of Advised Entities:

PennyMac Mortgage Investment Trust

$
1,458,590

$
1,414,503

Investment Funds

97,551

207,706

$
1,556,141

$
1,622,209

~~(1)~~

~~Relates to parent Company interest expense eliminated in consolidation.~~


	Quarter ended March 31,
	2018		2017
	(in thousands)
Revenues:
Net gains on mortgage loans held for sale at fair value	$	71,414	$	86,956
Mortgage loan origination fees		24,563		25,574
Fulfillment fees from PennyMac Mortgage Investment Trust		11,944		16,570
Net mortgage loan servicing fees		116,789		74,163
Management fees & Carried Interest		5,595		5,246
Net interest income (expense)		5,870		(5,615)
Other		2,026		1,579
Total net revenue		238,201		204,473
Expenses		165,205		142,441
Provision for income taxes		6,070		7,646
Net income	$	66,926	$	54,386

Income before provision for income taxes by segment:
Mortgage banking:
Production	$	17,170	$	47,504
Servicing		54,875		13,416
Total mortgage banking		72,045		60,920
Investment management		951		1,112
	$	72,996	$	62,032
During the quarter:
Interest rate lock commitments issued	$	10,857,635	$	11,105,899
Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees	$	4,225,631	$	4,631,906
At quarter end:
Unpaid principal balance of mortgage loan servicing portfolio:
Owned:
Mortgage servicing rights	$	173,487,165	$	135,349,287
Mortgage servicing liabilities		1,766,722		1,900,493
Mortgage loans held for sale		2,512,546		2,180,760
		177,766,433		139,430,540
Subserviced for Advised Entities		77,539,438		63,452,796
	$	255,305,871	$	202,883,336
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,542,258	$	1,458,590
Investment Funds		2,668		97,551
	$	1,544,926	$	1,556,141

Net income increased ~~$27.8~~$12.5 million during the quarter ended March 31, ~~2017~~2018 compared to the same period in ~~2016. These changes reflect the effects on our mortgage banking activities of higher market interest rates during the quarter ended March 31, 2017 compared to the same period in 2016.~~2017. The increase was primarily due to an increase in Net mortgage loan servicing fees ~~resulting from lower amortization~~,which reflects both growth in our servicing portfolio and ~~losses in change in~~improved fair value ~~of MSRs due to less adverse interest rate movements along with~~related adjustments, and an increase in ~~mortgage loan servicing fees from a larger servicing portfolio that was partially offset by an increase in expenses due to the larger scale of our business.~~net interest income, which reflect

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the effect of incentives we received for financing mortgage loans held for sale approved for satisfying certain customer relief characteristics. The increase was partially offset by decreases in Net gains on mortgage loans held for sale at fair value, Fulfillment fees from PennyMac Mortgage Investment Trust and Mortgage loan origination fees.

Net Gains on Mortgage Loans Held for Sale at Fair Value

Most of our mortgage loan production ~~is centered in government-insured or guaranteed mortgage loans. Over recent periods, the margins on correspondent~~consists of 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.

Wethat we source ~~the majority of our government-insured or guaranteed mortgage loan production~~primarily through PMT. PMT is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. We purchase ~~the government-insured or guaranteed~~such mortgage loans that PMT acquires through its correspondent ~~lending~~production activities and pay PMT a sourcing fee ranging from two to three and one-half basis points on the UPB of such mortgage loans.

During the quarter ended March 31, ~~2017,~~2018, we recognized Net gains on mortgage loans held for sale at fair value totaling ~~$87.0~~$71.4 million, a decrease of ~~$4.6~~$15.5 million ~~from~~compared to the same period in ~~2016.~~2017. The decrease was primarily due to decreases in profit margins reflecting the generally rising interest rates in the mortgage market, which has a ~~decrease~~negative influence on demand for mortgage lending. Reduced demand negatively influences profit margins by causing increased price competition in ~~our profit margin on~~the acquisition and origination of mortgage ~~loan production partially offset by growth in our mortgage loan production volume.~~loans.

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


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
From non affiliates:
Cash (loss) gain:
From non-affiliates:
Cash loss:
Mortgage loans	$	(58,681)	$	21,401	$	(181,801)	$	(58,681)
Hedging activities		1,107		(72,541)		104,396		1,107
		(57,574)		(51,140)		(77,405)		(57,574)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		132,143		95,373		141,873		132,143
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(1,402)		(2,082)		(1,492)		(1,402)
Reduction in liability due to change in estimate		872		—		1,113		872
Change in fair value of mortgage loans and derivative financial instruments outstanding at period end:
Change in fair value of mortgage loans and derivative financial instruments outstanding at quarter end:
Interest rate lock commitments		6,615		28,112		(7,376)		6,615
Mortgage loans		7,396		19,848		18,964		7,396
Hedging derivatives		601		3,365		(16,649)		601
		88,651		93,476		59,028		88,651
From PennyMac Mortgage Investment Trust - Recapture payable		(1,695)		(1,952)
From PennyMac Mortgage Investment Trust						12,386		(1,695)
	$	86,956	$	91,524	$	71,414	$	86,956
During the period:
Unpaid principal balance of mortgage loans sold	$	11,456,809	$	7,615,057
During the quarter:
Interest rate lock commitments issued:
Conventional mortgage loans	$	668,585	$	547,317	$	1,102,197	$	668,585
Government-insured or guaranteed mortgage loans		10,437,314		8,193,101		9,755,438		10,437,314
	$	11,105,899	$	8,740,418	$	10,857,635	$	11,105,899
At period end:
At quarter end:
Mortgage loans held for sale at fair value	$	2,277,751	$	1,653,963	$	2,584,236	$	2,277,751
Commitments to fund and purchase mortgage loans	$	3,727,441	$	3,477,022	$	4,275,126	$	3,727,441

Provision for Losses on Representations and Warranties

We record our estimate of the losses that we expect to incur in the future as a result of claims against us made in connection with the representations and warranties ~~we provide~~provided to the purchasers and insurers of the mortgage loans we

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~~sell~~ sold in our Net gains on sale of mortgage loans held for sale at fair value. Our agreements with the purchasers and insurers include representations and warranties related to the mortgage loans we sell to purchasers. The representations and

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warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage 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 purchaser or ~~insurer against future credit losses.~~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 originators that sold such mortgage loans to us 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 seller.

The method ~~we use~~used to estimate our losses on representations and warranties is a function of our estimate of future defaults, mortgage loan repurchase rates, the severity of loss in the event of ~~defaults~~default, if applicable, and the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time mortgage loans are sold and review our liability estimate on a periodic basis.

We recorded provisions for losses under representations and warranties relating to current mortgage loan sales as a component of Net gains on mortgage loans held for sale at fair value totaling ~~$530,000 during the quarter ended March 31, 2017 compared to $2.1~~$1.5 million during the quarter ended March 31, ~~2016. The decrease~~2018 compared to $1.4 million during the same period in ~~provision for losses under representations and warranties~~2017. We also recorded reductions in the liability of $1.1 million during the quarter ended March 31, ~~2017~~2018 compared to $872,000 during the same period in ~~2016 was primarily due to an $872,000 reduction~~2017. The reductions in the liability ~~estimate resulting~~resulted from ~~changes in estimates~~reductions relating to mortgage loans meeting previously announced limitations on pursuit by the Agencies of claims on mortgage loans with certain performance ~~histories, partially offset by increased loan sale volume.~~histories.

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


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
During the period:
During the quarter:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of period	$	5,599	$	3,470
Mortgage loans indemnified by PFSI at beginning of quarter					$	7,579	$	5,599
New indemnifications		689		139		2,632		689
Indemnified mortgage loans repaid or refinanced		—		(69)
Mortgage loans indemnified by PFSI at end of period	$	6,288	$	3,540
Less:
Indemnified mortgage loans sold, repaid or refinanced						210		—
Mortgage loans indemnified by PFSI at end of quarter					$	10,001	$	6,288
Repurchase activity
Total mortgage loans repurchased by PFSI	$	5,303	$	6,913	$	6,313	$	5,303
Less:
Mortgage loans repurchased by correspondent lenders		2,583		3,265		6,646		2,583
Mortgage loans repaid by borrowers or resold with defects resolved		3,219		327		116		3,219
Net mortgage loans (repaid or resold) repurchased by PFSI with losses chargeable to liability for representations and warranties	$	(499)	$	3,321
Net mortgage loans resold or repaid with losses chargeable to liability for representations and warranties					$	(449)	$	(499)
Net losses charged to liability for representations and warranties	$	161	$	484	$	3	$	161

At period end:
At quarter end:
Unpaid principal balance of mortgage loans subject to representations and warranties	$	98,569,346	$	63,806,614	$	127,056,220	$	98,569,346
Liability for representations and warranties	$	19,436	$	22,209	$	20,429	$	19,436

During the quarter ended March 31, ~~2017,~~2018, we repurchased mortgage loans totaling ~~$5.3~~$6.3 million in UPB. We recorded losses of ~~$161,000~~$3,000 net of recoveries from correspondent sellers as a result of these ~~repurchases.~~repurchases during the quarter ended March 31, 2018. 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 that the level of repurchase activity may 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,

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purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the

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underlying mortgage loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of mortgage loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties.

Other mortgage loan production-related revenues

Mortgage loan origination fees ~~increased $3.1~~decreased $1.0 million during the quarter ended March 31, ~~2017,~~2018 compared to the same period in ~~2016~~2017. The decrease was primarily due to ~~growth~~a decrease in ~~the~~ volume of ~~correspondent purchases in our loan production activities.~~mortgage loans we produced.

Fulfillment fees from PMT ~~which~~ represent fees we collect for services we perform on behalf of PMT in connection with ~~its~~the acquisition, packaging and sale of mortgage ~~loans,~~loans. The fulfillment fees are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT.

Fulfillment fees ~~increased $3.6~~decreased $4.6 million during the quarter ended March 31, ~~2017~~2018 compared to the same period in ~~2016.~~2017. The ~~effect of the increase in volume of mortgage loans we fulfilled for PMT was partially offset by~~decrease is primarily due to a ~~reduction in the average~~lower fulfillment fee rate ~~we charged during 2017 as compared~~pursuant to ~~2016.~~an amendment to our mortgage banking services agreement with PMT.

Summarized below are our fulfillment fees:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Fulfillment fee revenue	$	16,570	$	12,935	$	11,944	$	16,570
Unpaid principal balance of mortgage loans fulfilled	$	4,631,906	$	3,259,363
Unpaid principal balance of mortgage loans fulfilled subject to fulfillment fees					$	4,225,631	$	4,631,906
Average fulfillment fee rate (in basis points)		36		40		28		36

Net mortgage loan servicing fees

~~Our~~Following is a summary of our net mortgage loan servicing ~~fees are summarized below:~~fees:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates	$	106,467	$	91,327	$	135,483	$	106,467
From PennyMac Mortgage Investment Trust		10,486		11,453		11,019		10,486
From Investment Funds		496		701		—		496
Ancillary and other fees		11,866		11,452		14,171		11,866
		129,315		114,933		160,673		129,315
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing		(55,152)		(97,414)
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing net of hedging results						(43,884)		(55,152)
Net mortgage loan servicing fees	$	74,163	$	17,519	$	116,789	$	74,163
Average mortgage loan servicing portfolio	$	198,646,419	$	162,734,071	$	249,833,285	$	198,646,419

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



	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Amortization and realization of cash flows	$	(48,460)	$	(46,675)	$	(61,176)	$	(48,460)
Other changes, in fair value of, and reversal of (provision for) impairment of mortgage servicing rights and mortgage servicing liabilities		12,701		(128,908)
Other changes in fair value of, and provision for impairment of, mortgage servicing rights and mortgage servicing liabilities						127,806		12,701
Change in fair value of excess servicing spread		2,773		19,449		(6,921)		2,773
Hedging results		(22,166)		58,720		(103,593)		(22,166)
Total fair value adjustments, net of hedging results		(6,692)		(50,739)		17,292		(6,692)
Total amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread	$	(55,152)	$	(97,414)	$	(43,884)	$	(55,152)
Average mortgage servicing rights balances:
Carried at fair value					$	2,265,744	$	556,658
Carried at lower of amortized cost or fair value	$	891,887	$	741,686		—		891,887
Carried at fair value		556,658		618,992
	$	1,448,545	$	1,360,678	$	2,265,744	$	1,448,545
Average mortgage servicing liabilities	$	15,155	$	3,628	$	12,063	$	15,155

Mortgage servicing rights at period end:
Mortgage servicing rights at quarter end:
Carried at fair value					$	2,354,489	$	506,916
Carried at lower of amortized cost or fair value	$	1,218,145	$	742,679		—		1,218,145
Carried at fair value		506,916		594,403
	$	1,725,061	$	1,337,082	$	2,354,489	$	1,725,061
Mortgage servicing liabilities at period end	$	15,994	$	6,747
Mortgage servicing liabilities at quarter end					$	12,063	$	15,994

Following is a summary of our mortgage loan servicing ~~portfolio in UPB:~~portfolio:



	March 31,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Mortgage loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	97,505,384	$	89,516,155	$	125,643,312	$	119,673,403
Acquired		37,843,903		39,660,951		47,843,853		46,575,834
		135,349,287		129,177,106		173,487,165		166,249,237
Mortgage servicing liabilities		1,900,493		2,074,896		1,766,722		1,620,609
Mortgage loans held for sale		2,180,760		2,101,283		2,512,546		2,998,377
		139,430,540		133,353,285		177,766,433		170,868,223
Subserviced for Advised Entities		61,144,328		58,327,748		76,636,300		73,651,608
Total prime servicing		200,574,868		191,681,033		254,402,733		244,519,831
Subserviced– Special servicing for Advised Entities		2,308,468		2,558,969
Special servicing – Subserviced for Advised Entities						903,138		1,328,660
Total mortgage loans serviced	$	202,883,336	$	194,240,002	$	255,305,871	$	245,848,491

Net mortgage loan servicing fees increased ~~$56.6~~$42.6 million during the quarter ended March 31, ~~2017,~~2018, compared to the same period in ~~2016.~~2017. The increase was due to a combination of increased mortgage loan servicing fees resulting from growth in our mortgage loan servicing portfolio and a net gain in fair value of MSRs, MSLs and ESS, net of hedging results, reflecting the effect of rising interest rates during the quarter ended March 31, 2018.

Mortgage loan servicing fees increased $31.4 million during the quarter ended March 31, 2018, compared to the same period in 2017 reflecting increases in our average servicing portfolio of 26% for the quarter ended March 31, 2018 compared to the same period in 2017. The decrease of ~~$42.3~~$11.3 million in amortization, impairment and MSR, MSL and ESS valuation adjustments ~~reflecting the effect of a less adverse change in interest rates~~ during the quarter ended March 31, ~~2017,~~2018 compared to the same ~~period~~periods in ~~2016, and a $14.4 million~~ ~~increase in servicing fees resulting from growth in our mortgage loan servicing portfolio from~~2017 reflect the first quarter of 2016 to the first quarter of 2017. The decrease in amortization and valuation adjustments reflects the change in the interest rate environment from 2016 to 2017. During the first quarter of 2016, interest rates decreased significantly, whereas during the first quarter of 2017, remained fairly stable. Decreasing interest rates make mortgage refinancing more attractive, increasing expectations of prepayment activities which decrease MSR fair values, causing fair value losses and impairment.

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effect of generally higher interest rates in the market during the quarter ended March 31, 2018. Higher interest rates discourage refinancings which extend the expected life of the servicing asset, thereby contributing to a smaller decline in the fair value of MSRs.

Management fees and Carried Interest

Management fees and Carried Interest are summarized below:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Management Fees:
PennyMac Mortgage Investment Trust:
Base management	$	5,008	$	5,352	$	5,696	$	5,008
Performance incentive		—		—		—		—
		5,008		5,352		5,696		5,008
Investment Funds		366		560		79		366
Total management fees		5,374		5,912		5,775		5,374
Carried Interest		(128)		593		(180)		(128)
Total management fees and Carried Interest	$	5,246	$	6,505	$	5,595	$	5,246

Net assets of Advised Entities at period end:
Net assets of Advised Entities at quarter end:
PennyMac Mortgage Investment Trust	$	1,458,590	$	1,414,503	$	1,542,258	$	1,458,590
Investment Funds		97,551		207,706		2,668		97,551
	$	1,556,141	$	1,622,209	$	1,544,926	$	1,556,141

Management fees from PMT ~~decreased $344,000~~increased $688,000 during the quarter ended March 31, ~~2017,~~2018 compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was ~~primarily~~ due to ~~a decrease~~increases in PMT’s average shareholders’ equity, upon which its base management ~~fee is based.~~fees are calculated. The increase of PMT’s average shareholders’ equity during the quarter ended March 31, 2018 compared to the same period in 2017 was primarily due to the issuance of additional equity by PMT in the form of preferred shares in July 2017.

Management fees from the Investment Funds decreased ~~$194,000~~$287,000 during the quarter ended March 31, ~~2017,~~2018, compared to the same period in ~~2016.~~2017. The ~~decrease~~reduction of management fees was ~~due to a reduction in~~anticipated as the Investment ~~Funds’ net asset values as a result~~Funds sold or liquidated all of ~~continued~~their investment assets in 2017 through the quarter ended March 31, 2018 and distributed most of the sale proceeds to the funds’ investors. We expect to complete liquidation of the Investment Funds and make final distributions to the Investment Funds’ investors ~~following the end of the Investment Funds’ commitment period.~~

~~Carried Interest income from Investment Funds decreased $721,000~~ during the quarter ended March 31, 2017 compared to the same period in 2016. The decrease is due to a decline in the performance of the Funds compared to the same period in 2016, and to a shrinking investment base on which returns are generated.2018.

Other revenues

Net interest ~~expense decreased $1.8~~income increased $11.5 million during the quarter ended March 31, ~~2017,~~2018 compared to the same period in ~~2016.~~2017. The ~~decrease~~increase in net interest income is primarily due to ~~an increase in interest income on~~recognition of incentives that we received relating to our financing of certain mortgage loans ~~held~~satisfying certain consumer relief characteristics. In September 2017, we entered into a master repurchase agreement that provides us with incentives to finance mortgage loans approved for ~~sale~~satisfying certain consumer relief characteristics as provided in the agreement. We recorded $10.2 million of such incentives as a ~~result~~reduction of Interest expense for the quarter ended March 31, 2018. The master repurchase agreement has an ~~increase in average mortgage loan inventory and an increase in~~initial term of six months extendable for three additional six-month terms at the ~~placement fees we receive relating to~~option of the ~~custodial funds~~lender. The lender extended the master repurchase agreement on April 18, 2018. There is no assurance that ~~we manage, partially offset by an increase in interest expense incurred to fund~~ the ~~growth in our average inventory~~lender will exercise the remaining extension options upon the maturity of ~~mortgage loans held for sale and to finance our MSRs.~~this agreement.

Change in fair value of investment in and dividends received from PMT, increased ~~$225,000~~$43,000 during the quarter ended March 31, ~~2017,~~2018, compared to the same period in ~~2016 due to improved~~2017. The change reflects the increase in share price ~~performance in~~of our investment in PMT. We held 75,000 common shares of PMT during each of the periods ended March 31, ~~2017~~2018 and ~~2016,~~2017, with fair ~~value~~values of ~~$1.3~~$1.4 million and ~~$1.0~~$1.3 million, respectively, at ~~the end of each period.~~March 31, 2018 and 2017.

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Expenses

Compensation

Our compensation expense is summarized below:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Salaries and wages	$	56,903	$	48,113	$	63,380	$	56,903
Incentive compensation		11,528		6,330		19,576		11,528
Taxes and benefits		11,284		8,882		12,886		11,284
Stock and unit-based compensation		5,525		4,973		6,171		5,525
	$	85,240	$	68,298	$	102,013	$	85,240
Head count:
Average		2,956		2,590		3,233		2,956
Period end		2,864		2,617
Quarter end						3,241		2,864

Compensation expense increased ~~$16.9~~$16.8 million during the quarter ended March 31, ~~2017~~2018 compared to the same period in ~~2016.~~2017. The increase ~~in compensation expense~~ was primarily due to an increase in incentive compensation reflecting our expectation of improved results of operations during 2018, as well as an increase in salaries and wages due to increased average head count resulting from the growth in our mortgage banking activities. ~~Incentive compensation increased primarily due to higher attainment of profitability targets~~

Servicing

Servicing expense decreased $544,000 during the quarter ended March 31, ~~2017 compared to 2016.~~

~~Servicing~~

~~Servicing expense increased $6.0 million during the quarter ended March 31, 2017~~2018 compared to the same period in ~~2016.~~ 2017. The ~~increase~~decrease was primarily due to ~~increased early buyouts~~a decrease in provision for servicing advance losses reflecting improved credit performance in our portfolio of ~~delinquent~~MSRs backed by government-insured or guaranteed mortgage loans, ~~from Ginnie Mae guaranteed pools for the quarter ended March 31, 2017 as compared~~partially offset by an increase in other servicing expenses due to ~~the same period ended~~growth in ~~2016.~~ ~~The early buyout program reduces the ultimate cost of servicing such~~our mortgage loan pools when we purchase and either sell the defaulted mortgage loans to third-party investors or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rate at which we would otherwise be required to advance. Such purchases accelerate loss recognition when the mortgage loans are purchased. However, anticipated losses relating to such servicing advances are contemplated in the valuation of our MSRs and therefore the early buyout of delinquent mortgage loans included in Ginnie Mae guaranteed pools has an offsetting positive effect on our MSR valuation.portfolio.

Technology

Technology expense increased ~~$4.5~~$3.3 million during the quarter ended March 31, ~~2017,~~2018 compared to the same period in ~~2016~~2017 primarily due to our continued investment in loan production and servicing infrastructure.

Occupancy and equipment

Occupancy and equipment expenses increased $1.3 million during the quarter ended March 31, 2018 compared to the same period in 2017. The increase was primarily attributable to expansion of our facilities made to accommodate our growth.

Marketing

Marketing expenses increased $425,000 during the year ended March 31, 2018 compared to the same period in 2017. The increase was primarily due to increased outsourced loan solicitation calling campaigns.

Expenses Allocated to PMT

~~We are reimbursed by~~ PMT reimburses us for other expenses, including common overhead and personnel expenses ~~we have~~ incurred on ~~PMT’s~~its behalf by us, in accordance with the terms of our management agreement with PMT. We ~~present~~adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”) using the ~~expense amounts~~modified retrospective method effective January 1, 2018. Adoption of the ASU using the modified retrospective method required us to include those expenses in ~~the consolidated statements of~~ Other income ~~net of these allocations.~~starting January 1, 2018.

~~Common overhead expense amounts allocated to PMT during the periods ended March 31, 2017 and 2016 are summarized below:~~

Quarter ended March 31,

2017

2016

(in thousands)

Technology

$
457

$
1,145

Depreciation and amortization

408

399

Occupancy

379

573

Other

190

444

Total expenses

$
1,434

$
2,561

6665

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The expense amounts presented in our income statement are net of these allocations during 2017 and a component of Other revenue during 2018. Common overhead and personnel expense amounts allocated to PMT are summarized below:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Technology	$	220	$	457
Occupancy and equipment		589		787
Compensation		120		—
Other		192		190
Total expenses	$	1,121	$	1,434

Provision for Income Taxes

Our effective tax ~~rates were 12.3%~~rate was 8.3% during the quarter ended March 31 ~~2017,~~2018, compared to ~~11.9%~~12.3% during the same period in ~~2016.~~2017. The lower effective tax rate for 2018 reflects the effect of a reduction in the federal statutory rate from 35% to 21% under the Tax Act of 2017. 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 noncontrolling interest unitholders convert their ownership units into our shares and our ownership in PennyMac is increased through vesting of equity awards, 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,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
ASSETS
Cash and short-term investments	$	189,101	$	185,331	$	243,753	$	207,805
Mortgage loans held for sale at fair value		2,277,751		2,172,815		2,584,236		3,099,103
Servicing advances, net		317,513		348,306		284,145		318,066
Investments in and advances to affiliates		173,085		168,863		172,106		172,869
Carried Interest due from Investment Funds		70,778		70,906		538		8,552
Mortgage servicing rights		1,725,061		1,627,672		2,354,489		2,119,588
Mortgage loans eligible for repurchase		318,378		382,268		1,018,488		1,208,195
Other		179,710		177,741		245,136		233,915
Total assets	$	5,251,377	$	5,133,902	$	6,902,891	$	7,368,093

LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings	$	2,744,349	$	2,580,906	$	3,481,182	$	3,821,409
Payable to affiliates		539,295		555,052		400,052		419,970
Liability for mortgage loans eligible for repurchase		318,378		382,268		1,018,488		1,208,195
Other		191,760		216,320		208,970		198,845
Total liabilities		3,793,782		3,734,546		5,108,692		5,648,419
Stockholders' equity		1,457,595		1,399,356		1,794,199		1,719,674
Total liabilities and stockholders' equity	$	5,251,377	$	5,133,902	$	6,902,891	$	7,368,093

Total assets ~~increased $117.5~~decreased $465.2 million from ~~$5.1~~$7.4 billion at December 31, ~~2016~~2017 to ~~$5.3~~$6.9 billion at March 31, ~~2017.~~2018. The ~~increase~~decrease was primarily due to ~~an increase~~a decrease of ~~$104.9~~$514.9 million in mortgage loans held for sale at fair value resulting from ~~growth~~a reduction in ~~our~~ mortgage ~~loan production~~loans held for sale and a decrease of $189.7 million in mortgage loans eligible for repurchase, partially offset by an increase of ~~$97.4~~$234.9 million in our investment in MSRs reflecting continued additions from our mortgage loan production activities ~~partially offset by a $63.9~~and servicing portfolio acquisitions and an increase of $35.9 million ~~decrease~~ in ~~mortgage loans eligible for repurchase, reflecting increased level of early buyout activities,~~cash and ~~a $30.8 million decrease in servicing advances due to normal seasonal fluctuations.~~short-term investments.

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Total liabilities ~~increased~~decreased by ~~$59.2~~$539.7 million from ~~$3.7~~$5.6 billion as of December 31, ~~2016~~2017 to ~~$3.8~~$5.1 billion as of March 31, ~~2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~an increase~~a decrease in borrowings required to ~~fund growth in our~~finance a smaller inventory of mortgage loans held for sale at ~~fair value and~~March 31, 2018 as compared to ~~finance our MSRs.~~December 31, 2017.

Cash Flows

Our cash flows for the quarters ended March 31, ~~2017~~2018 and ~~2016~~2017 are summarized below:


	Quarter ended March 31,						Quarter ended March 31,
	2017		2016		Change		2018		2017		Change
	(in thousands)						(in thousands)
Operating	$	(111,345)	$	(516,862)	$	405,517	$	537,392	$	(111,292)	$	648,684
Investing		(60,354)		41,755		(102,109)		(81,263)		(60,354)		(20,909)
Financing		145,099		486,195		(341,096)		(355,981)		145,099		(501,080)
Net (decrease) increase in cash	$	(26,600)	$	11,088	$	(37,688)
Net increase (decrease) in cash and restricted cash							$	100,148	$	(26,547)	$	126,695

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Our cash flows resulted in a net ~~decrease~~increase in cash and restricted cash of ~~$26.6~~$100.1 million during the quarter ended March 31, ~~2017~~2018 as discussed below.

Operating activities

Net cash provided by operating activities totaled $537.4 million during the quarter ended March 31, 2018 and net cash used in operating activities totaled $111.3 million ~~and $516.9 million~~ during the ~~quarters ended March 31, 2017 and 2016, respectively,~~same period in 2017. Our cash flows from operating activities are primarily ~~due to~~influenced by changes in the ~~growth~~levels of our inventory of mortgage loans ~~held for sale at fair value.~~as shown below:


	Quarter ended March 31,
	2018		2017
	(in thousands)
Cash flows from:
Mortgage loans held for sale at fair value	$	473,727	$	(138,588)
Other operating sources		63,665		27,296
	$	537,392	$	(111,292)

Investing activities

Net cash used in investing activities during the quarter ended March 31, 2018 totaled $81.3 million primarily due to a $128.1 million net use of cash in net settlement of derivative financial instruments used to hedge our investment in MSRs and purchases of MSRs totaling $27.6 million, partially offset by a $64.2 million decrease in short-term investments. Net cash used in investing activities during the quarter ended March 31, 2017 totaled $60.4 million primarily due to a $30.4 million increase in short-term investments and $20.5 million in net settlements of derivative financial instruments used to hedge our investment in ~~our hedging of~~ MSRs.

Financing activities

Net cash ~~provided by investing~~used in financing activities totaled $356.0 million during the quarter ended March 31, ~~2016 totaled $41.8 million~~2018, primarily due to ~~$38.6 million in~~ net ~~settlements~~repurchases of ~~derivative financial instruments received~~assets sold under agreements to repurchase, reflecting a reduction in our ~~hedging~~financing of ~~MSRs and to an $18.1 million reduction in short-term investments.~~

~~Financing activities~~

mortgage loans held for sale. Net cash provided by financing activities totaled $145.1 million ~~and $486.2 million~~ during the ~~quarters~~quarter ended March 31, 2017, ~~and 2016, respectively,~~ primarily to finance the growth in our inventory of mortgage loans held for sale at fair value and our investments in 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 and ~~tax distributions to noncontrolling interest holders)~~on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash

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flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or ~~additional~~ equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

Our current ~~leverage~~borrowing 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 assets ~~sold~~ under agreements to repurchase, sales of mortgage loan participation certificates, ESS, notes payable (including a revolving credit ~~agreement, ESS~~agreement) and a capital lease. ~~While the GMSR term note, ESS and the capital lease have intermediate to long-term maturities, most~~All of our borrowings other than ESS, term notes payable and our obligation under capital lease have short-term maturities and provide for terms of approximately one year. ~~We will continue to finance most of our assets on a short-term basis until longer-term financing becomes more available.~~Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of ~~their~~ maturity ~~dates~~ in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average outstanding, maximum and ending balances:


	Quarter ended March 31,				Quarter ended March 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Repurchase agreements outstanding:
Average balance	$	1,516,480	$	1,039,573	$	1,643,443	$	1,516,480
Maximum daily balance	$	2,093,542	$	1,688,605	$	2,380,121	$	2,093,542
Balance at end of period	$	2,036,366	$	1,658,728
Balance at quarter end					$	1,813,463	$	2,036,366

The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants ~~specific to PLS~~ currently include the following:

positive net income during each calendar quarter;

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a minimum in unrestricted cash and cash equivalents of $40 million;

a minimum tangible net worth of $500 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 that are similar to those being financed under ~~one~~certain of our existing secured financing agreements.

With respect to servicing performed for PMT, PLS is also subject to certain covenants under ~~its~~PMT’s debt agreements. Covenants ~~of PLS~~ in PMT’s debt agreements are ~~at least equal to,~~equally, or sometimes less, restrictive than the covenants described above.

In addition to the covenants noted above, ~~our~~PennyMac’s revolving credit agreement ~~(classified as a note payable)~~ and capital lease contain additional financial covenants ~~specific to PennyMac~~ including, but not limited to,

a minimum of cash and carried interest equal to the amount borrowed under the revolving credit agreement;

a minimum of unrestricted cash and cash equivalents equal to $40 million;

a minimum of tangible net worth of $500 million;

a minimum asset coverage ratio (the ratio of the total asset amount to the total commitment) of 2.5; and

a maximum ratio of total indebtedness to tangible net worth ratio of 5:1.

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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.

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 are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers in the case of ~~FHFA,~~Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, ~~in the case of Ginnie Mae,~~ as summarized below:

FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

FHFA net worth requirement is a minimum net worth of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%;

Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

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Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations.

We believe that we are currently in compliance with the applicable Agency requirements.

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

Our Board approved stock repurchase program allows us to repurchase up to $50 million of our Class A common stock using open market stock purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of Class A common stock. We intend to finance the stock repurchase program through cash on hand.

We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions 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.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of March 31, ~~2017,~~2018, we have not entered into any off-balance sheet ~~arrangements or guarantees.~~arrangements.

Contractual Obligations

As of March 31, ~~2017,~~2018 we had contractual obligations aggregating ~~$7.1~~$8.5 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable ~~agreement, and anticipated payments related to excess servicing spread financing.~~agreement. We also lease our office facilities and license certain software to support our loan servicing operations.

All agreements to repurchase assets and mortgage loan participation purchase and sale agreements that matured between March 31, ~~2017~~2018 and the date of this Report have been renewed, extended or repaid and are described in Note ~~12—~~11—Borrowings in the accompanying consolidated financial statements.

Payment obligations under these agreements are summarized below:

Payments due by period

Less than

1-3

3-5

More than

Contractual obligations

Total

1 year

years

years

5 years


(in thousands)

Commitments to purchase and originate mortgage loans

$
3,727,441

$
3,727,441

$
—

$
—

$
—

Assets sold under agreements to repurchase

2,036,366

2,036,366

—

—

—

Mortgage loan participation and sale agreements

241,723

241,723

—

—

—

Notes payable

441,302

41,302

400,000

—

—

Obligations under capital lease

31,178

13,609

17,569

—

—

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust (1)

277,484

—

—

—

277,484

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

78,712

7,299

12,855

10,433

48,125

Anticipated interest payments related to excess servicing spread financing at fair value

112,004

16,729

27,180

20,480

47,615

Software licenses (2)

37,781

14,625

23,156

—

—

Office leases

101,875

10,782

27,062

24,535

39,496

Total

$
7,085,866

$
6,109,876

$
507,822

$
55,448

$
412,720


	Payments due by year
			Less than		1-3		3-5		More than
Contractual obligations	Total		1 year		years		years		5 years
	(in thousands)
Commitments to purchase and originate mortgage loans	$	4,275,126	$	4,275,126	$	—	$	—	$	—
Short-term debt		2,324,046		2,324,046		—		—		—
Long-term debt		1,402,969		12,101		4,334		1,150,000		236,534
Interest on long-term debt		356,851		71,007		194,466		54,555		36,823
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		46,037		—		12,763		7,681		25,593
Software licenses (1)		30,102		17,250		12,852		—		—
Office leases		94,916		14,029		28,990		21,886		30,011
Total	$	8,530,047	$	6,713,559	$	253,405	$	1,234,122	$	328,961

(1)

~~The ESS financing obligation payable to PMT does not have a stated contractual maturity date and will pay down as the underlying MSRs receive the excess servicing fee due to PMT.~~

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~~(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 ~~$1.3~~$1.6 million per month. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately ~~1.0~~1.3 million at March 31, ~~2017.~~2018. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended March 31, ~~2017,~~2018, software license fees totaled ~~$5.0~~$6.2 million.

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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 March 31, ~~2017:~~2018:

Weighted average

maturity of

advances under

Counterparty

Amount at risk

repurchase agreement

Facility Maturity

Amount at risk

repurchase agreement

Facility Maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC(1)

87,945

April 28, 2017

266,554

April 27, 2018

Credit Suisse First Boston Mortgage Capital LLC(2)

303,009

December 19, 2017

188,287

April 21, 2018

April 27, 2018

Deutsche Bank AG

99,415

June 18, 2018

September 30, 2018

Bank of America, N.A.

47,347

May 26, 2017

19,246

May 6, 2018

May 25, 2018

JP Morgan Chase Bank, N.A.

7,313

May 21, 2018

October 12, 2018

Morgan Stanley Bank, N.A.

22,255

May 20, 2017

August 25, 2017

5,823

June 15, 2018

August 24, 2018

JP Morgan Chase Bank, N.A.

17,060

May 22, 2017

August 18, 2017

Royal Bank of Canada

1,907

June 13, 2018

June 29, 2018

BNP Paribas

615

May 14, 2018

November 16, 2018

Citibank, N.A.

12,329

June 17, 2017

March 2, 2018

277

April 26, 2018

May 1, 2018

Barclays Bank PLC

96,522

June 17, 2017

December 1, 2017

Royal Bank of Canada

4,011

June 12, 2017

September 18, 2017

(1)

The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase.

(2)

The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase.

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 assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, ~~two~~three notes payable, ESS and a capital lease. The borrower under each of these facilities is PLS with the exception of the ~~revolving credit agreement,~~Credit Agreement, which is classified as a note payable, and the capital lease, in each case where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.

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 March 31, ~~2017,~~2018, we were in compliance in all material respects with these covenants.

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.

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The borrowings have maturities as follows:


	Outstanding		Total		Committed			Outstanding		Total		Committed
Lender	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)
	(dollar amounts in thousands)							(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC	$	650,127	$	1,093,000	$	293,000	April 27, 2018	$	518,639	$	1,100,000	$	300,000	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC (3)	$	232,000	$	407,000	$	407,000	December 19, 2017	$	100,000	$	400,000	$	400,000	April 27, 2018
Deutsche Bank AG								$	720,504	$	750,000	$	—	November 9, 2018
Bank of America, N.A.	$	444,148	$	500,000	$	225,000	May 26, 2017	$	246,356	$	500,000	$	225,000	May 25, 2018
JPMorgan Chase Bank, N.A.								$	93,179	$	500,000	$	50,000	October 12, 2018
Morgan Stanley Bank, N.A.	$	280,735	$	300,000	$	175,000	August 25, 2017	$	86,880	$	500,000	$	175,000	August 24, 2018
JP Morgan Chase Bank, N.A.	$	197,692	$	200,000	$	50,000	August 18, 2017
Royal Bank of Canada								$	29,489	$	135,000	$	40,000	June 29, 2018
BNP Paribas								$	12,463	$	200,000	$	100,000	November 16, 2018
Citibank, N.A.	$	127,980	$	400,000	$	200,000	March 2, 2018	$	5,953	$	700,000	$	275,000	May 1, 2018
Barclays Bank PLC (4)	$	54,203	$	220,000	$	—	December 1, 2017
Royal Bank of Canada	$	49,481	$	135,000	$	75,000	September 18, 2017
Mortgage loan participation and sale agreements
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	241,723	$	250,000	$	—	May 26, 2017	$	510,583	$	550,000	$	—	May 25, 2018
JP Morgan Chase Bank, N.A.	$	—		500,000	$	—	October 31, 2017
Notes payable
GMSR 2017-GT Term Note	$	400,000	$	400,000	$	—	February 25, 2020
Barclays Bank PLC (4)	$	41,302	$	80,000	$	80,000	December 1, 2017
GMSR 2017-GT2 Term Note								$	500,000	$	500,000	$	—	August 25, 2022
GMSR 2018-GT1 Term Note								$	650,000	$	650,000	$	—	February 25, 2023
Credit Suisse AG	$	—	$	150,000	$	150,000	November 17, 2017	$	—	$	150,000	$	150,000	November 16, 2018
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	31,178	$	—	$	—	March 23, 2020	$	16,435	$	35,000	$	—	March 23, 2020

(1)

Outstanding indebtedness as of March 31, ~~2017.~~2018.

(2)

Total facility size, committed facility and maturity date include contractual changes through the date of this Report.

(3)

The borrowing of ~~$232~~$100 million with Credit Suisse First Boston Mortgage Capital LLC is in the form of ~~sales~~a sale of a variable funding note under an agreement to repurchase.

All debt financing arrangements that matured between March 31, 2018 and the date of this Report have been renewed or extended.

~~(4)~~

~~The borrowings with Barclays Bank PLC are subject to a total aggregate facility amount of $300 million, of which $80 million represents the maximum amount for MSRs.~~

Item 3. Quantitative and Qualitative Disclosures 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 risks. The primary market risks that we are exposed to are credit risk, interest rate risk, prepayment risk, inflation risk and ~~market~~fair value risk.

The following 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 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 earnings forecasts.

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Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of March 31, 2017, 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%

(dollar amounts in thousands)

Fair value

$
1,336,728

$
1,279,601

$
1,252,797

$
1,202,382

$
1,178,655

$
1,133,899

Change in fair value:

$

$
109,651

$
52,524

$
25,719

$
(24,695)

$
(48,422)

$
(93,179)

%

8.9
%

4.3
%

2.1
%

(2.0)
%

(3.9)
%

(7.6)
%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
1,305,931

$
1,265,196

$
1,245,826

$
1,208,919

$
1,191,324

$
1,157,718

Change in fair value:

$

$
78,854

$
38,119

$
18,749

$
(18,158)

$
(35,753)

$
(69,359)

%

6.4
%

3.1
%

1.5
%

(1.5)
%

(2.9)
%

(5.7)
%

Per-loan servicing cost shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
1,264,922

$
1,246,000

$
1,236,538

$
1,217,616

$
1,208,155

$
1,189,232

Change in fair value:

$

$
37,845

$
18,923

$
9,461

$
(9,461)

$
(18,923)

$
(37,845)

%

3.1
%

1.5
%

0.8
%

(0.8)
%

(1.5)
%

(3.1)
%

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of March 31, ~~2017,~~2018, 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	$	546,081		$	525,758		$	516,161		$	498,002		$	489,405		$	473,097		$	2,543,382		$	2,445,291		$	2,399,027		$	2,311,585		$	2,270,233		$	2,191,875
Change in fair value:
$	$	39,166		$	18,843		$	9,246		$	(8,913)		$	(17,510)		$	(33,818)		$	188,893		$	90,802		$	44,539		$	(42,903)		$	(84,255)		$	(162,614)
%		7.7	%		3.7	%		1.8	%		(1.8)	%		(3.5)	%		(6.7)	%		8.0	%		3.9	%		1.9	%		(1.8)	%		(3.6)	%		(6.9)	%


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	$	544,091		$	524,830		$	515,714		$	498,419		$	490,209		$	474,594		$	2,500,450		$	2,424,940		$	2,389,115		$	2,321,000		$	2,288,592		$	2,226,813
Change in fair value:
$	$	37,176		$	17,915		$	8,798		$	(8,496)		$	(16,706)		$	(32,321)		$	145,962		$	70,451		$	34,626		$	(33,489)		$	(65,896)		$	(127,676)
%		7.3	%		3.5	%		1.7	%		(1.7)	%		(3.3)	%		(6.4)	%		6.2	%		3.0	%		1.5	%		(1.4)	%		(2.8)	%		(5.4)	%


Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)

Fair value	$	528,395		$	517,655		$	512,285		$	501,545		$	496,175		$	485,436		$	2,430,008		$	2,392,248		$	2,373,369		$	2,335,609		$	2,316,729		$	2,278,969
Change in fair value:
$	$	21,479		$	10,740		$	5,370		$	(5,370)		$	(10,740)		$	(21,479)		$	75,520		$	37,760		$	18,880		$	(18,880)		$	(37,760)		$	(75,520)
%		4.2	%		2.1	%		1.1	%		(1.1)	%		(2.1)	%		(4.2)	%		3.2	%		1.6	%		0.8	%		(0.8)	%		(1.6)	%		(3.2)	%

~~Table of Contents~~

Excess Servicing Spread Financing

The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value method as of March 31, ~~2017,~~2018, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ values increases net income):


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	$	288,543		$	282,908		$	280,171		$	274,848		$	272,261		$	267,227		$	243,968		$	239,922		$	237,946		$	234,088		$	232,204		$	228,523
Change in fair value:
$	$	11,059		$	5,424		$	2,686		$	(2,636)		$	(5,224)		$	(10,257)		$	7,967		$	3,920		$	1,944		$	(1,914)		$	(3,798)		$	(7,479)
%		4.0	%		2.0	%		1.0	%		(1.0)	%		(1.9)	%		(3.7)	%		3.4	%		1.7	%		0.8	%		(0.8)	%		(1.6)	%		(3.2)	%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%


(dollar amounts in thousands)

Fair value

$
304,369

$
290,355

$
283,786

$
271,436

$
265,625

$
254,668

Change in fair value:

$

$
26,884

$
12,871

$
6,301

$
(6,049)

$
(11,859)

$
(22,817)

%

9.7
%

4.6
%

2.3
%

(2.2)
%

(4.3)
%

(8.2)
%

Table of Contents


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)

Fair value	$	257,841		$	246,468		$	241,128		$	231,077		$	226,343		$	217,403
Change in fair value:
$	$	21,839		$	10,466		$	5,126		$	(4,925)		$	(9,659)		$	(18,599)
%		9.3	%		4.4	%		2.2	%		(2.1)	%		(4.1)	%		(7.9)	%

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

~~In response to this Item 3, the information set forth on pages 73 to 74 of this Report is incorporated herein by reference.~~

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required 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 the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of 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.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, ~~2017,~~2018, 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

There have been 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, ~~2016,~~2017, filed with the SEC on March 9, ~~2017~~2018 and our Quarterly Reports on Form 10-Q filed thereafter.

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

~~None.~~There were no sales of unregistered equity securities during the quarter ended March 31, 2018.

Repurchases of our Common Stock

The following table summarizes the stock repurchase activity since the stock repurchase program was approved:


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or program (1)		Approximate dollar value of shares that may yet be purchased under the plans or program (1)
July 1, 2017 – July 31, 2017		—	$	—		—	$	50,000,000
August 1, 2017 – August 31, 2017		270,905	$	17.06		270,905	$	45,379,288
September 1, 2017 – September 30, 2017		233,911	$	17.01		233,911	$	41,401,192
October 1, 2017 – December 31, 2017		—	$	—		—	$	41,401,192
January 1, 2018 – March 31, 2018		—		—		—	$	41,401,192
Total		504,816	$	17.03		504,816	$	41,401,192

(1)

As disclosed in our current report on Form 8-K filed on June 21, 2017, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $50.0 million of our outstanding Class A common stock. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits


		Incorporated by Reference from the Below‑Listed Form (Each Filed under SEC File Number 15‑ 68669)
Exhibit ~~Number~~ No.	Exhibit Description	Form	Filing Date
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).~~2013

3.2	Second 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).~~	March 6, 2018

~~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~~Loan and ~~Restated Limited Liability Company~~Security Agreement, dated as of February 1, 2018, by and among Credit Suisse AG, Cayman Islands Branch, PennyMac Loan Services, LLC and 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~~ LLC.	8-K ~~as filed with the SEC on May 14, 2013).~~	February 7, 2018

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 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

~~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 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

~~10.11†~~	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).

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~
~~10.12†~~		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†~~		Employment Agreement, dated December 8, 2015, among Stanford L. Kurland, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

~~10.14†~~		First Amendment to Employment Agreement, dated as of April 5, 2017, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and Stanford L. Kurland (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 7, 2017).

~~10.15†~~		Employment Agreement, dated December 8, 2015, among David A. Spector, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

~~10.16†~~		First Amendment to Employment Agreement, dated as of April 5, 2017, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and David A. Spector (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 7, 2017).

~~10.17~~		Second Amended and Restated Management Agreement, dated as of September 12, 2016, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016).

~~10.18~~		Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016).

~~10.19~~		Amended and Restated Mortgage Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016)

~~10.20~~		Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016)

~~10.21~~		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).

~~10.22~~		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).

~~10.23~~		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 (incorporated by reference to Exhibit 10.38 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~
~~10.24~~		Second Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, by and between PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.25~~		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).

~~10.26~~		Amendment No. 1 to the Second Amended and Restated Flow Servicing Agreement, dated as of December 5, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund Investors, LLC (incorporated by reference to Exhibit 10.43 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.27~~		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).

~~10.28~~		Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Co., LLC (incorporated by reference to Exhibit 10.41 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.29~~		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).

~~10.30~~		Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund, L.P. (incorporated by reference to Exhibit 10.45 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.31~~		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).

~~10.32~~		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).
~~10.33~~		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).

~~10.34~~		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).~~

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~
~~10.35~~		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).

~~10.36~~		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).

~~10.37~~		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).

~~10.38~~		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).

~~10.39~~		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).

~~10.40~~		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).

~~10.41~~		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).

~~10.42~~		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).

~~10.43~~		Amendment No. 10 to Master Repurchase Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.62 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
~~10.44~~		Guaranty, dated as of March 17, 2011, by Private National Mortgage Acceptance 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).

~~10.45~~		Amended and Restated Master Repurchase Agreement, dated as of March 3, 2017, among Citibank, N.A. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 8, 2017).

~~10.46~~		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).

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~

~~10.47~~		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).

~~10.48~~		Amendment No. 1 to Loan and Security Agreement, dated as of October 30, 2015, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.87 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

~~10.49~~		Amendment No. 2 to Loan and Security Agreement, dated as of November 10, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.92 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.50~~		Amendment No. 3 to Loan and Security Agreement, dated as of December 15, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.93 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.51~~		Amendment No. 4 to Loan and Security Agreement, dated as of January 28, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.94 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.52~~		Amendment No. 5 to Loan and Security Agreement, dated as of March 31, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

~~10.53~~		Amendment No. 6 to Loan and Security Agreement, dated as of September 26, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.71 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

~~10.54~~		Amended and Restated Master Spread Participation Agreement, dated as of November 10, 2015, by and among PennyMac Loan Services, LLC and PennyMac Loan Services, LLC as the Initial Participant (incorporated by reference to Exhibit 10.189 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.55~~		Master Repurchase Agreement (Participation Certificates and Servicing), dated as of November 10, 2015, 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 filed with the SEC on November 16, 2015).
~~10.56~~		Amendment No. 1 to Master Repurchase Agreement, dated as of December 19, 2016, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.74 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

~~10.57~~		Third Amended and Restated Guaranty (Participation Certificates and Servicing), dated as of November 10, 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 November 16, 2015).

~~Table of Contents~~


Exhibit Number	~~Exhibit Description~~
~~10.58~~	Third Amended and Restated Master Repurchase Agreement, dated as of ~~April 28, 2017,~~February 1, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, 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~~ LLC.	8-K ~~as filed with the SEC on May 3, 2017).~~	February 7, 2018

~~10.59~~	Amended and Restated Guaranty, dated as of April 28, 2017, by Private National Mortgage Acceptance 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 May 3, 2017).

~~10.60~~10.3	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).

~~10.61~~	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).

~~10.62~~	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).

~~10.63~~	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).

~~10.64~~	Amendment Number Four to the Master Repurchase Agreement, dated as of June 29, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.98 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.65~~	Amendment Number Five to the Master Repurchase Agreement, dated as of July 27, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 27, 2015).

~~10.66~~	Amendment Number Six to the Master Repurchase Agreement, dated as of November 9, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.118 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.67~~	Amendment Number Seven to the Master Repurchase Agreement, dated July 26, 2016, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.91 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
~~10.68~~	Amendment Number Eight to the Master Repurchase Agreement, dated August 26, 2016, by and between PennyMac Loan Services, LLC, Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

~~10.69~~	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).

~~10.70~~	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).

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~
~~10.71~~		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).

~~10.72~~		Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 22, 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 10.122 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.73~~		Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

~~10.74~~		Second 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).

~~10.75~~		Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.124 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.76~~		Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.104 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.77~~		Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of June 1, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.100 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

~~10.78~~		Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp., PennyMac Holdings, LLC, any other parties signing this Agreement as owner of Mortgage Loans listed in Schedule I and any New Owners, PennyMac Loan Services, LLC, and Midland Loan Services, a division of PNC Bank, National Association (incorporated by reference to Exhibit 10.127 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.79~~		Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.102 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

~~10.80~~		Master Repurchase Agreement, dated as of December 4, 2015, among Barclays Bank PLC, 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 December 10, 2015).

~~10.81~~		Amendment Number One to Master Repurchase Agreement, dated as of September 29, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.97 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

~~10.82~~		Amendment Number Two to Master Repurchase Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.101 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

~~Table of Contents~~


Exhibit Number		~~Exhibit Description~~
~~10.83~~		Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 4, 2015, between PennyMac Loan Services, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).

~~10.84~~		Amendment Number One to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 2, 2016, between PennyMac Loan Services, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.103 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

~~10.85~~		Loan and Security Agreement, dated as of December 4, 2015, among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).

~~10.86~~		Amendment Number One to the Loan and Security Agreement, dated as of February 26, 2016, among Barclays Bank PLC, 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 March 3, 2016)

~~10.87~~		Amendment Number Two to the Loan and Security Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.106 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

~~10.88~~		Amendment Number Three to the Loan and Security Agreement, dated as of January 30, 2017, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.107 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

~~10.89~~		Master Lease Agreement No. 30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

~~10.90~~		Addendum to Master Lease Agreement No. 30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & 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 December 14, 2015).

~~10.91~~		Schedule Number 001 to Master Lease Agreement, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

~~10.92~~		Schedule Number 002 to Master Lease Agreement, dated as of May 4, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.140 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

~~10.93~~		Schedule Number 003 to Master Lease Agreement, dated as of November 3, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).

~~Table of Contents~~


Exhibit Number	~~Exhibit Description~~
~~10.94~~	Schedule Number 004 to Master Lease Agreement, dated as of March 23, 2017, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2017).

~~10.95~~	Guaranty, dated as of December 9, 2015, by PennyMac Loan Services, LLC in favor of Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

~~10.96~~	Amended and Restated Credit Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, the lenders that are parties thereto, Credit Suisse AG and Credit Suisse Securities (USA) 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 22, 2016).

~~10.97~~	Amended and Restated Collateral and Guaranty Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac Financial Services, Inc., PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, 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 22, 2016).

~~10.98~~	Master Repurchase Agreement, dated as of August 19, 2016, between PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).

~~10.99~~	Guaranty, dated as of August 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank. N.A. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).

~~10.100~~	Master Repurchase Agreement, dated as of September 19, 2016, between Royal Bank of Canada 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 September 22, 2016).

~~10.101~~	Base Indenture, dated as of ~~December 19, 2016,~~February 28, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance ~~LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form~~ LLC.	8-K ~~as filed with the SEC on December 21, 2016).~~	March 6, 2018

~~10.102~~	Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance 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 23, 2017).

~~10.103~~10.4	Series ~~2016-MSRVF1~~2018-GT1 Indenture Supplement to Indenture, dated as of ~~December 19, 2016,~~February 28, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital ~~LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form~~ LLC.	8-K ~~as filed with the SEC on December 21, 2016).~~	March 6, 2018

~~10.104~~
10.5	Amended and Restated Series ~~2016-MBSADV1~~2016-MSRVF1 Indenture Supplement to Indenture, dated as of ~~December 19, 2016,~~February 28, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital ~~LLC (incorporated by reference to Exhibit 10.122 of the Registrant’s Annual Report on Form 10-K filed with the SEC on~~ LLC.	8-K	March ~~9, 2017).~~6, 2018

~~Table of Contents~~


Exhibit Number10.6	~~Exhibit Description~~
~~10.105~~	Omnibus Amendment No. 1 to the Series 2016-MSRVF1 Indenture Supplement and Series 2016-MBSADV1 Indenture Supplement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

~~10.106~~	Series 2017-GT1 Indenture Supplement, dated as of February 16, 2017, to Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, 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 February 23, 2017).

~~10.107~~	Master Repurchase Agreement, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.108~~	Amendment No. 1 to Master Repurchase Agreement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC and consented to by Citibank, N.A., Credit Suisse AG, Cayman Islands Branch, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

~~10.109~~	Guaranty, dated as of December 19, 2016, made by Private National Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR ISSUER TRUST (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.110~~	Amendment No. 1 to Guaranty, dated as of February 16, 2017, by and between PNMAC GMSR ISSUER TRUST and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

~~10.111~~	Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and PennyMac Mortgage Investment Trust, (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.112~~	Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.113~~	Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

~~10.114~~	~~Master Repurchase Agreement, dated as of December 19, 2016,~~28, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, ~~LLC (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form~~ LLC.	8-K ~~as filed with the SEC on December 21, 2016).~~	March 6, 2018

~~10.115~~	~~Guaranty,~~
10.7	Amendment No. 1 to Third Amended and Restated Flow Servicing Agreement, dated as of ~~December 19, 2016,~~March 1, 2018, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.9 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.	*

10.8	Amendment Number Two to Amended and Restated Master Repurchase Agreement, dated as of March 2, 2018, by and between Citibank, N.A. and PennyMac Loan Services, LLC.	*

10.9	Amendment Number Eleven to Master Repurchase Agreement, dated March 20, 2018, by and between PennyMac Loan Services, LLC, Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.	*

8576

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		Incorporated by Reference from the Below‑Listed Form (Each Filed under SEC File Number 15‑ 68669)
Exhibit No.	Exhibit Description	Form	Filing Date
10.10	Amendment No. 1 to Master Repurchase Agreement, dated as of April 17, 2018, by and among Deutsche Bank AG, Cayman Islands Branch and PennyMac Loan Services LLC.	*
Exhibit Number	~~Exhibit Description~~
~~10.116~~	~~Master Repurchase~~
10.11	Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated asApril 20, 2018, by and among Bank of ~~November 1, 2016, among JPMorgan Chase Bank, National Association,~~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 November 4, 2016).~~LLC.	*

~~10.117~~	~~Guaranty,~~
10.12	Amendment No. 12 to Master Repurchase Agreement, dated as of ~~November 1, 2016,~~April 20, 2018, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company ~~LLC, in favor of JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).~~LLC.	*

31.1	Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

31.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

32.1*
32.1	Certification of David A. Spector 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*
32.2	Certification of Andrew S. Chang 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.	**

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, ~~2017~~2018 and December 31, ~~2016~~2017 (ii) the Consolidated Statements of Income for the quarters ended March 31, ~~2017~~2018 and March 31, ~~2016,~~2017, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, ~~2017~~2018 and March 31, ~~2016,~~2017, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, ~~2017~~2018 and March 31, ~~2016~~2017 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 it 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.

†	~~Indicates management contract or compensatory plan or arrangement.~~

*Filed herewith

**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 it 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.

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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: May ~~9, 2017~~4, 2018	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		President and Chief Executive Officer

Dated: May ~~9, 2017~~4, 2018	By:	/s/ ANDREW S. CHANG
		Andrew S. Chang
		Chief Financial Officer

8778


	Estimated MSR
Twelve month period ending March 31,	amortization
	(in thousands)
2018	$	144,768
2019		132,343
2020		120,158
2021		108,839
2022		98,127
Thereafter		694,858
	$	1,299,093


	Quarter ended March 31, 2017
	Performance-		Stock		Time-based
	based RSUs		options		RSUs
	(in thousands)
December 31, 2016		2,475		2,738		382
Granted		694		861		405
Vested units and exercised options		—		(20)		(139)
Forfeited or canceled		(9)		(8)		(2)
March 31, 2017		3,160		3,571		646


	March 31, 2017
	(in thousands)
Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust	$	2,036,646
Commitments to fund mortgage loans		1,690,795
	$	3,727,441


	Payments due by period
			Less than		1-3		3-5		More than
Contractual obligations	Total		1 year		years		years		5 years
	(in thousands)
Commitments to purchase and originate mortgage loans	$	3,727,441	$	3,727,441	$	—	$	—	$	—
Assets sold under agreements to repurchase		2,036,366		2,036,366		—		—		—
Mortgage loan participation and sale agreements		241,723		241,723		—		—		—
Notes payable		441,302		41,302		400,000		—		—
Obligations under capital lease		31,178		13,609		17,569		—		—
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust (1)		277,484		—		—		—		277,484
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		78,712		7,299		12,855		10,433		48,125
Anticipated interest payments related to excess servicing spread financing at fair value		112,004		16,729		27,180		20,480		47,615
Software licenses (2)		37,781		14,625		23,156		—		—
Office leases		101,875		10,782		27,062		24,535		39,496
Total	$	7,085,866	$	6,109,876	$	507,822	$	55,448	$	412,720