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 June 30, ~~2016~~2017

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

For the transition period from to

Commission file number: 001-35916

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


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


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

(818) 224-7442

(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐
~~(Do not check if a 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 August ~~8, 2016~~4, 2017
Class A Common Stock, $0.0001 par value		~~22,193,572~~23,510,542
Class B Common Stock, $0.0001 par value		4950

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

June 30, ~~2016~~2017

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	56 64
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4.	Controls and Procedures	80

PART II. OTHER INFORMATION		82

Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:

projections of our revenues, income, earnings per share, capital structure or other financial items;

descriptions of our plans or objectives for future operations, products or services;

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the Securities and Exchange Commission (“SEC”) on March ~~10, 2016.~~9, 2017.

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

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

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

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

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

changes to government mortgage modification programs;

~~the licensing and operational requirements of states and other jurisdictions applicable to~~certain banking regulations that may limit our ~~businesses, to which our bank competitors are not subject;~~business activities;

foreclosure delays and changes in foreclosure practices;

~~certain banking regulations that may limit~~the licensing and operational requirements of states and other jurisdictions applicable to our ~~business activities;~~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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~~purchase opportunities for mortgage servicing rights (“MSRs”)~~any required additional capital and ~~our success in winning bids;~~liquidity to support business growth that may not be available on acceptable terms, if at all;

changes in prevailing interest rates;

~~Table of Contents~~

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;

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

our obligation to indemnify third party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

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

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

decreases in the ~~historical~~ returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

the extensive amount of regulation applicable to our investment management segment;

conflicts of interest in allocating our services and investment opportunities among ourselves and certain advised entities;

the effect of public opinion on our reputation;

our recent growth;

our ability to effectively identify, manage, monitor and mitigate financial risks;

our initiation of new business activities or expansion of existing business activities;

our ability to detect misconduct and fraud; and

our ability to mitigate cybersecurity risks and cyber incidents.

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

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

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PART I. FINANCIAL ~~INFORMATIO~~INFORMATIONN

Item 1. Financial ~~Statement~~Statementss

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE ~~SHEET~~SHEETS (UNAUDITED)~~S (UNAUDITED)~~


	June 30,		December 31,
	2017		2016
	(in thousands, except share amounts)
ASSETS
Cash (includes $50,458 and $91,788 pledged to creditors)	$	75,978	$	99,367
Short-term investments at fair value		145,440		85,964
Mortgage loans held for sale at fair value (includes $3,019,088 and $2,125,174 pledged to creditors)		3,037,602		2,172,815
Derivative assets		70,075		82,905
Servicing advances, net (includes valuation allowance of $48,161 and $45,425; $72,010 and $81,306 pledged to creditors)		291,907		348,306
Carried Interest due from Investment Funds pledged to creditors		71,019		70,906
Investment in PennyMac Mortgage Investment Trust at fair value		1,372		1,228
Mortgage servicing rights (includes $678,441 and $515,925 at fair value; $1,736,119 and $1,617,671 pledged to creditors)		1,951,599		1,627,672
Real estate acquired in settlement of loans		822		1,418
Furniture, fixtures, equipment and building improvements, net (includes $27,476 and $25,134 pledged to creditors)		31,418		31,321
Capitalized software, net (includes $1,797 and $515 pledged to creditors)		18,197		11,205
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		150,000		150,000
Receivable from PennyMac Mortgage Investment Trust		17,725		16,416
Receivable from Investment Funds		1,330		1,219
Mortgage loans eligible for repurchase		462,487		382,268
Other		77,767		50,892
Total assets	$	6,404,738	$	5,133,902
LIABILITIES
Assets sold under agreements to repurchase	$	3,021,328	$	1,735,114
Mortgage loan participation and sale agreements		243,361		671,426
Notes payable		429,692		150,942
Obligations under capital lease		26,641		23,424
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		261,796		288,669
Derivative liabilities		16,564		22,362
Accounts payable and accrued expenses		132,053		134,611
Mortgage servicing liabilities at fair value		18,295		15,192
Payable to Investment Funds		15,236		20,393
Payable to PennyMac Mortgage Investment Trust		132,709		170,036
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		73,084		75,954
Income taxes payable		40,672		25,088
Liability for mortgage loans eligible for repurchase		462,487		382,268
Liability for losses under representations and warranties		19,568		19,067
Total liabilities		4,893,486		3,734,546

Commitments and contingencies – See Note 20

STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 23,472,795 and 22,426,779 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 50 and 49 shares, respectively		—		—
Additional paid-in capital		199,146		182,772
Retained earnings		185,907		164,549
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		385,055		347,323
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		1,126,197		1,052,033
Total stockholders' equity		1,511,252		1,399,356
Total liabilities and stockholders’ equity	$	6,404,738	$	5,133,902

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands, except earnings per share)
Revenues
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	99,597	$	132,118	$	188,248	$	225,594
Recapture payable to PennyMac Mortgage Investment Trust		(1,506)		(1,915)		(3,201)		(3,867)
		98,091		130,203		185,047		221,727
Mortgage loan origination fees:
From non-affiliates		28,303		27,443		52,498		48,870
From PennyMac Mortgage Investment Trust		1,890		1,464		3,269		2,471
		30,193		28,907		55,767		51,341
Fulfillment fees from PennyMac Mortgage Investment Trust		21,107		19,111		37,677		32,046
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates		112,348		92,770		218,815		184,097
From PennyMac Mortgage Investment Trust		10,099		16,427		20,585		27,880
From Investment Funds		543		723		1,039		1,424
Ancillary and other fees		11,202		10,818		23,068		22,270
		134,192		120,738		263,507		235,671
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities		(94,435)		(111,611)		(152,360)		(228,474)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		7,156		17,428		9,929		36,877
		(87,279)		(94,183)		(142,431)		(191,597)
Net mortgage loan servicing fees		46,913		26,555		121,076		44,074
Management fees:
From PennyMac Mortgage Investment Trust		5,638		5,199		10,646		10,551
From Investment Funds		369		531		735		1,091
		6,007		5,730		11,381		11,642
Carried Interest from Investment Funds		241		244		113		837
Net interest expense:
Interest income:
From non-affiliates		32,948		18,332		55,002		30,259
From PennyMac Mortgage Investment Trust		2,025		2,222		3,830		3,824
		34,973		20,554		58,832		34,083
Interest expense:
To non-affiliates		32,511		19,753		57,338		33,725
To PennyMac Mortgage Investment Trust		4,366		5,713		9,013		12,728
		36,877		25,466		66,351		46,453
Net interest expense		(1,904)		(4,912)		(7,519)		(12,370)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		76		229		215		143
Results of real estate acquired in settlement of loans		(119)		393		(144)		(42)
Other		1,116		1,346		2,581		1,809
Total net revenues		201,721		207,806		406,194		351,207
Expenses
Compensation		82,967		83,147		168,207		151,445
Servicing		24,702		13,430		51,545		34,317
Technology		11,581		7,733		22,937		14,580
Loan origination		5,116		4,910		9,249		9,096
Professional services		4,523		4,559		8,341		8,292
Other		14,872		9,769		25,923		19,080
Total expenses		143,761		123,548		286,202		236,810
Income before provision for income taxes		57,960		84,258		119,992		114,397
Provision for income taxes		7,214		9,963		14,860		13,559
Net income		50,746		74,295		105,132		100,838
Less: Net income attributable to noncontrolling interest		40,267		59,820		83,774		81,188
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,479	$	14,475	$	21,358	$	19,650

Earnings per common share
Basic	$	0.45	$	0.66	$	0.93	$	0.89
Diluted	$	0.44	$	0.65	$	0.91	$	0.89
Weighted average common shares outstanding
Basic		23,388		22,078		23,006		22,042
Diluted		77,650		76,280		77,641		76,236

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)

June 30,

December 31,

2016

2015

(in thousands, except share amounts)

ASSETS

Cash (includes $124,026 and $93,757 pledged to creditors)
$
143,715

$
105,472

Short-term investments at fair value

41,063

46,319

Mortgage loans held for sale at fair value (includes $2,071,968 and $1,079,489 pledged to creditors)

2,097,138

1,101,204

Derivative assets

124,542

50,280

Servicing advances, net (includes $38,647 and $33,458 valuation allowance)

296,581

299,354

Carried Interest due from Investment Funds pledged to creditors

70,763

69,926

Investment in PennyMac Mortgage Investment Trust at fair value

1,217

1,145

Mortgage servicing rights (includes $526,294 and $660,247 at fair value; $1,285,700 and $803,560 pledged to creditors)

1,290,928

1,411,935

Real estate acquired in settlement of loans

1,394

—

Furniture, fixtures, equipment and building improvements, net (includes $27,240 and $14,034 pledged to creditors)

27,851

16,311

Capitalized software, net (includes $986 and $783 pledged to creditors)

6,209

3,025

Note receivable from PennyMac Mortgage Investment Trust

150,000

150,000

Receivable from PennyMac Mortgage Investment Trust

22,054

18,965

Receivable from Investment Funds

1,288

1,316

Deferred tax asset

4,878

18,378

Mortgage loans eligible for repurchase

286,048

166,070

Other

50,651

45,594

Total assets
$
4,616,320

$
3,505,294

LIABILITIES

Assets sold under agreements to repurchase
$
1,591,798

$
1,166,731

Mortgage loan participation and sale agreement

737,176

234,872

Notes payable

114,235

61,136

Obligations under capital lease

22,886

13,579

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

294,551

412,425

Derivative liabilities

3,734

9,083

Accounts payable and accrued expenses

102,310

89,915

Mortgage servicing liabilities at fair value

4,681

1,399

Payable to Investment Funds

28,209

30,429

Payable to PennyMac Mortgage Investment Trust

160,712

162,379

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

74,850

74,315

Liability for mortgage loans eligible for repurchase

286,048

166,070

Liability for losses under representations and warranties

24,277

20,611

Total liabilities

3,445,467

2,442,944

Commitments and contingencies

STOCKHOLDERS’ EQUITY

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,189,337 and 21,990,831 shares, respectively

2

2

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 50 and 51 shares, respectively

—

—

Additional paid-in capital

176,742

172,354

Retained earnings

118,120

98,470

Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders

294,864

270,826

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

875,989

791,524

Total stockholders' equity

1,170,853

1,062,350

Total liabilities and stockholders’ equity
$
4,616,320

$
3,505,294


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

Balance at December 31, 2015	21,991	$	2	$	172,354	$	98,470	$	791,524	$	1,062,350
Net income	—		—		—		19,650		81,188		100,838
Stock and unit-based compensation	93		—		2,119		—		5,917		8,036
Issuance of Class A common stock in settlement of directors' fees	12		—		149		—		—		149
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	93		—		2,640		—		(2,640)		—
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.	—		—		(520)		—		—		(520)
Balance at June 30, 2016	22,189	$	2	$	176,742	$	118,120	$	875,989	$	1,170,853

Balance at December 31, 2016	22,427	$	2	$	182,772	$	164,549	$	1,052,033	$	1,399,356
Net income	—		—		—		21,358		83,774		105,132
Stock and unit-based compensation	—		—		3,450		—		7,256		10,706
Issuance of Class A common stock in settlement of directors' fees	—		—		108		—		61		169
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	1,046		—		16,927		—		(16,927)		—
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.	—		—		(4,111)		—		—		(4,111)
Balance at June 30, 2017	23,473	$	2	$	199,146	$	185,907	$	1,126,197	$	1,511,252

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF ~~INCOM~~CASH FLOWS (UNAUDITED)~~E (UNAUDITED)~~

Quarter ended June 30,

Six months ended June 30,

2016

2015

2016

2015

(in thousands, except earnings per share)

Revenue

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

From non-affiliates

$
132,118

$
85,411

$
225,594

$
162,078

Recapture payable to PennyMac Mortgage Investment Trust

(1,915)

(1,456)

(3,867)

(2,745)

130,203

83,955

221,727

159,333

Mortgage loan origination fees

28,907

24,421

51,341

41,103

Fulfillment fees from PennyMac Mortgage Investment Trust

19,111

15,333

32,046

28,199

Net mortgage loan servicing fees:

Mortgage loan servicing fees:

From non-affiliates

92,770

66,867

184,097

116,968

From PennyMac Mortgage Investment Trust

16,427

12,136

27,880

22,806

From Investment Funds

723

153

1,424

1,121

Ancillary and other fees

10,818

11,850

22,270

23,035

120,738

91,006

235,671

163,930

Amortization, impairment and change in fair value of mortgage servicing rights

(111,611)

(15,324)

(228,474)

(69,008)

Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust

17,428

(7,133)

36,877

403

(94,183)

(22,457)

(191,597)

(68,605)

Net mortgage loan servicing fees

26,555

68,549

44,074

95,325

Management fees:

From PennyMac Mortgage Investment Trust

5,199

5,779

10,551

12,782

From Investment Funds

531

1,184

1,091

2,670

5,730

6,963

11,642

15,452

Carried Interest from Investment Funds

244

182

837

1,415

Net interest expense:

Interest income:

From non-affiliates

18,332

12,651

30,259

21,584

From PennyMac Mortgage Investment Trust

2,222

533

3,824

533

20,554

13,184

34,083

22,117

Interest expense:

To non-affiliates

19,753

10,531

33,725

18,608

To PennyMac Mortgage Investment Trust

5,713

5,818

12,728

9,570

25,466

16,349

46,453

28,178

Net interest expense

(4,912)

(3,165)

(12,370)

(6,061)

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

229

(244)

143

(137)

Result of real estate acquired in settlement of loans

393

—

(42)

—

Other

1,346

357

1,809

2,036

Total net revenue

207,806

196,351

351,207

336,665

Expenses

Compensation

83,147

70,422

151,445

128,566

Servicing

13,430

28,603

34,317

38,338

Technology

7,733

6,490

14,580

11,428

Loan origination

4,910

4,148

9,096

8,499

Professional services

4,559

4,074

8,292

6,907

Other

9,769

7,815

19,080

14,890

Total expenses

123,548

121,552

236,810

208,628

Income before provision for income taxes

84,258

74,799

114,397

128,037

Provision for income taxes

9,963

8,619

13,559

14,733

Net income

74,295

66,180

100,838

113,304

Less: Net income attributable to noncontrolling interest

59,820

53,431

81,188

91,527

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

$
14,475

$
12,749

$
19,650

$
21,777

Earnings per share

Basic

$
0.66

$
0.59

$
0.89

$
1.01

Diluted

$
0.65

$
0.59

$
0.89

$
1.01

Weighted average common shares outstanding

Basic

22,078

21,700

22,042

21,647

Diluted

76,280

76,105

76,236

76,063


	Six months ended June 30,
	2017		2016
	(in thousands)
Cash flow from operating activities
Net income	$	105,132	$	100,838
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(185,047)		(221,727)
Accrual of servicing rebate payable to Investment Funds		100		148
Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		142,431		191,597
Carried Interest from Investment Funds		(113)		(837)
Capitalization of interest on mortgage loans held for sale at fair value		(21,615)		(13,513)
Accrual of interest on excess servicing spread financing		9,013		12,728
Amortization of debt issuance costs		7,122		5,215
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(144)		(72)
Results of real estate acquired in settlement in loans		144		42
Stock and unit-based compensation expense		10,390		8,036
Provision for servicing advance losses		18,030		12,519
Loss from disposition of fixed assets		377		—
Depreciation and amortization		4,117		2,274
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(21,244,194)		(16,783,840)
Originations of mortgage loans held for sale		(2,353,899)		(2,736,621)
Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(1,814,080)		(703,464)
Sale and principal payments of mortgage loans held for sale		24,497,179		19,176,697
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		40,222		8,139
Repurchase of mortgage loans subject to representations and warranties		(11,520)		(11,399)
Decrease (increase) in servicing advances		38,821		(11,182)
Increase in receivable from Investment Funds		(211)		(120)
Increase in receivable from PennyMac Mortgage Investment Trust		(1,092)		(2,056)
Decrease in deferred tax asset		—		13,515
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(6,221)		—
Increase in other assets		(29,608)		(10,941)
(Decrease) increase in accounts payable and accrued expenses		(30,395)		9,781
Decrease in payable to Investment Funds		(5,157)		(2,220)
Decrease in payable to PennyMac Mortgage Investment Trust		(37,650)		(2,332)
Increase in income taxes payable		14,824		—
Net cash used in operating activities		(853,044)		(958,795)
Cash flow from investing activities
(Increase) decrease in short-term investments		(59,476)		5,256
Net settlement of derivative financial instruments used for hedging		(30,949)		138,801
Purchase of mortgage servicing rights		(159,465)		(11)
Purchase of furniture, fixtures, equipment and leasehold improvements		(4,668)		(14,459)
Acquisition of capitalized software		(7,719)		(3,342)
Increase in margin deposits and restricted cash		(12,071)		(16,443)
Net cash (used in) provided by investing activities		(274,348)		109,802
Cash flow from financing activities
Sale of assets under agreements to repurchase		13,332,610		18,461,897
Repurchase of assets sold under agreements to repurchase		(12,046,244)		(18,037,356)
Issuance of mortgage loan participation certificates		10,491,796		10,843,858
Repayment of mortgage loan participation certificates		(10,919,650)		(10,341,436)
Advances on notes payable		435,000		68,000
Repayment of notes payable		(153,073)		(15,671)
Advances of obligations under capital lease		10,298		12,652
Repayment of obligations under capital lease		(7,081)		(3,345)
Repayment of excess servicing spread financing		(28,910)		(38,281)
Settlement of excess servicing spread financing		—		(59,045)
Payment of debt issuance costs		(11,059)		(4,037)
Proceeds from common stock options exercised		316		—
Net cash provided by financing activities		1,104,003		887,236
Net (decrease) increase in cash		(23,389)		38,243
Cash at beginning of period		99,367		105,472
Cash at end of period	$	75,978	$	143,715

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

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~~PENNYMAC FINANCIAL SERVICES, INC.~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)~~

Class A Common Stock

Noncontrolling

interest in Private





Additional



National Mortgage

Total

Number of

Par

paid-in

Retained

Acceptance

stockholders'


shares

value

capital

earnings

Company, LLC

equity


(in thousands)

Balance at December 31, 2014

21,578

$
2


$
162,720

$
51,242

$
593,302

$
807,266

Net income

—

—

—

21,777

91,527

113,304

Stock and unit-based compensation

72

—

2,452

—

6,146

8,598

Distributions

—

—

—

—

(9,627)

(9,627)

Issuance of common stock in settlement of directors' fees

8

—

149

—

—

149

Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to
Class A common stock of PennyMac Financial Services, Inc.

133

—

2,432

—

(2,432)

—

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.

—

—

(217)

—

—

(217)

Balance at June 30, 2015

21,791

$
2

$
167,536

$
73,019

$
678,916

$
919,473

Balance at December 31, 2015

21,991

$
2

$
172,354

$
98,470

$
791,524

$
1,062,350

Net income

—

—

—

19,650

81,188

100,838

Stock and unit-based compensation

93

—

2,119

—

5,917

8,036

Issuance of common stock in settlement of directors' fees

12

—

149

—

—

149

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to
Class A common stock of PennyMac Financial Services, Inc.

93

—

2,640

—

(2,640)

—

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.

—

—

(520)

—

—

(520)

Balance at June 30, 2016

22,189

$
2

$
176,742

$
118,120

$
875,989

$
1,170,853

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

~~Table of Contents~~

~~PENNYMAC FINANCIAL SERVICES, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

Six months ended June 30,


2016

2015

(in thousands)

Cash flow from operating activities





Net income

$
100,838

$
113,304

Adjustments to reconcile net income to net cash used in operating activities:

Net gains on mortgage loans held for sale at fair value

(221,727)

(159,333)

Accrual of servicing rebate payable to Investment Funds

148

1,114

Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread

191,597

68,605

Carried Interest from Investment Funds

(837)

(1,415)

Amortization of debt issuance costs and commitment fees relating to financing facilities

5,215

3,631

Capitalization of interest on mortgage loans held for sale at fair value

(13,513)

(4,745)

Accrual of interest on excess servicing spread financing

12,728

9,570

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

(72)

275

Results of real estate acquired in settlement in loans

42

—

Stock and unit-based compensation expense

8,036

8,598

Provision for servicing advance losses

12,519

16,013

Depreciation and amortization

2,274

911

Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust

(16,783,840)

(13,514,568)

Originations of mortgage loans held for sale

(2,730,709)

(2,052,648)

Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale

(703,464)

(531,842)

Purchase of commercial real estate loans from non-affiliates

(5,912)

—

Sale and principal payments of mortgage loans held for sale

19,176,697

15,619,191

Sale of loans held for sale to PennyMac Mortgage Investment Trust

8,139

10,828

Repurchase of mortgage loans and real estate acquired in settlement of loans subject to representations and warranties

(11,399)

(11,567)

Increase in servicing advances

(11,182)

(32,189)

Increase in receivable from Investment Funds

(120)

(971)

(Increase) decrease in receivable from PennyMac Mortgage Investment Trust

(2,056)

9,175

Decrease in deferred tax asset

13,515

12,826

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

—

(4,299)

Increase in other assets

(10,941)

(14,282)

Increase in accounts payable and accrued expenses

9,781

20,941

Decrease in payable to Investment Funds

(2,220)

(4,653)

(Decrease) increase in payable to PennyMac Mortgage Investment Trust

(2,332)

16,120

Net cash used in operating activities

(958,795)

(421,410)

Cash flow from investing activities

Decrease (increase) in short-term investments

5,256

(1,890)

Advance on note receivable from PennyMac Mortgage Investment Trust

—

(71,072)

Repayment of note receivable from PennyMac Mortgage Investment Trust

—

18,546

Purchase of mortgage servicing rights

(11)

(270,133)

Net settlement of derivative financial instruments used for hedging

138,801

(8,293)

Purchase of furniture, fixtures, equipment and building improvements

(14,459)

(2,277)

Acquisition of capitalized software

(3,342)

(860)

(Increase) decrease in margin deposits and restricted cash

(16,443)

19,932

Net cash  provided by (used in) investing activities

109,802

(316,047)

Cash flow from financing activities

Sale of assets under agreements to repurchase

18,461,897

14,379,136

Repurchase of assets sold under agreements to repurchase

(18,037,356)

(13,937,711)

Issuance of mortgage loan participation certificates

10,843,858

7,937,026

Repayment of mortgage loan participation certificates

(10,341,436)

(7,884,705)

Advances on notes payable

68,000

129,012

Repayment of notes payable

(15,671)

(29,411)

Issuance of excess servicing spread financing

—

187,287

Repayment of excess servicing spread financing

(38,281)

(31,083)

Repurchase of excess servicing spread financing

(59,045)

—

Advances of obligations under capital lease

12,652

—

Repayment of obligation under capital lease

(3,345)

(5)

Payment of debt issuance costs

(4,037)

(3,990)

Distribution to Private National Mortgage Acceptance Company, LLC members

—

(9,627)

Net cash provided by financing activities

887,236

735,929

Net increase (decrease) in cash

38,243

(1,528)

Cash at beginning of period

105,472

76,256

Cash at end of period

$
143,715

$
74,728

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

~~Table of Contents~~

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL ~~STATEMENT~~STATEMENTS (UNAUDITED)~~S (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 ~~investment vehicles~~entities that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

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

Presently, PCM has management agreements with, ~~PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”),~~ 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, ~~and~~ PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”) and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

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

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

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

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

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 ~~the results of operations~~income to be anticipated for the full year ending December 31, ~~2016.~~2017. Intercompany accounts and transactions have been eliminated.

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

Note 2—Concentration of Risk

A substantial portion of the Company’s activities relate to the Advised Entities. ~~Fees~~Revenues generated from these entities (generally comprised of servicing recapture fees, mortgage loan origination fees, fulfillment fees, mortgage loan servicing fees, management fees, Carried Interest, and ~~Carried Interest) and~~net interest charged to these ~~entities~~entities) totaled ~~26%~~21% and ~~10%~~26% of total net revenue for the quarters ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~28%~~19% and ~~17%~~28% for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

Note 3—Transactions with Affiliates

Transactions with PMT

Operating Activities

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

~~Following is~~The Company provides fulfillment and other services to PMT under a ~~summary~~mortgage banking services agreement. Before September 12, 2016, the Company was entitled to a fulfillment fee based on the type of mortgage ~~lending~~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, the applicable fulfillment fee percentages are (i) 0.35% for mortgage loans sold or delivered to Fannie Mae or Freddie Mac, and (ii) 0.85% for all other mortgage loans; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to Ginnie Mae guidelines. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae mortgage-backed securities (“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 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 ~~activity between~~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 ~~PMT:~~(ii) in the amount of $35 for each mortgage loan that PMT acquires thereunder.

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Fulfillment fee revenue

$
19,111

$
15,333

$
32,046

$
28,199

Unpaid principal balance of mortgage loans fulfilled for PMT

$
5,174,020

$
3,579,078

$
8,433,383

$
6,469,210

Sourcing fees paid to PMT

$
2,824

$
2,427

$
4,773

$
3,848

Unpaid principal balance of mortgage loans purchased from PMT

$
9,409,399

$
8,082,764

$
15,905,121

$
12,818,138

Proceeds from sale of mortgage loans held for sale to PMT

$
3,424

$
2,423

$
8,139

$
10,828

Tax service fee from PMT

$
1,464

$
1,113

$
2,471

$
2,002

Mortgage servicing rights and excess servicing spread recapture incurred

$
1,915

$
1,456

$
3,867

$
2,745

Mortgage banking and warehouse service fees paid by PMT

$
1

$
—

$
2

$
—

Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if the Company refinances 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 in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate UPB that is not less than 30% of the aggregate UPB of all the mortgage loans so originated.

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Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, 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 June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Mortgage servicing rights and excess servicing spread recapture incurred included in Net gains on mortgage loans held for sale at fair value	$	1,506	$	1,915	$	3,201	$	3,867

Fulfillment fee revenue	$	21,107	$	19,111	$	37,677	$	32,046
Unpaid principal balance of mortgage loans fulfilled for PMT	$	5,918,027	$	5,174,020	$	10,549,933	$	8,433,383

Sourcing fees paid to PMT	$	3,204	$	2,824	$	6,065	$	4,773
Unpaid principal balance of mortgage loans purchased from PMT	$	10,641,243	$	9,409,399	$	20,215,960	$	15,905,121

Proceeds from sale of mortgage loans held for sale to PMT	$	18,692	$	3,424	$	40,222	$	8,139
Tax service fees received from PMT included in Mortgage loan origination fees	$	1,890	$	1,464	$	3,269	$	2,471
Property management fees received from PMT included in Other income	$	95	$	54	$	166	$	85
Early purchase program fees earned from PMT included in Mortgage loan servicing fees	$	1	$	1	$	6	$	2

Mortgage Loan Servicing ~~Activities~~

The Company has a loan servicing agreement with PMT (“Servicing Agreement”). The 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”). The Company also remains entitled to customary ancillary income and market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and 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.

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $100 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 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.

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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 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.

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”); 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 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 June 30,				Six months ended June 30,
	2016		2015		2016		2015
	(in thousands)								Quarter ended June 30,				Six months ended June 30,
									2017		2016		2017		2016
									(in thousands)
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	79	$	42	$	135	$	68	$	82	$	79	$	147	$	135
Activity-based		172		59		287		90		176		172		319		287
		251		101		422		158		258		251		466		422
Mortgage loans at fair value:
Base and supplemental		2,959		4,210		6,359		8,272		1,754		2,959		3,713		6,359
Activity-based		8,518		3,093		11,967		5,987		1,767		8,518		4,157		11,967
		11,477		7,303		18,326		14,259		3,521		11,477		7,870		18,326
Mortgage servicing rights:
Base and supplemental		4,583		4,627		8,927		8,253		6,188		4,583		12,025		8,927
Activity-based		116		105		205		136		132		116		224		205
		4,699		4,732		9,132		8,389		6,320		4,699		12,249		9,132
	$	16,427	$	12,136	$	27,880	$	22,806	$	10,099	$	16,427	$	20,585	$	27,880

Investment Management Activities

The Company has a management agreement with PMT (“Management Agreement”). The Management Agreement provides that:

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s 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.

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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% of the amount by which PMT’s net income for the quarter exceeds a 16% return on equity plus the “high watermark.”

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

“Net income” is defined as net income or loss computed in accordance with 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 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.

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

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Base management

$
5,199

$
5,709


$
10,551

$
11,439

Performance incentive

—

70

—

1,343

$
5,199

$
5,779

$
10,551

$
12,782

The ~~term of the management agreement, as amended,~~Management Agreement expires on ~~February 1, 2017,~~September 12, 2020, subject to automatic renewal for additional ~~18‑month~~18-month periods, unless terminated earlier in accordance with the terms of the ~~management~~ 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 ~~before~~immediately preceding the date of termination.

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


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Base management	$	5,334	$	5,199	$	10,342	$	10,551
Performance incentive		304		—		304		—
	$	5,638	$	5,199	$	10,646	$	10,551

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Expense Reimbursement

Under the Management Agreement, PMT reimburses the Company for ~~other~~its organizational and operating expenses, including ~~common overhead~~third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its ~~behalf~~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

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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 ~~in accordance with~~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 ~~terms~~Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses will be allocated based on the ratio of ~~its management agreement. Such amounts are summarized below:~~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 June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Reimbursement of:










Common overhead incurred by the Company (1)

$
2,435

$
2,702

$
4,996

$
5,431

Expenses incurred on (the Company's) PMT's behalf

(169)

83

(114)

462

$
2,266

$
2,785

$
4,882

$
5,893

Payments and settlements during the period (2)

$
28,952

$
24,114

$
56,613

$
46,866


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	1,593	$	2,435	$	3,027	$	4,996
Expenses incurred on PMT's behalf, net		398		(169)		653		(114)
	$	1,991	$	2,266	$	3,680	$	4,882
Payments and settlements during the period (1)	$	16,070	$	28,952	$	40,463	$	56,613

(1)

For the quarter ended June 30, 2015, reimbursement of common overhead incurred by the Company included a discretionary waiver, in accordance with the terms of the management agreement, of $700,000 of overhead expenses otherwise allocable to PMT. On December 15, 2015, the Company and PMT amended their management agreement to provide that the total overhead costs and expenses incurred by the Company in any quarter and reimbursable by PMT is capped at an amount equal to the product of (A) 70 basis points (0.0070), multiplied by (B) PMT’s shareholders’ equity (as defined in the management agreement) as of the last day of such quarter, divided by four (4).

~~(2)~~

Payments and settlements include payments for ~~operating, investment~~management fees and ~~financing~~correspondent production activities itemized in ~~this Note~~the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

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

June 30,

December 31,


2016

2015

(in thousands)

Receivable from PMT:

Management fees

$
5,200

$
5,670

Servicing fees

9,154

3,682

Correspondent production fees

2,567

2,729

Fulfillment fees

1,890

1,082

Interest on note receivable

1,042

412

Conditional reimbursement


900


900

Allocated expenses

847

1,043

Expenses incurred on PMT's behalf

454

3,447

$
22,054

$
18,965

Payable to PMT:

Deposits made by PMT to fund servicing advances

$
148,337

$
153,573

Mortgage servicing rights ("MSR") recapture payable

605

781

Other

11,770

8,025

$
160,712

$
162,379

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 ~~reimbursement payments from PMT totaling $73,000 and $230,000 for the quarter and six months ended June 30, 2015, respectively, and received~~ no reimbursement from PMT during the six months ended June 30, 2017 and 2016.

~~Table of Contents~~

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.

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 excess servicing spread (“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

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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.

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.

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. The note receivable was replaced by the PMH Repurchase Agreement upon the closing of the GNMA MSR facility.

The Company also 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 June 30,				Six months ended June 30,				Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(in thousands)								(in thousands)

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell:										��
Interest income									$	2,025	$	—	$	3,830	$	—
Note receivable from PennyMac Mortgage Investment Trust:
Interest income	$	2,222	$	533	$	3,824	$	533	$	—	$	2,222	$	—	$	3,824

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received from PennyMac Mortgage Investment Trust	$	36	$	46	$	71	$	138	$	35	$	36	$	71	$	71
Change in fair value of investment in PennyMac Mortgage Investment Trust		193		(290)		72		(275)
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust										41		193		144		72
	$	229	$	(244)	$	143	$	(137)	$	76	$	229	$	215	$	143


	June 30,		December 31,
	2017		2016
	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	150,000	$	150,000
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,372	$	1,228
Number of shares		75		75

June 30,

December 31,

2016

2015

(in thousands)

Note receivable from PennyMac Mortgage Investment Trust:

$
150,000

$
150,000

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

Fair value

$
1,217

$
1,145

Number of shares

75

75

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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 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, the Company entered into a second master spread acquisition and MSR servicing agreement with PMT (the “12/19/14 Spread Acquisition Agreement”). The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that 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, 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

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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 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.

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

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Excess servicing spread financing:

Issuance:





Cash

$
—

$
140,875

$
—

$
187,287

Pursuant to recapture agreement

$
1,690

$
1,319

$
3,601

$
2,565

Repayment

$
(17,400)

$
(18,352)

$
(38,281)

$
(31,083)

Repurchase

$
—

$
—

$
(59,045)

$
—

Change in fair value

$
(17,428)

$
(7,133)

$
(36,877)

$
403

Interest expense

$
5,713

$
5,818

$
12,728

$
9,570

Excess servicing spread recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread

$
1,604

$
1,456

$
3,426

$
2,745


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Excess servicing spread financing:
Issuance pursuant to recapture agreement	$	1,380	$	1,690	$	2,953	$	3,601
Repayment	$	14,278	$	17,400	$	28,910	$	38,281
Settlement	$	—	$	—	$	—	$	59,045
Change in fair value	$	(7,156)	$	(17,428)	$	(9,929)	$	(36,877)
Interest expense	$	4,366	$	5,713	$	9,013	$	12,728
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	$	1,271	$	1,604	$	2,674	$	3,426

Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	June 30,		December 31,
	2017		2016
	(in thousands)
Receivable from PMT:
Management fees	$	5,638	$	5,081
Servicing fees		4,231		5,465
Correspondent production fees		2,495		2,371
Allocated expenses and expenses incurred on PMT's behalf		2,324		1,046
Fulfillment fees		2,022		1,300
Conditional Reimbursement		900		900
Interest on assets purchased under agreements to resell		115		253
	$	17,725	$	16,416
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	127,696	$	162,945
Mortgage servicing rights recapture payable		428		707
Other		4,585		6,384
	$	132,709	$	170,036

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Investment Funds

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. 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 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.

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 of the Investment Funds. At that time, the Company settled its accrued servicing fee rebate and amended its loan servicing agreement with such fund to charge scheduled servicing fees in place of the previous “at cost” servicing arrangement.

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


	June 30,		December 31,
	2016		2015		June 30,		December 31,
	(in thousands)				2017		2016
					(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	42,430	$	41,893	$	42,174	$	42,427
PNMAC Mortgage Opportunity Fund Investors, LLC		28,333		28,033		28,845		28,479
	$	70,763	$	69,926	$	71,019	$	70,906
Receivable from Investment Funds:
Expense reimbursements					$	453	$	238
Management fees	$	455	$	655		359		500
Expense reimbursements		359		45
Mortgage loan servicing fees		247		392		263		231
Mortgage loan servicing rebate		227		224
Mortgage loan servicing fee rebate deposit						255		250
	$	1,288	$	1,316	$	1,330	$	1,219
Payable to Investment Funds—Servicing advances	$	28,209	$	30,429
Payable to Investment Funds:
Deposits received to fund servicing advances					$	15,103	$	20,221
Other						133		172
					$	15,236	$	20,393

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company entered into a tax receivable agreement with ~~PennyMac’s existing unitholders~~owners of PennyMac other than the Company on the date of the IPO that ~~will provide~~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 ~~$74.9~~$73.1 million and ~~$74.3~~$76.0 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. The Company made payments ~~under the tax receivable agreement totaling $0 and $4.3~~of $6.2 million during the ~~quarter and~~ six months ended June 30, ~~2015, respectively. There~~2017. No payments were ~~no payments~~ made during the six months ended June 30, 2016.

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 ~~diluted~~ net income attributable to the Company’s common stockholders by the weighted average number of shares of common stock outstanding, assuming all ~~potentially~~ dilutive shares of common stock were issued.

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 ~~the shares of common stock assumed to be exchanged.~~such earnings.

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands, except per share amounts)								2017		2016		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	$	14,475	$	12,749	$	19,650	$	21,777	$	10,479	$	14,475	$	21,358	$	19,650
Weighted average shares of common stock outstanding		22,078		21,700		22,042		21,647		23,388		22,078		23,006		22,042
Basic earnings per share of common stock	$	0.66	$	0.59	$	0.89	$	1.01	$	0.45	$	0.66	$	0.93	$	0.89

Diluted earnings per share of common stock:
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	14,475	$	12,749	$	19,650	$	21,777	$	10,479	$	14,475	$	21,358	$	19,650
Effect of net income attributable to PennyMac Class A units exchangeable to common stock, net of income taxes		35,433		31,925		48,040		54,688		23,849		35,433		49,403		48,040
Diluted net income attributable to common stockholders	$	49,908	$	44,674	$	67,690	$	76,465	$	34,328	$	49,908	$	70,761	$	67,690
Weighted average shares of common stock outstanding		22,078		21,700		22,042		21,647		23,388		22,078		23,006		22,042
Dilutive shares:
PennyMac Class A units exchangeable to common stock		54,021		53,620		54,032		53,592		53,375		54,021		53,481		54,032
Non-vested PennyMac Class A units issuable under unit-based stock compensation plan and exchangeable to common stock		—		650		—		714
Common shares issuable under stock-based compensation plan		181		135		162		110		887		181		1,154		162
Diluted weighted average shares of common stock outstanding		76,280		76,105		76,236		76,063		77,650		76,280		77,641		76,236
Diluted earnings per share of common stock	$	0.65	$	0.59	$	0.89	$	1.01	$	0.44	$	0.65	$	0.91	$	0.89

~~Potentially dilutive securities are excluded from the calculation~~Calculations of diluted earnings per share ~~when~~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 June 30,				Six months ended June 30,
	2016			2015	2016			2015	Quarter ended June 30,				Six months ended June 30,
	(in thousands except for weighted-average exercise price)								2017		2016		2017		2016
									(in thousands except for weighted-average exercise price)
Stock options (1)		2,795		1,875		2,450		1,635		2,636		2,795		2,335		2,450
Performance-based RSUs (2)		2,684		2,389		2,512		2,126		1,433		2,684		1,192		2,512
Time-based RSUs										134		-		87		-
Total anti-dilutive stock-based compensation units		5,479		4,264		4,962		3,761		4,203		5,479		3,614		4,962
Weighted-average exercise price of anti-dilutive stock options (1)	$	15.81	$	18.17	$	15.81	$	18.17
Weighted average exercise price of anti-dilutive stock options (1)									$	16.38	$	15.81	$	16.38	$	15.81

(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 ~~due to~~because the performance thresholds included in such RSUs have not ~~being~~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.

1520

Table of Contents

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 June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Cash flows:
Sales proceeds	$	11,234,497	$	9,853,346	$	19,176,697	$	15,619,191	$	12,637,046	$	11,234,497	$	24,497,179	$	19,176,697
Servicing fees received (1)	$	60,623	$	35,317	$	119,103	$	69,312	$	89,970	$	60,623	$	174,991	$	119,103
Net servicing advances	$	(1,264)	$	(5,248)	$	(9,545)	$	(8,955)
Net servicing advances (recoveries)									$	15,700	$	(1,264)	$	13,791	$	(9,545)

(1)

Net of guarantee fees paid to the Agencies.


	June 30,		December 31,		June 30,		December 31,
	2016		2015		2017		2016
	(in thousands)				(in thousands)

Unpaid principal balance of mortgage loans outstanding at end of period	$	71,436,178	$	60,687,246
Unpaid principal balance of mortgage loans outstanding					$	106,297,560	$	89,516,155
Delinquencies:
30-89 days	$	1,796,640	$	1,539,568	$	3,042,877	$	2,545,970
90 days or more:
Not in foreclosure	$	434,899	$	340,313	$	1,204,131	$	735,263
In foreclosure or bankruptcy	$	347,221	$	227,025
In foreclosure					$	397,412	$	137,856
Foreclosed	$	2,630	$	755	$	27,740	$	2,552
Bankruptcy					$	518,416	$	256,471

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


	June 30, 2016
			Contract		Total		June 30, 2017
	Servicing		servicing and		mortgage				Contract		Total
	rights owned		subservicing		loans serviced		Servicing		servicing and		mortgage
	(in thousands)						rights owned		subservicing		loans serviced
							(in thousands)
Investor:				��
Non-affiliated entities	$	117,787,996	$	—	$	117,787,996	$	158,922,497	$	—	$	158,922,497
Affiliated entities		—		51,958,636		51,958,636		—		67,125,932		67,125,932
Mortgage loans held for sale		1,971,903		—		1,971,903		2,915,346		—		2,915,346
	$	119,759,899	$	51,958,636	$	171,718,535	$	161,837,843	$	67,125,932	$	228,963,775
Amount subserviced for the Company (1)	$	12,375	$	—	$	12,375
Amounts subserviced for the Company (1)							$	11,909,829	$	61,108	$	11,970,937
Delinquent mortgage loans:
30 days	$	2,621,050	$	324,346	$	2,945,396	$	3,803,957	$	410,437	$	4,214,394
60 days		788,609		117,638		906,247		1,067,664		134,083		1,201,747
90 days or more:
Not in foreclosure		1,340,898		640,677		1,981,575		2,138,947		512,227		2,651,174
In foreclosure or bankruptcy		638,916		910,346		1,549,262
In foreclosure								795,309		491,142		1,286,451
Foreclosed		24,855		493,441		518,296		35,352		361,521		396,873
	$	5,414,328	$	2,486,448	$	7,900,776	$	7,841,229	$	1,909,410	$	9,750,639
Bankruptcy							$	900,628	$	254,396	$	1,155,024
Custodial funds managed by the Company (2)	$	3,163,812	$	804,003	$	3,967,815	$	3,455,435	$	982,652	$	4,438,087

(1)

Certain of the mortgage loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan ~~servicers. Mortgage~~servicers including commercial real estate loans ~~are subserviced for the Company~~and certain mortgage loans on a transitional basis ~~when the Company has obtained the rights to service the mortgage loans but servicing of the loans has not yet transferred to the Company’s servicing system.~~

~~(2)~~

Borrower and investor custodial cash accounts relate to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of

~~Table of Contents~~

~~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.~~

December 31, 2015

Contract

Total

Servicing

servicing and

mortgage


rights owned

subservicing

loans serviced

(in thousands)

Investor:










Non-affiliated entities

$
111,409,601

$
—

$
111,409,601

Affiliated entities

—

47,810,632

47,810,632

Mortgage loans held for sale

1,052,485

—

1,052,485

$
112,462,086

$
47,810,632

$
160,272,718

Amount subserviced for the Company (1)

$
14,454

$
—

$
14,454

Delinquent mortgage loans:

30 days

$
2,666,435

$
349,859

$
3,016,294

60 days

834,617

136,924

971,541

90 days or more:

Not in foreclosure

1,270,236

788,410

2,058,646

In foreclosure or bankruptcy

656,617

1,180,014

1,836,631

Foreclosed

23,372

542,031

565,403

$
5,451,277

$
2,997,238

$
8,448,515

Custodial funds managed by the Company (2)

$
2,242,146

$
502,751

$
2,744,897

~~(1)~~

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

(2)

~~Borrower~~Custodial funds include borrower and investor custodial cash accounts ~~relate~~relating to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns

Table of Contents

placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which are included in Interestincome in the Company’s consolidated statements of income.


	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 isare 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 servicing portfolio for the top five and all other states as measured by UPB:


	June 30,		December 31,		June 30,		December 31,
State	2016		2015		2017		2016
	(in thousands)				(in thousands)

California	$	40,010,729	$	39,007,363	$	45,679,111	$	42,303,952
Texas		13,679,577		12,191,722		18,468,384		16,037,426
Florida						15,829,653		12,817,627
Virginia		11,194,022		9,816,114		15,002,859		13,143,510
Florida		10,897,536		9,709,940
Maryland		7,090,073		6,151,945		10,215,463		8,564,923
All other states		88,846,598		83,395,634		123,768,305		101,372,564
	$	171,718,535	$	160,272,718	$	228,963,775	$	194,240,002

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Note 6—Mortgage Loans Held for Sale at Fair Value

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


	June 30,		December 31,
	2017		2016
	(in thousands)
Government-insured or guaranteed	$	2,523,757	$	1,984,020
Conventional conforming		133,761		141,524
Purchased from Ginnie Mae pools serviced by the Company		373,938		40,437
Repurchased pursuant to representations and warranties		6,146		6,834
	$	3,037,602	$	2,172,815
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,766,171	$	1,422,255
Mortgage loan participation and sale agreements		252,917		702,919
	$	3,019,088	$	2,125,174

Note ~~6—Netting of Financial Instruments~~7—Derivative Activities

The Company ~~uses derivative financial instruments~~is exposed to ~~manage exposure~~fair value risk relative to ~~interest rate risk~~its mortgage loans held for ~~the~~sale as well as to its interest rate lock commitments (“IRLCs”) ~~it makes~~and MSRs. The Company bears fair value risk from the time an IRLC is made to ~~purchase~~PMT or ~~originate~~a loan applicant to the time the mortgage loan is sold. The Company is exposed to loss in fair value of its IRLCs and mortgage loans ~~at specified~~held for sale when market mortgage interest rates increase. The Company is exposed to loss in fair value of its MSRs when market mortgage interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and ~~MSRs.~~ the portion of its MSRs not financed with ESS.

The Company does not use derivative financial instruments other than IRLCs or for purposes other than in support of its risk management activities. IRLCs are generated in the process of purchasing or originating mortgage loans held for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

Table of Contents

Derivative Notional Amounts and Fair Value of Derivatives

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


	June 30, 2017					December 31, 2016
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,999,761	$	51,287	$	5,129	4,279,611	$	65,848	$	6,457
Used for hedging purposes:
Forward purchase contracts	7,819,706		25		33,731	12,746,191		77,905		16,914
Forward sales contracts	7,641,979		28,759		528	16,577,942		28,324		85,035
MBS put options	6,075,000		11,232		—	1,175,000		3,934		—
MBS call options	—		—		—	1,600,000		217		—
Put options on interest rate futures purchase contracts	1,250,000		2,520		63	1,125,000		3,109		—
Call options on interest rate futures purchase contracts	200,000		438		—	900,000		203		—
Put options on interest rate futures sale contracts	200,000		—		—	—		—		—
Interest rate swap futures purchase contracts	325,000		—		—	200,000		—		—
Total derivatives before netting			94,261		39,451			179,540		108,406
Netting			(24,186)		(22,887)			(96,635)		(86,044)
		$	70,075	$	16,564		$	82,905	$	22,362
Deposits placed with derivative counterparties		$	1,299				$	10,591

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


	Quarter ended June 30, 2017
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	9,292,052	46,756,266	(48,228,612)	7,819,706
Forward sale contracts	11,383,749	56,284,621	(60,026,391)	7,641,979
MBS put options	2,950,000	7,325,000	(4,200,000)	6,075,000
MBS call options	—	4,200,000	(4,200,000)	—
Put options on interest rate futures purchase contracts	1,160,000	1,400,000	(1,310,000)	1,250,000
Call options on interest rate futures purchase contracts	482,300	534,300	(816,600)	200,000
Put options on interest rate futures sale contracts	—	1,510,000	(1,310,000)	200,000
Call options on interest rate futures sale contracts	57,300	759,300	(816,600)	—
Treasury futures purchase contracts	—	61,300	(61,300)	—
Treasury futures sale contracts	—	61,300	(61,300)	—
Interest rate swap futures purchase contracts	200,000	325,000	(200,000)	325,000
Interest rate swap futures sale contracts	—	200,000	(200,000)	—

Table of Contents


	Quarter ended June 30, 2016
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	9,464,470	46,870,345	(42,823,952)	13,510,863
Forward sale contracts	10,418,906	56,521,979	(53,326,689)	13,614,196
MBS put options	1,375,000	6,750,000	(4,575,000)	3,550,000
Put options on interest rate futures purchase contracts	1,750,000	1,650,000	(2,400,000)	1,000,000
Call options on interest rate futures purchase contracts	3,937,500	—	(3,485,400)	452,100


	Six months ended June 30, 2017
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	12,746,191	88,940,575	(93,867,061)	7,819,706
Forward sale contracts	16,577,942	107,934,447	(116,870,410)	7,641,979
MBS put options	1,175,000	12,850,000	(7,950,000)	6,075,000
MBS call options	1,600,000	4,200,000	(5,800,000)	—
Put options on interest rate futures purchase contracts	1,125,000	4,460,000	(4,335,000)	1,250,000
Call options on interest rate futures purchase contracts	900,000	1,489,300	(2,189,300)	200,000
Put options on interest rate futures sale contracts	—	4,535,000	(4,335,000)	200,000
Call options on interest rate futures sale contracts	—	2,189,300	(2,189,300)	—
Treasury futures purchase contracts	—	166,100	(166,100)	—
Treasury futures sale contracts	—	166,100	(166,100)	—
Interest rate swap futures purchase contracts	200,000	525,000	(400,000)	325,000
Interest rate swap futures sales contracts	—	400,000	(400,000)	—


	Six months ended June 30, 2016
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	5,254,293	77,682,720	(69,426,150)	13,510,863
Forward sale contracts	6,230,811	95,918,405	(88,535,020)	13,614,196
MBS put options	1,275,000	9,450,000	(7,175,000)	3,550,000
Put options on interest rate futures purchase contracts	1,650,000	4,675,000	(5,325,000)	1,000,000
Call options on interest rate futures purchase contracts	600,000	3,637,500	(3,785,400)	452,100

Table of Contents

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.

~~Table of Contents~~

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts.


	June 30, 2016						December 31, 2015						June 30, 2017						December 31, 2016
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount		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		amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated		recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet		assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)												(in thousands)

Derivatives not subject to a master netting arrangement - IRLCs	$	91,607	$	—	$	91,607	$	45,885	$	—	$	45,885
Derivatives subject to a master netting arrangement:
Derivatives not subject to master netting arrangements - IRLCs													$	51,287	$	—	$	51,287	$	65,848	$	—	$	65,848
Derivatives subject to a master netting arrangements:
Forward purchase contracts		125,358		—		125,358		4,181		—		4,181		25		—		25		77,905		—		77,905
Forward sale contracts		664		—		664		4,965		—		4,965		28,759		—		28,759		28,324		—		28,324
Mortgage-backed security ("MBS") put options		1,777		—		1,777		404		—		404
MBS put options														11,232		—		11,232		3,934		—		3,934
MBS call options														—		—		—		217		—		217
Put options on interest rate futures purchase contracts		1,618		—		1,618		1,832		—		1,832		2,520		—		2,520		3,109		—		3,109
Call options on interest rate futures purchase contracts		8,279		—		8,279		1,555		—		1,555		438		—		438		203		—		203
Netting		—		(104,761)		(104,761)		—		(8,542)		(8,542)		—		(24,186)		(24,186)		—		(96,635)		(96,635)
		137,696		(104,761)		32,935		12,937		(8,542)		4,395		42,974		(24,186)		18,788		113,692		(96,635)		17,057
	$	229,303	$	(104,761)	$	124,542	$	58,822	$	(8,542)	$	50,280	$	94,261	$	(24,186)	$	70,075	$	179,540	$	(96,635)	$	82,905

Derivative Assets, Financial ~~Assets,~~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 ~~qualify~~meet the accounting guidance qualifying for ~~set off accounting.~~netting.

June 30, 2016

December 31, 2015

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)

Interest rate lock commitments

$
91,607

$
—

$
—

$
91,607

$
45,885

$
—

$
—

$
45,885

Fannie Mae

10,279

—

—

10,279

453

—

—

453

Barclays Capital

7,483

—

—

7,483

72

—

—

72

RJ O'Brien

7,341

—

—

7,341

2,246

—

—

2,246

Bank of America, N.A.

4,141

—

—

4,141

—

—

—

—

JP Morgan

2,661

—

—

2,661

—

—

—

—

Morgan Stanley Bank, N.A.

383

—

—

383

—

—

—

—

Wells Fargo Bank, N.A.

370

—

—

370

53

—

—

53

Goldman Sachs

125

—

—

125

471

—

—

471

Jefferies & Co.

—

—

—

—

888

—

—

888

Others

152

—

—

152

212

—

—

212

$
124,542

$
—

$
—

$
124,542

$
50,280

$
—

$
—

$
50,280


	June 30, 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	$	51,287	$	—	$	—	$	51,287	$	65,848	$	—	$	—	$	65,848
Barclays Capital		7,105		—		—		7,105		12,002		—		—		12,002
Goldman Sachs		3,446		—		—		3,446		—		—		—		—
RJ O'Brien		2,895		—		—		2,895		2,750		—		—		2,750
Bank of America, N.A.		2,803		—		—		2,803		—		—		—		—
Others		2,539		—		—		2,539		2,305		—		—		2,305
	$	70,075	$	—	$	—	$	70,075	$	82,905	$	—	$	—	$	82,905

1826

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 mortgage loans~~Assets sold under agreements to repurchase do not qualify for ~~set off accounting.~~netting.


	June 30, 2016						December 31, 2015						June 30, 2017						December 31, 2016
					Net						Net						Net						Net
					amount						amount						amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the		amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated		recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)												(in thousands)

Derivatives not subject to a master netting arrangement - IRLCs	$	1,345	$	—	$	1,345	$	2,112	$	—	$	2,112
Derivatives not subject to master netting arrangements - IRLCs													$	5,129	$	—	$	5,129	$	6,457	$	—	$	6,457
Derivatives subject to a master netting arrangement:
Forward purchase contracts		119		—		119		9,004		—		9,004		33,731		—		33,731		16,914		—		16,914
Forward sale contracts		101,772		—		101,772		7,497		—		7,497		528		—		528		85,035		—		85,035
Put options on interest rate futures purchase contracts		2,070		—		2,070		203		—		203		63		—		63		—		—		—
Call options on interest rate futures purchase contracts		234		—		234		47		—		47
Netting		—		(101,806)		(101,806)		—		(9,780)		(9,780)		—		(22,887)		(22,887)		—		(86,044)		(86,044)
		104,195		(101,806)		2,389		16,751		(9,780)		6,971		34,322		(22,887)		11,435		101,949		(86,044)		15,905
Total derivatives		105,540		(101,806)		3,734		18,863		(9,780)		9,083		39,451		(22,887)		16,564		108,406		(86,044)		22,362
Mortgage loans sold under agreements to repurchase:
Amount outstanding		1,591,947		—		1,591,947		1,167,405		—		1,167,405		3,023,288		—		3,023,288		1,736,922		—		1,736,922
Unamortized debt issuance costs		(149)		—		(149)		(674)		—		(674)		(1,960)		—		(1,960)		(1,808)		—		(1,808)
		1,591,798		—		1,591,798		1,166,731		—		1,166,731		3,021,328		—		3,021,328		1,735,114		—		1,735,114
	$	1,697,338	$	(101,806)	$	1,595,532	$	1,185,594	$	(9,780)	$	1,175,814	$	3,060,779	$	(22,887)	$	3,037,892	$	1,843,520	$	(86,044)	$	1,757,476

1927

Table of Contents

Derivative Liabilities, Financial ~~Liabilities,~~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.

June 30, 2016

December 31, 2015

Gross amounts

Gross amounts

not offset in the

not offset in the

Net amount

consolidated

Net amount

Net amount

consolidated

Net amount

of liabilities

balance sheet

of liabilities

of liabilities

balance sheet

of liabilities

in the

Cash

in the

in the

Cash

in the

consolidated

Financial

collateral

consolidated

consolidated

Financial

collateral

consolidated


balance sheet

instruments

pledged

balance sheet

balance sheet

instruments

pledged

balance sheet

(in thousands)

Interest rate lock commitments

$
1,345

$
—

$
—

$
1,345

$
2,112

$
—

$
—

$
2,112

Bank of America, N.A.

372,742

(372,742)

—

—

271,130

(269,510)

—

1,620

Credit Suisse First Boston Mortgage Capital LLC

856,725

(855,962)

—

763

795,179

(794,470)

—

709

Morgan Stanley Bank, N.A.

168,200

(168,200)

—

—

49,763

(49,521)

—

242

Citibank, N.A.

157,201

(157,201)

—

—

55,948

(53,904)

—

2,044

Barclays Capital

37,842

(37,842)

—

—

—

—

—

—

Nomura

330

—

—

330

—

—

—

—

Raymond James & Associates

271

—

—

271

—

—

—

—

Cantor Fitzgerald LP

195

—

—

195

—

—

—

—

Bank of Oklahoma

497

—

—

497

135

—

—

135

Bank of New York Mellon

—

—

—

—

154

—

—

154

JP Morgan

—

—

—

—

672

—

—

672

BNP Paribas

—

—

—

—

738

—

—

738

Others

333

—

—

333

657

—

—

657

Unamortized debt issuance costs

(149)

149

—

—

(674)

674

—

—

$
1,595,532

$
(1,591,798)

$
—

$
3,734

$
1,175,814

$
(1,166,731)

$
—

$
9,083


	June 30, 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	$	5,129	$	—	$	—	$	5,129	$	6,457	$	—	$	—	$	6,457
Credit Suisse First Boston Mortgage Capital LLC		1,231,323		(1,231,323)		—		—		961,533		(960,988)		—		545
Bank of America, N.A.		766,544		(766,544)		—		—		349,638		(342,769)		—		6,869
JP Morgan Chase Bank, N.A.		490,058		(489,474)		—		584		135,322		(135,322)		—		—
Citibank, N.A.		175,878		(175,878)		—		—		81,555		(80,525)		—		1,030
Barclays Capital		135,757		(135,757)		—		—		28,467		(28,467)		—		—
Morgan Stanley Bank, N.A.		135,439		(131,399)		—		4,040		189,756		(188,851)		—		905
Royal Bank of Canada		93,780		(92,913)		—		867		2,937		—		—		2,937
Wells Fargo Bank, N.A.		5,403		—		—		5,403		—		—		—		—
BNP Paribas		—		—		—		—		1,151		—		—		1,151
Federal National Mortgage Association		—		—		—		—		1,033		—		—		1,033
Goldman Sachs		—		—		—		—		823		—		—		823
Others		541		—		—		541		612		—		—		612
	$	3,039,852	$	(3,023,288)	$	—	$	16,564	$	1,759,284	$	(1,736,922)	$	—	$	22,362

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 June 30,				Six months ended June 30,
Hedged item	Income statement line	2017		2016		2017		2016
		(in thousands)
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale	$	(1,918)	$	(48,943)	$	(210)	$	(118,119)
Mortgage servicing rights	Net mortgage loan servicing fees - Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(2,026)	$	64,948	$	(24,192)	$	123,668

Table of Contents

Note 7—8—Fair Value

The Company’s consolidated financial statements include assets and 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 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, ~~(for example, when there is little or no market activity for an asset or liability at the end of the period),~~ 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.

~~Table of Contents~~

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 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 Trustunder agreements to resell, as well as its originated MSRs relating to loans with initial interest rates of more than 4.5%, its purchased MSRs ~~subject to excess servicing spread financing (“ESS”)~~ and its 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 ~~elected~~identified its ESS financing to ~~account~~be accounted for ~~its ESS~~ at fair value as a means of hedging the related MSRs’ fair value risk. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method.

~~Financial Statement Items~~

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	June 30, 2016
	Level 1		Level 2		Level 3		Total		June 30, 2017
	(in thousands)								Level 1		Level 2		Level 3		Total
									(in thousands)
Assets:
Short-term investments	$	41,063	$	—	$	—	$	41,063	$	145,440	$	—	$	—	$	145,440
Mortgage loans held for sale at fair value		—		2,059,059		38,079		2,097,138		—		2,657,518		380,084		3,037,602
Derivative assets:
Interest rate lock commitments		—		—		91,607		91,607		—		—		51,287		51,287
Forward purchase contracts		—		125,358		—		125,358		—		25		—		25
Forward sales contracts		—		664		—		664		—		28,759		—		28,759
MBS put options		—		1,777		—		1,777		—		11,232		—		11,232
Put options on interest rate futures purchase contracts		1,618		—		—		1,618		2,520		—		—		2,520
Call options on interest rate futures purchase contracts		8,279		—		—		8,279		438		—		—		438
Total derivative assets before netting		9,897		127,799		91,607		229,303		2,958		40,016		51,287		94,261
Netting		—		—		—		(104,761)		—		—		—		(24,186)
Total derivative assets		9,897		127,799		91,607		124,542		2,958		40,016		51,287		70,075
Investment in PennyMac Mortgage Investment Trust		1,217		—		—		1,217		1,372		—		—		1,372
Mortgage servicing rights at fair value		—		—		526,294		526,294		—		—		678,441		678,441
	$	52,177	$	2,186,858	$	655,980	$	2,790,254	$	149,770	$	2,697,534	$	1,109,812	$	3,932,930
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	294,551	$	294,551	$	—	$	—	$	261,796	$	261,796
Derivative liabilities:
Interest rate lock commitments		—		—		1,345		1,345		—		—		5,129		5,129
Forward purchase contracts		—		119		—		119		—		33,731		—		33,731
Forward sales contracts		—		101,772		—		101,772		—		528		—		528
Put options on interest rate futures purchase contracts		2,070		—		—		2,070		63		—		—		63
Call options on interest rate futures purchase contracts		234		—		—		234
Total derivative liabilities before netting		2,304		101,891		1,345		105,540		63		34,259		5,129		39,451
Netting		—		—		—		(101,806)		—		—		—		(22,887)
Total derivative liabilities		2,304		101,891		1,345		3,734		63		34,259		5,129		16,564
Mortgage servicing liabilities		—		—		4,681		4,681
Mortgage servicing liabilities at fair value										—		—		18,295		18,295
	$	2,304	$	101,891	$	300,577	$	302,966	$	63	$	34,259	$	285,220	$	296,655

2130

Table of Contents


	December 31, 2015
	Level 1		Level 2		Level 3		Total		December 31, 2016
	(in thousands)								Level 1		Level 2		Level 3		Total
									(in thousands)
Assets:
Short-term investments	$	46,319	$	—	$	—	$	46,319	$	85,964	$	—	$	—	$	85,964
Mortgage loans held for sale at fair value		—		1,052,673		48,531		1,101,204		—		2,125,544		47,271		2,172,815
Derivative assets:
Interest rate lock commitments		—		—		45,885		45,885		—		—		65,848		65,848
Forward purchase contracts		—		4,181		—		4,181		—		77,905		—		77,905
Forward sales contracts		—		4,965		—		4,965		—		28,324		—		28,324
MBS put options		—		404		—		404		—		3,934		—		3,934
MBS call options										—		217		—		217
Put options on interest rate futures purchase contracts		1,832		—		—		1,832		3,109		—		—		3,109
Call options on interest rate futures purchase contracts		1,555		—		—		1,555		203		—		—		203
Total derivative assets before netting		3,387		9,550		45,885		58,822		3,312		110,380		65,848		179,540
Netting		—		—		—		(8,542)		—		—		—		(96,635)
Total derivative assets		3,387		9,550		45,885		50,280		3,312		110,380		65,848		82,905
Investment in PennyMac Mortgage Investment Trust		1,145		—		—		1,145		1,228		—		—		1,228
Mortgage servicing rights at fair value		—		—		660,247		660,247		—		—		515,925		515,925
	$	50,851	$	1,062,223	$	754,663	$	1,859,195	$	90,504	$	2,235,924	$	629,044	$	2,858,837
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	412,425	$	412,425	$	—	$	—	$	288,669	$	288,669
Derivative liabilities:
Interest rate lock commitments		—		—		2,112		2,112		—		—		6,457		6,457
Forward purchase contracts		—		9,004		—		9,004		—		16,914		—		16,914
Forward sales contracts		—		7,497		—		7,497		—		85,035		—		85,035
Put options on interest rate futures purchase contracts		203		—		—		203
Call options on interest rate futures purchase contracts		47		—		—		47
Total derivative liabilities before netting		250		16,501		2,112		18,863		—		101,949		6,457		108,406
Netting		—		—		—		(9,780)		—		—		—		(86,044)
Total derivative liabilities		250		16,501		2,112		9,083		—		101,949		6,457		22,362
Mortgage servicing liabilities		—		—		1,399		1,399
Mortgage servicing liabilities at fair value										—		—		15,192		15,192
	$	250	$	16,501	$	415,936	$	422,907	$	—	$	101,949	$	310,318	$	326,223

2231

Table of Contents

As shown above, all or a portion of the Company’s mortgage loans held for sale, IRLCs, MSRs at fair value, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for the quarters and six ~~month periods~~months ended June 30, ~~2016~~2017 and ~~2015:~~2016:


	Quarter ended June 30, 2016
	Mortgage		Net interest		Mortgage				Quarter ended June 30, 2017
	loans held		rate lock		servicing				Mortgage		Net interest		Mortgage
	for sale		commitments (1)		rights			Total	loans held		rate lock		servicing
	(in thousands)								for sale		commitments (1)		rights			Total
									(in thousands)
Assets:
Balance, March 31, 2016	$	33,030	$	71,885	$	594,403	$	699,318
Balance, March 31, 2017									$	327,682	$	66,007	$	506,916	$	900,605
Purchases		142,912		—		—		142,912		625,492		—		183,586		809,078
Sales		(3,826)		—		—		(3,826)
Repayments		(10,617)		—		—		(10,617)
Sales and repayments										(264,558)		—		—		(264,558)
Interest rate lock commitments issued, net		—		102,755		—		102,755		—		71,062		—		71,062
Mortgage servicing rights resulting from mortgage loan sales		—		—		4,820		4,820		—		—		7,945		7,945
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(1,078)		—		—		(1,078)		(3,046)		—		—		(3,046)
Other factors		—		77,518		(72,929)		4,589		—		32,613		(20,006)		12,607
		(1,078)		77,518		(72,929)		3,511		(3,046)		32,613		(20,006)		9,561
Transfers of mortgage loans held for sale from Level 3 to Level 2 (2)		(122,342)		—		—		(122,342)
Transfers from Level 3 to Level 2										(305,486)		—		—		(305,486)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(161,896)		—		(161,896)		—		(123,524)		—		(123,524)
Balance, June 30, 2016	$	38,079	$	90,262	$	526,294	$	654,635
Changes in fair value recognized during the period relating to assets still held at June 30, 2016	$	442	$	90,262	$	(72,929)	$	17,775

Balance, June 30, 2017									$	380,084	$	46,158	$	678,441	$	1,104,683
Changes in fair value recognized during the period relating to assets still held at June 30, 2017									$	(3,042)	$	46,158	$	(20,006)	$	23,110

(1)

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


	Quarter ended June 30, 2017
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, March 31, 2017	$	277,484	$	15,994	$	293,478
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,380		—		1,380
Accrual of interest		4,366		—		4,366
Repayments		(14,278)		—		(14,278)
Mortgage servicing liabilities resulting from mortgage loan sales		—		3,810		3,810
Changes in fair value included in income		(7,156)		(1,509)		(8,665)
Balance, June 30, 2017	$	261,796	$	18,295	$	280,091
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2017	$	(7,156)	$	(1,509)	$	(8,665)

Table of Contents


	Quarter ended June 30, 2016
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance, March 31, 2016	$	33,030	$	71,885	$	594,403	$	699,318
Purchases		142,912		—		—		142,912
Sales and repayments		(14,443)		—		—		(14,443)
Interest rate lock commitments issued, net		—		102,755		—		102,755
Mortgage servicing rights resulting from mortgage loan sales		—		—		4,820		4,820
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(1,078)		—		—		(1,078)
Other factors		—		77,518		(72,929)		4,589
		(1,078)		77,518		(72,929)		3,511
Transfers from Level 3 to Level 2		(122,342)		—		—		(122,342)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(161,896)		—		(161,896)
Balance, June 30, 2016	$	38,079	$	90,262	$	526,294	$	654,635
Changes in fair value recognized during the period relating to assets still held at June 30, 2016	$	442	$	90,262	$	(72,929)	$	17,775

(1)

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


	Quarter ended June 30, 2016
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, March 31, 2016	$	321,976	$	6,747	$	328,723
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,690		—		1,690
Accrual of interest		5,713		—		5,713
Repayments		(17,400)		—		(17,400)
Changes in fair value included in income		(17,428)		(2,066)		(19,494)
Balance, June 30, 2016	$	294,551	$	4,681	$	299,232
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2016	$	(17,428)	$	(2,066)	$	(19,494)

Table of Contents


	Six months ended June 30, 2017
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2016	$	47,271	$	59,391	$	515,925	$	622,587
Purchases		1,315,963		—		183,789		1,499,752
Sales and repayments		(538,860)		—		—		(538,860)
Interest rate lock commitments issued, net		—		142,819		—		142,819
Mortgage servicing rights resulting from mortgage loan sales		—		—		13,929		13,929
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(4,974)		—		—		(4,974)
Other factors		—		57,732		(35,202)		22,530
		(4,974)		57,732		(35,202)		17,556
Transfers from Level 3 to Level 2		(439,316)		—		—		(439,316)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(213,784)		—		(213,784)
Balance, June 30, 2017	$	380,084	$	46,158	$	678,441	$	1,104,683
Changes in fair value recognized during the period relating to assets still held at June 30, 2017	$	(4,620)	$	46,158	$	(35,202)	$	6,336

(1)

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


	Six months ended June 30, 2017
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
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		2,953		—		2,953
Accrual of interest		9,013		—		9,013
Repayments		(28,910)		—		(28,910)
Mortgage servicing liabilities resulting from mortgage loan sales		—		7,869		7,869
Changes in fair value included in income		(9,929)		(4,766)		(14,695)
Balance, June 30, 2017	$	261,796	$	18,295	$	280,091
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2017	$	(9,929)	$	(4,766)	$	(14,695)

Table of Contents


	Six months ended June 30, 2016
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Purchases		488,798		—		11		488,809
Sales and repayments		(298,176)		—		—		(298,176)
Interest rate lock commitments issued, net		—		181,218		—		181,218
Mortgage servicing rights resulting from mortgage loan sales		—		—		9,288		9,288
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		691		—		—		691
Other factors		—		149,188		(143,252)		5,936
		691		149,188		(143,252)		6,627
Transfers from Level 3 to Level 2		(201,765)		—		—		(201,765)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(283,917)		—		(283,917)
Balance, June 30, 2016	$	38,079	$	90,262	$	526,294	$	654,635
Changes in fair value recognized during the year relating to assets still held at June 30, 2016	$	860	$	90,262	$	(143,252)	$	(52,130)

(1)

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

~~(2)~~

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

Quarter ended June 30, 2016

Excess

servicing

Mortgage

spread

servicing

financing

liabilities

Total


(in thousands)

Liabilities:

Balance, March 31, 2016

$
321,976

$
6,747

$
328,723

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

1,690

—

1,690

Accrual of interest

5,713

—

5,713

Repayments

(17,400)

—

(17,400)

Changes in fair value included in income

(17,428)

(2,066)

(19,494)

Balance, June 30, 2016

$
294,551

$
4,681

$
299,232

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2016

$
(17,428)

$
(2,066)

$
(19,494)

~~Table of Contents~~

Quarter ended June 30, 2015

Mortgage

Net interest

Mortgage

loans held

rate lock

servicing

for sale

commitments (1)

rights

Total

(in thousands)

Assets:

Balance, March 31, 2015

$
83,684

$
54,392

$
361,413

$
499,489

Purchases

400,705

—

206,996

607,701

Sales

(386,586)

—

—

(386,586)

Repayments

(11,610)

—

—

(11,610)

Interest rate lock commitments issued, net

—

61,365

—

61,365

Mortgage servicing rights resulting from mortgage loan sales

—

—

3,443

3,443

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

1,739

—

—

1,739

Other factors

746

(10,245)

9,417

(82)

2,485

(10,245)

9,417

1,657

Transfers of mortgage loans held for sale from Level 3 to Level 2  (2)

(54,593)

—

—

(54,593)

Transfers of interest rate lock commitments to mortgage loans held for sale

—

(77,775)

—

(77,775)

Balance, June 30, 2015

$
34,085

$
27,737

$
581,269

$
643,091

Changes in fair value recognized during the period relating to assets still held at June 30, 2015

$
481

$
(10,245)

$
9,417

$
(347)

~~(1)~~

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

~~(2)~~

Quarter ended June 30, 2015

Excess

servicing

Mortgage

spread

servicing

financing

liabilities

Total

(in thousands)

Liabilities:

Balance, March 31, 2015

$
222,309

$
6,529

$
228,838

Issuance of excess servicing spread financing:

For cash

140,875

—

140,875

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

1,319

—

1,319

Mortgage servicing liabilities resulting from mortgage loan sales

—

9,156

9,156

Accrual of interest

5,818

—

5,818

Repayments

(18,352)

—

(18,352)

Changes in fair value included in income

7,133

(3,894)

3,239

Balance, June 30, 2015

$
359,102

$
11,791

$
370,893

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2015

$
7,133

$
(3,894)

$
3,239

~~Table of Contents~~

Six months ended June 30, 2016

Mortgage

Net interest

Mortgage

loans held

rate lock

servicing

for sale

commitments (1)

rights

Total


(in thousands)

Assets:








Balance, December 31, 2015

$
48,531

$
43,773

$
660,247

$
752,551

Purchases

488,798

—

11

488,809

Sales

(278,318)

—

—

(278,318)

Repayments

(19,858)

—

—

(19,858)

Interest rate lock commitments issued, net

—

181,218

—

181,218

Mortgage servicing rights resulting from mortgage loan sales

—

—

9,288

9,288

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

691

—

—

691

Other factors

—

149,188

(143,252)

5,936

691

149,188

(143,252)

6,627

Transfers of mortgage loans held for sale from Level 3 to Level 2 (2)

(201,765)

—

—

(201,765)

Transfers of interest rate lock commitments to mortgage loans held for sale

—

(283,917)

—

(283,917)

Balance, June 30, 2016

$
38,079

$
90,262

$
526,294

$
654,635

Changes in fair value recognized during the period relating to assets still held at June 30, 2016

$
860

$
90,262

$
(143,252)

$
(52,130)

~~(1)~~

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

~~(2)~~

Six months ended June 30, 2016

Excess

servicing

Mortgage

spread

servicing

financing

liabilities

Total

(in thousands)

Liabilities:

Balance, December 31, 2015

$
412,425

$
1,399

$
413,824

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

3,601

—

3,601

Accrual of interest

12,728

—

12,728

Repurchase

(59,045)

—

(59,045)

Repayments

(38,281)

—

(38,281)

Mortgage servicing liabilities resulting from mortgage loan sales

—

5,409

5,409

Changes in fair value included in income

(36,877)

(2,127)

(39,004)

Balance, June 30, 2016

$
294,551

$
4,681

$
299,232

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2016

$
(29,667)

$
(2,127)

$
(31,794)

~~Table of Contents~~

Six months ended June 30, 2015

Mortgage

Net interest

Mortgage

loans held

rate lock

servicing


for sale

commitments (1)

rights

Total

(in thousands)

Assets:

Balance December 31, 2014

$
209,908

$
32,401

$
325,383

$
567,692

Purchases

466,285

—

270,133

736,418

Sales

(511,854)

—

—

(511,854)

Repayments

(20,002)

—

—

(20,002)

Interest rate lock commitments issued, net

—

144,145

—

144,145

Mortgage servicing rights resulting from mortgage loan sales

—

—

6,118

6,118

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

4,054

—

—

4,054

Other factors

(791)

(10,292)

(20,365)

(31,448)

3,263

(10,292)

(20,365)

(27,394)

Transfers of mortgage loans held for sale from Level 3 to Level 2 (2)

(113,515)

—

—

(113,515)

Transfers of interest rate lock commitments to mortgage loans held for sale

—

(138,517)

—

(138,517)

Balance, June 30, 2015

$
34,085

$
27,737

$
581,269

$
643,091

Changes in fair value recognized during the period relating to assets still held at June 30, 2015

$
906

$
(10,292)

$
(20,365)

$
(29,751)

~~(1)~~

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

~~(2)~~

Six months ended June 30, 2015

Excess

servicing

Mortgage

spread

servicing


financing


liabilities

Total

(in thousands)

Liabilities:

Balance December 31, 2014

$
191,166

$
6,306

$
197,472

Issuance of excess servicing spread financing:

For cash

187,287

—

187,287

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

2,565

—

2,565

Mortgage servicing liabilities resulting from mortgage loan sales

—

12,084

12,084

Accrual of interest

9,570

—

9,570

Repayments

(31,083)

—

(31,083)

Changes in fair value included in income

(403)

(6,599)

(7,002)

Balance, June 30, 2015

$
359,102

$
11,791

$
370,893

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2015

$
(403)

$
(6,599)

$
(7,002)


	Six months ended June 30, 2016
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance December 31, 2015	$	412,425	$	1,399	$	413,824
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		3,601		—		3,601
Accrual of interest		12,728		—		12,728
Repurchase		(59,045)		—		(59,045)
Repayments		(38,281)		—		(38,281)
Mortgage servicing liabilities resulting from mortgage loan sales		—		5,409		5,409
Changes in fair value included in income		(36,877)		(2,127)		(39,004)
Balance, June 30, 2016	$	294,551	$	4,681	$	299,232
Changes in fair value recognized during the year relating to liabilities still outstanding at June 30, 2016	$	(29,667)	$	(2,127)	$	(31,794)

The information used in the preceding roll forwards represents activity for ~~any financial statement items~~assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” inputs that are significant to the fair value ~~inputs~~measurement 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. Such mortgage loans become saleable into the active secondary market due to curing of the loans’ defects through borrower reperformance, modification of the loan or resolution of deficiencies contained in the borrowers’ credit file.

2635

Table of Contents

~~Financial Statement Items~~

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

Net changes in fair values included in income for ~~financial statement items~~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 June 30,
	2016						2015						Quarter ended June 30,
	Net gains on						Net gains on						2017						2016
	mortgage		Net mortgage				mortgage		Net mortgage				Net gains on						Net gains on
	loans held		loan				loans held		loan				mortgage		Net mortgage				mortgage		Net mortgage
	for sale at		servicing				for sale at		servicing				loans held		loan				loans held		loan
	fair value		fees		Total		fair value		fees		Total		for sale at		servicing				for sale at		servicing
	(in thousands)												fair value		fees		Total		fair value		fees		Total
													(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	164,527	$	—	$	164,527	$	68,503	$	—	$	68,503	$	123,657	$	—	$	123,657	$	164,527	$	—	$	164,527
Mortgage servicing rights at fair value		—		(72,929)		(72,929)		—		9,417		9,417		—		(20,006)		(20,006)		—		(72,929)		(72,929)
	$	164,527	$	(72,929)	$	91,598	$	68,503	$	9,417	$	77,920	$	123,657	$	(20,006)	$	103,651	$	164,527	$	(72,929)	$	91,598
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	17,428	$	17,428	$	—	$	(7,133)	$	(7,133)	$	—	$	7,156	$	7,156	$	—	$	17,428	$	17,428
Mortgage servicing liabilities at fair value		—		2,066		2,066		—		3,894		3,894		—		1,509		1,509		—		2,066		2,066
	$	—	$	19,494	$	19,494	$	—	$	(3,239)	$	(3,239)	$	—	$	8,665	$	8,665	$	—	$	19,494	$	19,494


	Six months ended June 30,
	2017						2016
	Net gains on		Net				Net gains on		Net
	mortgage		mortgage				mortgage		mortgage
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	205,967	$	—	$	205,967	$	300,608	$	—	$	300,608
Mortgage servicing rights at fair value		—		(35,202)		(35,202)		—		(143,252)		(143,252)
	$	205,967	$	(35,202)	$	170,765	$	300,608	$	(143,252)	$	157,356
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	9,929	$	9,929	$	—	$	36,877	$	36,877
Mortgage servicing liabilities at fair value		—		4,766		4,766		—		2,127		2,127
	$	—	$	14,695	$	14,695	$	—	$	39,004	$	39,004

Six months ended June 30,

2016

2015


Net gains on

Net



Net gains on

Net


mortgage

mortgage

mortgage

mortgage

loans held

loan

loans held

loan

for sale at

servicing

for sale at

servicing

fair value

fees

Total

fair value

fees

Total

(in thousands)

Assets:

Mortgage loans held for sale at fair value

$
300,608

$
—

$
300,608

$
149,817

$
—

$
149,817

Mortgage servicing rights at fair value

—

(143,252)

(143,252)

—

(20,365)

(20,365)

$
300,608

$
(143,252)

$
157,356

$
149,817

$
(20,365)

$
129,452

Liabilities:

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

$
—

$
36,877

$
36,877

$
—

$
403

$
403

Mortgage servicing liabilities at fair value

—

2,127

2,127

—

6,599

6,599

$
—

$
39,004

$
39,004

$
—

$
7,002

$
7,002

Table of Contents

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


	June 30, 2016
			Principal				June 30, 2017
			amount						Principal
	Fair		due upon						amount
	value		maturity		Difference		Fair		due upon
	(in thousands)						value		maturity		Difference
							(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,076,718	$	1,951,046	$	125,672	$	2,719,560	$	2,592,354	$	127,206
90 days or more delinquent:
Not in foreclosure		12,924		12,882		42		239,660		244,419		(4,759)
In foreclosure		7,496		7,975		(479)		78,382		78,573		(191)
	$	2,097,138	$	1,971,903	$	125,235	$	3,037,602	$	2,915,346	$	122,256


	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~~

December 31, 2015

Principal

amount

Fair

due upon


value

maturity

Difference


(in thousands)

Mortgage loans held for sale:



Current through 89 days delinquent

$
1,068,548

$
1,016,314

$
52,234

90 days or more delinquent:

Not in foreclosure

26,399

26,999

(600)

In foreclosure

6,257

6,598

(341)

$
1,101,204

$
1,049,911

$
51,293

~~Financial Statement Items~~Assets Measured at Fair Value on a Nonrecurring Basis

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


	June 30, 2016
	Level 1		Level 2		Level 3		Total		June 30, 2017
	(in thousands)								Level 1		Level 2		Level 3		Total
									(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	764,634	$	764,634	$	—	$	—	$	1,254,152	$	1,254,152
Real estate acquired in settlement of loans		—		—		948		948		—		—		523		523
	$	—	$	—	$	765,582	$	765,582	$	—	$	—	$	1,254,675	$	1,254,675

December 31, 2015


Level 1

Level 2

Level 3

Total

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
—

$
—

$
202,991

$
202,991

$
—

$
—

$
202,991

$
202,991


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

Table of Contents

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(72,647)	$	13,566	$	(149,720)	$	(18,126)	$	(30,635)	$	(72,647)	$	(16,636)	$	(149,720)
Real estate acquired in settlement of loans		393		—		(42)		—		(73)		393		(105)		(42)
	$	(72,254)	$	13,566	$	(149,762)	$	(18,126)	$	(30,708)	$	(72,254)	$	(16,741)	$	(149,762)

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s ~~Cash~~ ~~as well as its~~ ~~Carried Interest due~~Assets purchased from PennyMac Mortgage Investment ~~Funds~~Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation and sale agreements, Notes payable, Obligations under capital lease ~~Note receivable from PMT~~ and amounts receivable from and payable to the Advised Entities are carried at amortized cost.

~~Cash~~ ~~is measured using a “Level 1” fair value input.~~

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

The Company’s borrowings carried at amortized cost and the receivables from and payables to the Advised Entities 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

~~Table of Contents~~

significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” fair value ~~financial statement items~~liabilities due to the lack of observable inputs to estimate their fair ~~values.~~

~~The Company~~values and has concluded that ~~the~~those liabilities’ fair ~~value of the receivables from and payables to the Advised Entities and the~~ ~~Note receivable from PMT~~ ~~approximates~~values approximate the carrying value due to their short terms and/or variable interest rates.

Valuation Techniques and Inputs

Most of the Company’s financial assets, a portion 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 ~~financial statement items~~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 ~~financial statement items,~~assets and liabilities, management has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation 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 ~~financial statement items~~assets and liabilities other than ~~IRLCs and maintaining its valuation policies and procedures.~~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 ~~financial statement items,~~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, ~~operating,~~chief risk, ~~business development~~chief enterprise operations and ~~asset/liability management~~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 “Level 3” fair value ~~financial statement items,~~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.

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Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value ~~financial statement items:~~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 ~~financial statement items~~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 ~~may become~~held for sale are 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 such mortgage loans arisesand are therefore categorized as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. To the extent such mortgage loans have not become saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms, the Company measures such mortgage loans along with mortgage loans with identified defects using “Level 3” fair value ~~inputs.~~assets:

The Company may 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.

~~Table of Contents~~

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 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~~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.

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	June 30, 2016	December 31, 2015	June 30, 2017	December 31, 2016
Discount rate
Discount rate:
Range	2.5% – 8.1%	2.5% – 9.1%	2.9% – 9.4%	2.6% – 8.8%
Weighted average	3.2%	2.8%	2.9%	3.0%
Twelve-month projected housing price index change
Twelve-month projected housing price index change:
Range	2.3% – 4.8%	1.8% – 5.0%	2.6% – 4.7%	2.0% – 4.5%
Weighted average	4.0%	3.7%	3.8%	3.7%
Voluntary prepayment / resale speed (1)
Voluntary prepayment / resale speed (1):
Range	0.4% – 21.4%	0.6% – 20.1%	0.1% – 19.3%	0.1% – 24.4%
Weighted average	17.0%	16.6%	17.3%	20.9%
Total prepayment speed (2)
Total prepayment speed (2):
Range	0.7% – 38.6%	0.7% – 37.6%	0.1% – 40.0%	0.1% – 39.8%
Weighted average	30.4%	30.9%	37.7%	34.3%

(1)

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

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

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

Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective mortgage loan’s delinquency status and performance history at period end from the later of the

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beginning of the period or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as a “Level 3” fair value ~~financial statement item.~~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 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 ~~IRLC, the~~mortgage loan principal and interest payment cash ~~flows that have~~flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on mortgage loans ~~held~~acquired for sale at fair value and may be allocated to Net mortgage loan servicing fees as a hedge of the fair value of MSRs in the consolidated statements of ~~income.~~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	June 30, 2016	December 31, 2015	June 30, 2017	December 31, 2016
Pull-through rate
Pull-through rate:
Range	37.1% – 100.0%	54.1% – 100.0%	38.7% – 100.0%	35.0% – 100.0%
Weighted average	84.9%	90.1%	86.2%	84.9%
Mortgage servicing rights value expressed as:
Servicing fee multiple
Servicing fee multiple:
Range	1.2 – 5.5	1.0 – 5.8	1.1 – 5.7	1.2 – 5.9
Weighted average	4.0	4.4	4.0	4.3
Percentage of unpaid principal balance
Percentage of unpaid principal balance:
Range	0.2% – 2.6%	0.2% – 3.8%	0.3% – 2.5%	0.3% – 2.8%
Weighted average	1.1%	1.5%	1.3%	1.3%

Hedging Derivatives

~~The remaining~~Fair value of hedging derivative financial instruments ~~held or issued~~based on exchange traded market prices are categorized by the Company ~~are categorized~~ as “Level 1” ~~or “Level 2”~~ fair value ~~financial statement items. The Company estimates the fair~~assets and liabilities. Fair value of ~~commitments to sell and purchase mortgage loans~~hedging derivative financial instruments based on observable MBS ~~prices. The Company estimates the fair value of MBS options based on observed~~prices or interest rate volatilities in the MBS ~~market.~~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 ~~held~~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.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value ~~financial statement items.~~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 discount rate or pricing spread,~~ and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSRs are included in Net servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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Following are the key ~~“Level 3” fair value~~ inputs used in determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:


	Quarter ended June 30,
	2016		2015		Quarter ended June 30,
	Fair	Amortized	Fair	Amortized	2017				2016
	value	cost	value	cost	Fair		Amortized		Fair		Amortized
	(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)				value		cost		value		cost
					(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)
MSR and pool characteristics:
Amount recognized	$4,820	$127,652	$3,443	$125,561	$	7,945	$	128,927	$	4,820	$	127,652
Unpaid principal balance of underlying mortgage loans	$400,433	$10,370,549	$280,613	$8,762,024	$	795,875	$	11,005,607	$	400,433	$	10,370,549
Weighted average servicing fee rate (in basis points)	33	29	34	36		29		30		33		29
Key inputs:
Pricing spread (1)
Range	7.2% – 9.5%	7.2% – 14.4%	7.0% – 13.4%	6.8% – 15.7%		7.6% – 11.0%		7.6% – 15.2%		7.2% – 9.5%		7.2% – 14.4%
Weighted average	8.7%	8.9%	9.9%	9.0%		10.4%		10.7%		8.7%		8.9%
Annual total prepayment speed (2)
Range	3.3% – 45.1%	3.9% – 50.9%	7.7% – 46.0%	7.7% – 34.0%		4.2% – 71.8%		4.0% – 45.7%		3.3% – 45.1%		3.9% – 50.9%
Weighted average	12.2%	9.8%	10.2%	8.3%		12.9%		9.7%		12.2%		9.8%
Life (in years)
Range	1.6 – 11.8	1.3 – 11.8	1.5 – 7.3	2.1 – 7.3		0.8 – 11.5		1.6 – 11.7		1.6 – 11.8		1.3 – 11.8
Weighted average	6.7	7.7	6.6	7.0		6.5		7.7		6.7		7.7
Per-loan annual cost of servicing
Range	$68 – $105	$68 – $106	$59 – $82	$59 – $82		$78 – $98		$79 – $98		$68 – $105		$68 – $106
Weighted average	$89	$90	$74	$75		$88		$89		$89		$90

(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.


	Six months ended June 30,
	2017		2016
	Fair	Amortized	Fair	Amortized
	value	cost	value	cost
	(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)
MSR and pool characteristics:
Amount recognized	$13,929	$259,145	$9,288	$223,966
Unpaid principal balance of underlying mortgage loans	$1,299,940	$21,706,206	$768,240	$17,354,721
Weighted average servicing fee rate (in basis points)	30	29	33	31
Key inputs:
Pricing spread (1)
Range	7.6% – 11.0%	7.6% – 15.2%	7.2% – 9.8%	7.2% – 14.4%
Weighted average	10.5%	10.7%	8.7%	8.9%
Annual total prepayment speed (2)
Range	4.2% – 71.8%	3.4% – 45.7%	3.3% – 52.3%	3.8% – 50.9%
Weighted average	12.1%	9.0%	12.7%	10.3%
Life (in years)
Range	0.8 – 11.5	1.6 – 12.2	1.3 – 11.8	1.3 – 11.9
Weighted average	6.7	8.0	6.5	7.5
Per-loan annual cost of servicing
Range	$78 – $101	$79 – $101	$68 – $105	$68 – $106
Weighted average	$89	$90	$85	$87

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Six months ended June 30,

2016

2015

Fair

Amortized

Fair

Amortized

value

cost

value

cost

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

MSR and pool characteristics:








Amount recognized

$9,288

$223,966

$6,118

$192,842

Unpaid principal balance of underlying mortgage loans

$768,240

$17,354,721

$522,130

$13,899,109

Weighted average servicing fee rate (in basis points)

33

31

33

35

Key inputs:

Pricing spread (1)

Range

7.2% – 9.8%

7.2% – 14.4%

7.0% – 14.4%

6.8% – 15.9%

Weighted average

8.7%

8.9%

10.3%

9.3%

Annual total prepayment speed (2)

Range

3.3% – 52.3%

3.8% – 50.9%

7.7% – 62.4%

7.6% – 39.4%

Weighted average

12.7%

10.3%

11.0%

8.5%

Life (in years)

Range

1.3 – 11.8

1.3 – 11.9

1.1 – 7.3

1.8 – 7.3

Weighted average

6.5

7.5

6.4

7.0

Per-loan annual cost of servicing

Range

$68 – $105

$68 – $106

$59 – $82

$59 – $82

Weighted average

$85

$87

$74

$75

(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”)~~LIBOR curve for purposes of discounting cash flows relating to MSRs.

(2)

Prepayment speed is measured using Life Total CPR.

~~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 and the effect on fair value from adverse changes in those inputs (weighted averages are based upon UPB):


	June 30, 2016				December 31, 2015
	Fair		Amortized		Fair		Amortized		June 30, 2017				December 31, 2016
	value		cost		value		cost		Fair		Amortized		Fair		Amortized
	(Carrying value, unpaid principal balance of underlying								value		cost		value		cost
	mortgage loans and effect on fair value amounts in thousands)								(Carrying value, unpaid principal balance of underlying
									mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$	526,294	$	764,634	$	660,247	$	751,688	$	678,441	$	1,273,158	$	515,925	$	1,111,747
Unpaid principal balance of underlying mortgage loans	$	49,376,858	$	67,659,946	$	54,182,477	$	56,420,227	$	56,775,177	$	100,448,732	$	43,667,165	$	85,509,941
Weighted average note interest rate		4.1%		3.8%		4.1%		3.8%		4.0%		3.7%		4.1%		3.7%
Weighted average servicing fee rate (in basis points)		32		32		32		32		32		30		32		31
Key inputs:
Pricing spread (1)
Pricing spread (1):
Range		7.6% – 14.4%		7.6% – 14.4%		7.2% – 14.1%		7.2% – 12.8%		10.0% – 14.3%		7.6% – 14.3%		7.6% – 14.9%		7.6% – 14.9%
Weighted average		8.8%		9.2%		8.9%		8.9%		10.6%		10.6%		10.1%		10.7%
Effect on fair value of (2):
5% adverse change	$	(8,472)	$	(12,998)	$	(11,115)	$	(13,467)	$	(12,381)	$	(25,059)	$	(9,097)	$	(22,382)
10% adverse change	$	(16,665)	$	(25,551)	$	(21,857)	$	(26,472)	$	(24,302)	$	(49,154)	$	(17,872)	$	(43,889)
20% adverse change	$	(32,268)	$	(49,405)	$	(42,293)	$	(51,183)	$	(46,865)	$	(94,654)	$	(34,516)	$	(84,464)
Average life (in years)
Prepayment speed (3):
Range		1.6 – 8.9		1.3 – 9.2		1.9 – 9.0		1.8 – 9.1		7.6% – 70.8%		7.3% – 43.2%		7.0% – 46.7%		6.6% – 43.9%
Weighted average		6.0		6.3		6.9		7.4		10.6%		9.2%		10.3%		8.7%
Prepayment speed (3)
Average life (in years):
Range		6.8% – 38.6%		6.8% – 53.1%		5.3% – 43.8%		5.7% – 46.7%		3.5 – 8.2		2.0 – 8.9		1.3 – 8.6		1.6 – 9.4
Weighted average		12.7%		12.8%		9.7%		9.5%		6.8		7.8		6.7		8.1
Effect on fair value of (2):
5% adverse change	$	(11,946)	$	(18,312)	$	(12,475)	$	(14,360)	$	(11,403)	$	(20,003)	$	(8,818)	$	(16,636)
10% adverse change	$	(23,401)	$	(35,830)	$	(24,499)	$	(28,197)	$	(22,421)	$	(39,356)	$	(17,336)	$	(32,750)
20% adverse change	$	(44,946)	$	(68,674)	$	(47,286)	$	(54,406)	$	(43,374)	$	(76,236)	$	(33,533)	$	(63,513)
Annual per-loan cost of servicing
Annual per-loan cost of servicing:
Range		$78 – $105		$79 – $106		$68 – $97		$68 – $95		$78 – $98		$79 – $98		$78 – $101		$79 – $101
Weighted average		$96		$94		$86		$84		$89		$89		$92		$92
Effect on fair value of (2):
5% adverse change	$	(6,393)	$	(6,680)	$	(6,812)	$	(5,725)	$	(6,645)	$	(9,965)	$	(5,612)	$	(8,890)
10% adverse change	$	(12,785)	$	(13,361)	$	(13,624)	$	(11,451)	$	(13,290)	$	(19,230)	$	(11,225)	$	(17,781)
20% adverse change	$	(25,570)	$	(26,722)	$	(27,247)	$	(22,901)	$	(26,580)	$	(39,858)	$	(22,450)	$	(35,562)

(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 in recognition of MSR impairment. The extent of the recognized MSR impairment will depend on the relationship of fair value to the carrying value of such MSRs.

(3)

Prepayment speed is measured using Life Total CPR.

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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.

~~Table of Contents~~

Excess Servicing Spread Financing at Fair Value

The Company categorizes ESS as a “Level 3” fair value ~~financial statement item.~~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 athe same discounted cash flow approach to ~~estimate~~measuring the ~~fair value~~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 in the fair value of ESS decrease income and are included in Net mortgage loan servicing ~~fees.~~

Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS through the expected life of the underlying mortgage loans. Other changes in fair value are recorded in fees~~Amortization, impairment and change~~—Change in fair value of ~~mortgage~~excess servicing ~~rights~~.spread payable to PennyMac Mortgage Investment Trust.

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


	June 30,	December 31,
	2016	2015	June 30,	December 31,
			2017	2016
Carrying value (in thousands)	$294,551	$412,425	$261,796	$288,669
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$36,151,940	$51,966,405	$29,716,891	$32,376,359
Average servicing fee rate (in basis points)	34	32	34	34
Average excess servicing spread (in basis points)	19	17	19	19
Key inputs:
Pricing spread (1)
Pricing spread (1):
Range	4.7% – 5.9%	4.8% – 6.5%	3.8% – 4.4%	3.8% – 4.8%
Weighted average	5.5%	5.7%	4.2%	4.4%
Average life (in years)
Annualized prepayment speed (2):
Range	1.6 – 8.9	1.4 – 9.0	7.7% – 70.9%	7.0% – 41.3%
Weighted average	6.2	6.9	10.7%	10.5%
Annualized prepayment speed (2)
Average life (in years):
Range	6.8% – 37.3%	5.2% – 52.4%	0.7 – 8.1	1.4 – 8.6
Weighted average	12.5%	9.6%	6.6	6.8

(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, 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 liabilities in the consolidated statements of income.

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

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

June 30,

December 31,


2016

2015

(in thousands)

Government-insured or guaranteed

$
1,947,944

$
992,805

Conventional conforming

109,744

59,868

Jumbo

1,371

—

Delinquent mortgage loans purchased from Ginnie Mae pools serviced by the Company

28,745

42,600

Mortgage loans repurchased pursuant to representations and warranties

9,334

5,931

$
2,097,138

$
1,101,204

Fair value of mortgage loans pledged to secure:

Assets sold under agreements to repurchase

$
1,302,339

$
833,748

Mortgage loan participation and sale agreement

769,629

245,741

$
2,071,968

$
1,079,489

~~Note 9—Derivative Financial Instruments~~

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

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

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the process of purchasing or originating mortgage loans held for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

~~Table of Contents~~

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

June 30, 2016

December 31, 2015

Fair value

Fair value

Notional

Derivative

Derivative

Notional

Derivative

Derivative

Instrument

amount

assets

liabilities

amount

assets

liabilities

(in thousands)

Derivatives not designated as hedging instruments:

Interest rate lock commitments

3,868,230

$
91,607

$
1,345

3,487,366

$
45,885

$
2,112

Forward purchase contracts

13,510,863

125,358

119

5,254,293

4,181

9,004

Forward sales contracts

13,614,196

664

101,772

6,230,811

4,965

7,497

MBS put options

3,550,000

1,777

—

1,275,000

404

—

Put options on interest rate futures purchase contracts

1,000,000

1,618

2,070

1,650,000

1,832

203

Call options on interest rate futures purchase contracts

452,100

8,279

234

600,000

1,555

47

Total derivatives before netting

229,303

105,540

58,822

18,863

Netting

(104,761)

(101,806)

(8,542)

(9,780)

$
124,542

$
3,734

$
50,280

$
9,083

Deposits placed with (received from) derivative counterparties, net

$
2,955

$
(1,238)

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

Quarter ended June 30, 2016

Balance





Balance

beginning of

Dispositions/

end of

Instrument

period

Additions

expirations

period

(in thousands)

Forward purchase contracts

9,464,470

46,870,345

(42,823,952)

13,510,863

Forward sale contracts

10,418,906

56,521,979

(53,326,689)

13,614,196

MBS put options

1,375,000

6,750,000

(4,575,000)

3,550,000

Put options on interest rate futures purchase contracts

1,750,000

1,650,000

(2,400,000)

1,000,000

Call options on interest rate futures purchase contracts

3,937,500

—

(3,485,400)

452,100

Quarter ended June 30, 2015

Balance





Balance

beginning of

Dispositions/

end of

Instrument

period

Additions

expirations

period

(in thousands)

Forward purchase contracts

5,124,867

25,739,853

(24,662,302)

6,202,418

Forward sale contracts

7,464,527

37,634,838

(35,309,801)

9,789,564

MBS put options

450,000

457,500

(580,000)

327,500

MBS call options

—

160,000

—

160,000

Put options on interest rate futures purchase contracts

1,470,500

2,284,500

(1,735,500)

2,019,500

Call options on interest rate futures purchase contracts

870,000

2,170,000

(2,015,000)

1,025,000

Put options on interest rate futures sale contracts

100,000

—

(100,000)

—


	June 30,		December 31,
	2017		2016
MSL and pool characteristics:
Carrying value (in thousands)	$	18,295	$	15,192
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,698,588	$	2,074,896
Weighted average servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		7.8%		8.0%
Prepayment speed (2)		32.3%		31.7%
Average life (in years)		3.6		3.7
Annual per-loan cost of servicing	$	443	$	497

~~Table of Contents~~

(1)

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

Six months ended June 30, 2016

Balance





Balance

beginning of

Dispositions/

end of

Instrument

period

Additions

expirations

period

(in thousands)

Forward purchase contracts

5,254,293

77,682,720

(69,426,150)

13,510,863

Forward sale contracts

6,230,811

95,918,405

(88,535,020)

13,614,196

MBS put options

1,275,000

9,450,000

(7,175,000)

3,550,000

Put options on interest rate futures purchase contracts

1,650,000

4,675,000

(5,325,000)

1,000,000

Call options on interest rate futures purchase contracts

600,000

3,637,500

(3,785,400)

452,100

Six months ended June 30, 2015

Balance





Balance

beginning of

Dispositions/

end of

Instrument

period

Additions

expirations

period

(in thousands)

Forward purchase contracts

2,634,218

45,375,703

(41,807,503)

6,202,418

Forward sale contracts

3,901,851

64,375,110

(58,487,397)

9,789,564

MBS put options

340,000

1,242,500

(1,255,000)

327,500

MBS call options

—

160,000

—

160,000

Put options on interest rate futures purchase contracts

755,000

3,825,000

(2,560,500)

2,019,500

Call options on interest rate futures purchase contracts

630,000

2,915,000

(2,520,000)

1,025,000

Put options on interest rate futures sale contracts

50,000

50,000

(100,000)

—

Call options on interest rate futures sales contracts

—

35,100

(35,100)

—

~~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 June 30,

Six months ended June 30,

Hedged item

Income statement line

2016

2015

2016

2015

(in thousands)

Interest rate lock commitments and mortgage loans held for sale

Net gains on mortgage loans held for sale

$
(48,943)

$
45,029

$
(118,119)

$
19,241

Mortgage servicing rights

Net mortgage loan servicing fees

$
64,948

$
(28,317)

$
123,668

$
(11,196)

(2)

Prepayment speed is measured using Life Total CPR.

~~Table of Contents~~

Note ~~10—~~9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Carried at Fair Value

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Balance at beginning of period	$	594,403	$	361,413	$	660,247	$	325,383	$	506,916	$	594,403	$	515,925	$	660,247
Additions:
Purchases		—		206,996		11		270,133		183,586		—		183,789		11
Mortgage servicing rights resulting from mortgage loan sales		4,820		3,443		9,288		6,118		7,945		4,820		13,929		9,288
		4,820		210,439		9,299		276,251		191,531		4,820		197,718		9,299

Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		(51,855)		26,308		(100,731)		8,593		(1,588)		(51,855)		404		(100,731)
Other changes in fair value (2)		(21,074)		(16,891)		(42,521)		(28,958)		(18,418)		(21,074)		(35,606)		(42,521)
Total change in fair value		(72,929)		9,417		(143,252)		(20,365)		(20,006)		(72,929)		(35,202)		(143,252)
Balance at end of period	$	526,294	$	581,269	$	526,294	$	581,269	$	678,441	$	526,294	$	678,441	$	526,294

	June 30,		December 31,						June 30,		December 31,
	2016		2015						2017		2016
Fair value of mortgage servicing rights pledged to secure:
Assets sold under agreements to repurchase	$	418,257	$	37,705
Note payable		107,160		20,881
	$	525,417	$	58,586					(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable									$	468,138	$	509,847

(1)

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

(2)

Represents changes due to realization of cash flows.

3944

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 June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Amortized cost:
Balance at beginning of period	$	866,989	$	470,490	$	798,925	$	415,245	$	1,299,093	$	866,989	$	1,206,694	$	798,925
Mortgage servicing rights resulting from mortgage loan sales		127,652		125,561		223,966		192,842		128,927		127,652		259,145		223,966
Amortization		(33,050)		(14,493)		(61,300)		(26,529)		(43,279)		(33,050)		(81,098)		(61,300)
Application of valuation allowance to write down mortgage servicing rights with other-than-temporary-impairment		—		—		—		—
Balance at end of period		961,591		581,558		961,591		581,558		1,384,741		961,591		1,384,741		961,591

Valuation allowance:
Balance at beginning of period		(124,310)		(41,492)		(47,237)		(9,800)		(80,948)		(124,310)		(94,947)		(47,237)
Additions		(72,647)		14,175		(149,720)		(17,517)
Application of valuation allowance to write down mortgage servicing rights with other-than-temporary-impairment		—		—		—		—
Reductions (additions)										(30,635)		(72,647)		(16,636)		(149,720)
Balance at end of period		(196,957)		(27,317)		(196,957)		(27,317)		(111,583)		(196,957)		(111,583)		(196,957)
Mortgage servicing rights, net	$	764,634	$	554,241	$	764,634	$	554,241
Mortgage servicing rights, net at end of period									$	1,273,158	$	764,634	$	1,273,158	$	764,634

Fair value of mortgage servicing rights at beginning of period	$	743,062	$	437,824	$	766,345	$	416,802	$	1,227,077	$	743,062	$	1,112,302	$	766,345
Fair value of mortgage servicing rights at end of period	$	764,634	$	569,969					$	1,273,364	$	764,634	$	1,273,364	$	764,634

	June 30,		December 31,						June 30,		December 31,
	2016		2015						2017		2016
Fair value of mortgage servicing rights pledged to secure:
Assets sold under agreements to repurchase	$	739,763	$	744,974
Note payable		20,520		—
	$	760,283	$	744,974					(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable									$	1,267,981	$	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 June 30, ~~2016~~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		Estimated MSR
Twelve month period ending June 30,	amortization		amortization
	(in thousands)		(in thousands)

2017	$	139,642
2018		114,718	$	162,473
2019		97,719		145,784
2020		84,154		131,122
2021		73,351		117,708
2022				105,638
Thereafter		452,007		722,016
	$	961,591	$	1,384,741

4045

Table of Contents

Mortgage Servicing Liabilities Carried at Fair Value

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


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Balance at beginning of period	$	15,994	$	6,747	$	15,192	$	1,399
Mortgage servicing liabilities resulting from mortgage loan sales		3,810		—		7,869		5,409
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		4,705		—		7,995		—
Other changes in fair value (2)		(6,214)		(2,066)		(12,761)		(2,127)
Total change in fair value		(1,509)		(2,066)		(4,766)		(2,127)
Balance at end of period	$	18,295	$	4,681	$	18,295	$	4,681

(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~~Mortgage 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~~Mortgage loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. ~~The fees~~Such amounts are summarized below:

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Contractual servicing fees

$
92,770

$
66,867

$
184,097

$
116,968

Ancillary and other fees:







Late charges

1,346

1,467

2,881

3,118

Other

476

691

860

1,402

$
94,592

$
69,025

$
187,838

$
121,488

~~Mortgage Servicing Liabilities Carried at Fair Value~~

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

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Balance at beginning of period

$
6,747

$
6,529

$
1,399

$
6,306

Mortgage servicing liabilities resulting from mortgage loan sales

—

9,156

5,409

12,084

Change in fair value

(2,066)

(3,894)

(2,127)

(6,599)

Balance at end of period

$
4,681

$
11,791

$
4,681

$
11,791


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Contractual servicing fees	$	112,348	$	92,770	$	218,815	$	184,097
Ancillary and other fees:
Late charges		5,905		1,424		12,589		3,044
Other		1,101		488		2,026		883
	$	119,354	$	94,682	$	233,430	$	188,024

Note ~~11—~~10—Carried Interest Due from Investment Funds

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Balance at beginning of period	$	70,519	$	68,531	$	69,926	$	67,298	$	70,778	$	70,519	$	70,906	$	69,926
Carried Interest recognized during the period		244		182		837		1,415		241		244		113		837
Proceeds received during the period		—		—		—		—
Balance at end of period	$	70,763	$	68,713	$	70,763	$	68,713	$	71,019	$	70,763	$	71,019	$	70,763

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~~During the quarter ended June 30, 2017, the Investment Funds entered into agreements to sell their remaining assets to a non-affiliate. If the sale settles as anticipated, the Company expects to collect a substantial portion of the Carried Interest ~~to be collected by~~during 2017 and the ~~Company when the Investment Funds liquidate.~~remaining balance during 2018. The ~~Investment Fund limited liability company and limited partnership~~sale agreements ~~specify that the funds will continue in existence through December 31, 2016,~~are subject to ~~three one-year extensions by PCM~~continuing due diligence and closing conditions. There can be no assurance regarding the size of the transaction or whether the transaction will be completed at ~~its discretion.~~all.

Table of Contents

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 June 30, ~~2016.~~2017.

~~Table of Contents~~

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 ~~secured~~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 ~~for two agreements and~~or on LIBOR ~~for~~depending on the ~~other four~~terms of the respective agreements. Mortgage loans and MSRs financed under these agreements may be re-pledged by the lenders.

~~Following is a summary of financial information relating to assets~~Assets sold under agreements to ~~repurchase:~~repurchase are summarized below:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended June 30,						Six months ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(dollars in thousands)												(dollars in thousands)

During the period:
Average balance of assets sold under agreements to repurchase	$	1,352,401		$	819,988		$	1,195,987		$	719,003		$	2,082,668		$	1,352,401		$	1,801,138		$	1,195,987
Weighted average interest rate (1)		3.06	%		1.80	%		2.87	%		1.80	%		3.13	%		3.06	%		3.11	%		2.87	%
Total interest expense	$	12,252		$	4,758		$	20,912		$	8,498		$	19,101		$	12,252		$	33,046		$	20,912
Maximum daily amount outstanding	$	1,803,371		$	1,264,046		$	1,863,455		$	1,264,046		$	3,617,164		$	1,803,371		$	3,617,164		$	1,863,455


		June 30,			December 31,
	2016			2015				June 30,			December 31,
	(dollars in thousands)						2017			2016
							(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,591,947		$	1,167,405		$	3,023,288		$	1,736,922
Unamortized debt issuance costs		(149)			(674)			(1,960)			(1,808)
	$	1,591,798		$	1,166,731		$	3,021,328		$	1,735,114
Unused amount (2)	$	415,053		$	40,178
Fair value of assets securing repurchase agreements
Weighted average interest rate								2.91	%		3.02	%
Available borrowing capacity (2) (3):
Committed							$	142,723		$	347,487
Uncommitted								1,338,989			857,591
							$	1,481,712		$	1,205,078
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	1,302,339		$	833,748		$	2,766,171		$	1,422,255
Servicing advances							$	72,010		$	81,306
Mortgage servicing rights		1,158,020			782,679		$	1,202,483		$	1,479,322
	$	2,460,359		$	1,616,427
Weighted average interest rate		2.68	%		2.50	%
Margin deposits placed with counterparties (3)	$	2,500		$	2,500
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell							$	150,000		$	150,000
Margin deposits placed with counterparties (4)							$	5,250		$	3,000

(1)

Excludes the effect of amortization of commitment fees totaling ~~$1.8~~$2.6 million and ~~$1.0~~$1.8 million for the quarters ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$3.6~~$4.9 million and ~~$2.3~~$3.6 million for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

(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.

(3)

At June 30, 2017, available borrowing capacity includes $500 million of temporary increases in credit facility limits expiring on various dates through September 30, 2017.

(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 June 30, 2016~~	~~Balance~~
	~~(in thousands)~~

~~Within 30 days~~	$	~~56,338~~
~~Over 30 to 90 days~~		~~1,535,033~~
~~Over 90 days~~		~~576~~
		~~1,591,947~~
~~Unamortized debt issuance costs~~		~~(149)~~
~~Total loans sold under agreements to repurchase~~	$	~~1,591,798~~
~~Weighted average maturity (in months)~~		~~1.8~~


Remaining maturity at June 30, 2017	Balance
	(dollars in thousands)
Within 30 days	$	591,929
Over 30 to 90 days		1,973,532
Over 180 days to one year		457,827
Total loans sold under agreements to repurchase	$	3,023,288
Weighted average maturity (in months)		3.1

~~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 ~~mortgage loans held for sale~~assets sold under agreements to repurchase is summarized by counterparty below as of June 30, ~~2016:~~2017:


			~~Weighted average~~
			~~maturity of advances~~
			~~under repurchase~~
~~Counterparty~~	~~Amount at risk~~		~~agreement~~	~~Facility maturity~~
	~~(in thousands)~~

~~Credit Suisse First Boston Mortgage Capital LLC~~	$	~~754,830~~	~~September 27, 2016~~	~~September 27, 2016~~
~~Credit Suisse First Boston Mortgage Capital LLC~~	$	~~43,002~~	~~September 8, 2016~~	~~March 30, 2017~~
~~Bank of America, N.A.~~	$	~~40,601~~	~~September 22, 2016~~	~~March 28, 2017~~
~~Morgan Stanley Bank, N.A.~~	$	~~15,071~~	~~August 24, 2016~~	~~August 26, 2016~~
~~Citibank, N.A.~~	$	~~13,851~~	~~August 8, 2016~~	~~October 20, 2016~~
~~Barclays Bank PLC~~	$	~~3,931~~	~~September 22, 2016~~	~~December 2, 2016~~


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	91,587	April 27, 2018	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC	$	48,987	August 1, 2017	April 27, 2018
Bank of America, N.A.	$	69,343	September 19, 2017	May 25, 2018
JP Morgan Chase Bank, N.A.	$	41,179	August 19, 2017	October 13, 2017
Barclays Bank PLC	$	13,758	September 19, 2017	December 1, 2017
Citibank, N.A.	$	10,631	August 2, 2017	March 2, 2018
Morgan Stanley Bank, N.A.	$	9,914	August 17, 2017	August 25, 2017
Royal Bank of Canada	$	7,406	September 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 and Sale Agreements

Certain of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan participation 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 and~~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 and sale ~~agreement is~~agreements are summarized below:

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(dollars in thousands)

During the period:

Average balance

$
189,363

$
162,150

$
178,460

$
144,484

Weighted average interest rate (1)

1.69
%

1.43
%

1.68
%

1.43
%
Total interest expense

$
917

$
651

$
1,698

$
1,239

Maximum daily amount outstanding

$
737,319

$
199,572

$
737,319

$
199,572

June 30,

December 31,


2016

2015

(dollars in thousands)

Carrying value:

Unpaid principal balance

$
737,319

$
234,898

Unamortized debt issuance costs

(143)

(26)

$
737,176

$
234,872

Weighted average interest rate

1.71
%

1.45
%
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreement

$
769,629

$
245,741


	Quarter ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
	(dollars in thousands)
Average balance	$	180,968		$	189,363		$	193,326		$	178,460
Weighted average interest rate (1)		2.32	%		1.69	%		2.12	%		1.68	%
Total interest expense	$	1,164		$	917		$	2,296		$	1,698
Maximum daily amount outstanding	$	286,138		$	737,319		$	719,434		$	737,319

(1)

Excludes the effect of amortization of facility fees totaling ~~$107,000~~$102,000 and ~~$63,000~~$107,000 for the quarters ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$185,000~~$231,000 and ~~$130,000~~$185,000 for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

4348

Table of Contents


	June 30,			December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	243,707		$	671,562
Unamortized debt issuance costs		(346)			(136)
	$	243,361		$	671,426
Weighted average interest rate		2.48	%		2.02	%
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreements	$	252,917		$	702,919

Notes Payable

On February 16, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $400 million in Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Term Notes bear interest at a rate equal to one-month LIBOR plus 4.75% per annum. The Term Notes will 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 the terms of the Term Notes). The Term Notes rank pari passu with the VFN issued by 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.

The Company entered into a revolving credit agreement, ~~classified as a note payable,~~ 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 (“Credit Agreement”), the lenders have agreed to make revolving loans in an amount not to exceed $100,000,000. Interest on the note payable accrues at an annual rate of interest equal to, at the election of the Company, either LIBOR plus the applicable contract margin or an alternate base rate. The maturity date of the note payable is 364 days following the date of the revolving credit agreement.$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 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 at a higher rate. The maturity date of the loans is 364 days following the date of the Credit Agreement.

~~As of June 30, 2016,~~During December 2015, the Company entered into a ~~second~~ 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.

Notes payable are summarized below:

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015


(dollars in thousands)

During the period:

Average balance

$
121,941

$
214,618

$
103,554

$
178,152

Weighted average interest rate (1)

4.53
%

3.00
%

4.47
%

2.98
%
Total interest expense

$
2,291

$
2,463

$
3,889

$
4,098

Maximum daily amount outstanding

$
128,849

$
257,000

$
128,849

$
257,000

June 30,

December 31,


2016

2015

(in thousands)

Carrying value:

Unpaid principal balance

$
115,006

$
62,677

Unamortized debt issuance costs

(771)

(1,541)

$
114,235

$
61,136

Unused amount

$
84,994

$
57,328

Assets pledged to secure notes payable:

Mortgage servicing rights

$
127,680

$
20,881

Cash

$
124,026

$
93,757

Carried Interest

$
70,763

$
69,296


	Quarter ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
	(dollars in thousands)
Average balance	$	461,365		$	121,941		$	378,638		$	103,554
Weighted average interest rate (1)		5.79	%		4.53	%		5.78	%		4.47	%
Total interest expense	$	8,059		$	2,291		$	12,999		$	3,889
Maximum daily amount outstanding	$	471,868		$	128,849		$	546,868		$	128,849

(1)

Excluding the effect of amortization of debt issuance costs totaling $1.1 million and $0.9 million for the quarters ended June 30, 2017 and 2016, respectively, and $2.0 million and $1.5 million ~~during~~ for the ~~quarter and~~ six months ended June 30, ~~2016.~~2017 and 2016, respectively.

Table of Contents


	June 30,			December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	433,865		$	151,935
Unamortized debt issuance costs		(4,173)			(993)
	$	429,692		$	150,942
Weighted average interest rate		4.87	%		4.67	%
Unused amount	$	246,135		$	98,065
Assets pledged to secure notes payable:
Cash	$	50,458		$	91,788
Carried Interest	$	71,019		$	70,906
Mortgage servicing rights	$	533,636		$	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 ~~December 9,~~November 3, 2019 and bears interest at a spread over ~~one month~~one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended June 30,						Six months ended June 30,						Quarter ended June 30,						Six months ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(dollars in thousands)												(dollars in thousands)

During the period:
Average balance	$	17,566		$	—		$	15,641		$	—		$	29,053		$	17,566		$	25,739		$	15,641
Weighted average interest rate		2.44	%		—	%		2.44	%		—	%		2.69	%		2.44	%		2.69	%		2.44	%
Total interest expense	$	161		$	—		$	224		$	—		$	221		$	161		$	380		$	224
Maximum daily amount outstanding	$	24,720		$	—		$	24,720		$	—		$	30,044		$	24,720		$	30,044		$	24,720

~~Table of Contents~~


	June 30,		December 31,
	2016		2015		June 30,			December 31,
	(in thousands)				2017			2016
					(in thousands)
Unpaid principal balance	$	22,886	$	13,579	$	26,641		$	23,424
Weighted average interest rate						2.70	%		2.48	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	27,240	$	14,034	$	27,476		$	25,134
Capitalized software	$	986	$	783	$	1,797		$	515

Excess Servicing Spread Financing

In conjunction with the Company’s purchase from non-affiliates of certain MSRs ~~relating to~~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 ~~mortgage loans.~~loans and a fixed base servicing fee. The Company continues to be the servicer of the mortgage loans and ~~provides~~retains all servicing ~~functions,~~obligations, including ~~the~~ 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 June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Balance at beginning of period	$	321,976	$	222,309	$	412,425	$	191,166	$	277,484	$	321,976	$	288,669	$	412,425
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust:
For cash		—		140,875		—		187,287
Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,690		1,319		3,601		2,565
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust										1,380		1,690		2,953		3,601
Accrual of interest		5,713		5,818		12,728		9,570		4,366		5,713		9,013		12,728
Repayment		(17,400)		(18,352)		(38,281)		(31,083)		(14,278)		(17,400)		(28,910)		(38,281)
Repurchase (1)		—		—		(59,045)		—
Settlement (1)										—		—		—		(59,045)
Change in fair value		(17,428)		7,133		(36,877)		(403)		(7,156)		(17,428)		(9,929)		(36,877)
Balance at end of period	$	294,551	$	359,102	$	294,551	$	359,102	$	261,796	$	294,551	$	261,796	$	294,551

(1)

On February 29, 2016, the Company and PMT terminated ~~that certain master spread acquisition and MSR servicing agreement that~~ the ~~parties entered into effective February 1, 2013 (the “2/~~2/1/13 Spread Acquisition ~~Agreement”)~~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 June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Balance at beginning of period	$	22,209	$	14,689	$	20,611	$	13,259	$	19,436	$	22,209	$	19,067	$	20,611
Provision for losses on mortgage loans sold		2,286		1,748		4,368		3,243
Provision for losses on mortgage loans sold:
Resulting from sales of mortgage loans										1,296		2,286		2,698		4,368
Reduction in liability due to change in estimate										(1,020)		—		(1,892)		—
Incurred losses		(218)		(180)		(702)		(245)		(144)		(218)		(305)		(702)
Balance at end of period	$	24,277	$	16,257	$	24,277	$	16,257	$	19,568	$	24,277	$	19,568	$	24,277
Unpaid principal balance of mortgage loans subject to representations and warranties at period end	$	72,151,175	$	44,794,166
Unpaid principal balance of mortgage loans subject to representations and warranties at end of period									$	106,284,973	$	72,151,175

~~Table of Contents~~

Note ~~14—~~13—Income Taxes

The Company’s effective tax rates were ~~11.8%~~12.4% and ~~11.5%~~11.8% for the quarters ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~11.9%~~12.4% and ~~11.5%~~11.9% for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The difference between the Company’s effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into the Company’s shares, the portion of the Company’s income that will be subject to corporate federal and state statutory tax rates will increase, which will in turn increase the Company’s effective income tax rate.

Table of Contents

Note ~~15—~~14—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 June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

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

$
14,475

$
12,749

$
19,650

$
21,777

Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A stock of PennyMac Financial Services, Inc.

$
2,039

$
1,640

$
2,640

$
2,432

Exchange of Class A units of Private National Mortgage Acceptance Company, LLC for Class A stock of PennyMac Financial Services, Inc.

90

89

93

133


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,479	$	14,475	$	21,358	$	19,650
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.	$	8,164	$	2,039	$	16,927	$	2,640
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		555		90		1,046		93

June 30,

December 31,



2016


2015

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

70.9
%

71.1
%


	June 30,			December 31,
	2017			2016
Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC		69.4	%		70.6	%

Note ~~16—~~15—Net Gains on Mortgage Loans Held for Sale

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


	Quarter ended June 30,				Six months ended June 30,				Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(in thousands)								(in thousands)

From non-affiliates:
Cash (loss) gain:
Mortgage loans	$	20,830	$	(38,944)	$	42,231	$	(36,214)	$	1,904	$	20,830	$	(56,777)	$	42,231
Hedging activities		(77,593)		17,995		(150,133)		(334)		5,317		(77,593)		6,424		(150,133)
		(56,763)		(20,949)		(107,902)		(36,548)		7,221		(56,763)		(50,353)		(107,902)
Non-cash gain:
Mortgage servicing rights resulting from mortgage loan sales		132,472		129,004		233,254		198,960
Mortgage servicing liabilities resulting from mortgage loan sales		—		(9,156)		(5,409)		(12,084)
Provision for losses relating to representations and warranties on loans sold		(2,286)		(1,748)		(4,368)		(3,243)
From non-affiliates:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales										133,062		132,472		265,205		227,845
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales										(1,296)		(2,286)		(2,698)		(4,368)
Reduction in liability due to change in estimate										1,020		—		1,892		—
Change in fair value relating to mortgage loans and hedging derivatives held at period end:
Interest rate lock commitments		18,377		(26,654)		46,488		(4,663)		(19,849)		18,377		(13,234)		46,488
Mortgage loans		11,669		(12,120)		31,517		81		(13,326)		11,669		(5,930)		31,517
Hedging derivatives		28,649		27,034		32,014		19,575		(7,235)		28,649		(6,634)		32,014
		132,118		85,411		225,594		162,078		99,597		132,118		188,248		225,594
Recapture payable to PennyMac Mortgage Investment Trust		(1,915)		(1,456)		(3,867)		(2,745)		(1,506)		(1,915)		(3,201)		(3,867)
	$	130,203	$	83,955	$	221,727	$	159,333	$	98,091	$	130,203	$	185,047	$	221,727

4652

Table of Contents

Note ~~17—~~16—Net Interest Expense

Net interest expense is summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Interest income:
From non-affiliates:
Short-term investments	$	284	$	204	$	456	$	334	$	657	$	284	$	994	$	456
Mortgage loans held for sale at fair value		13,262		11,718		23,743		20,139		23,714		13,262		40,329		23,743
Custodial funds		4,786		729		6,060		1,111
Placement fees relating to custodial funds										8,577		4,786		13,679		6,060
		18,332		12,651		30,259		21,584		32,948		18,332		55,002		30,259
From PennyMac Mortgage Investment Trust—Note receivable		2,222		533		3,824		533
From PennyMac Mortgage Investment Trust—Financings receivable										2,025		2,222		3,830		3,824
		20,554		13,184		34,083		22,117		34,973		20,554		58,832		34,083

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase		12,252		4,758		20,912		8,498		19,101		12,252		33,046		20,912
Mortgage loan participation and sale agreement		917		651		1,698		1,239
Mortgage loan participation and sale agreements										1,164		917		2,296		1,698
Notes payable		2,291		2,463		3,889		4,098		8,059		2,291		12,999		3,889
Obligations under capital lease		161		—		224		—		221		161		380		224
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		3,422		1,676		5,527		3,200		3,304		3,422		6,927		5,527
Interest on mortgage loan impound deposits		710		983		1,475		1,573		662		710		1,690		1,475
		19,753		10,531		33,725		18,608		32,511		19,753		57,338		33,725
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		5,713		5,818		12,728		9,570		4,366		5,713		9,013		12,728
		25,466		16,349		46,453		28,178		36,877		25,466		66,351		46,453
	$	(4,912)	$	(3,165)	$	(12,370)	$	(6,061)	$	(1,904)	$	(4,912)	$	(7,519)	$	(12,370)

Note ~~18—~~17—Stock-based Compensation

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Performance-based RSUs	$	1,644	$	2,474	$	4,433	$	4,345	$	2,409	$	1,644	$	5,712	$	4,433
Stock options		1,423		1,516		2,503		2,996		1,163		1,423		2,439		2,503
Time-based RSUs		641		602		1,348		1,137		1,294		641		2,239		1,348
Exchangeable PNMAC units		18		58		43		120		—		18		—		43
	$	3,726	$	4,650	$	8,327	$	8,598	$	4,866	$	3,726	$	10,390	$	8,327

Following is a summary of equity award activity:


	Quarter ended June 30, 2017
	Performance-		Stock		Time-based
	based RSUs		options		RSUs
	(in thousands)
March 31, 2017		3,160		3,571		646
Granted		—		—		—
Vested units and exercised options		(446)		(5)		(22)
Forfeited or canceled		(308)		(17)		(6)
June 30, 2017		2,406		3,549		618

4753

Table of Contents

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


	Quarter ended June 30, 2016
	Performance-		Stock		Time-based
	based RSUs		options		RSUs
	(in thousands)
March 31, 2016		2,686		2,799		454
Granted		—		—		—
Vested units and exercised options		—		—		(49)
Forfeited or canceled		(13)		(13)		(7)
June 30, 2016		2,673		2,786		398

Quarter ended June 30, 2016


Performance-

Stock

Time-based

Exchangeable


based RSUs

options

RSUs

PNMAC units

(in thousands)

March 31, 2016

2,686

2,799

454

76,057

Granted

—

—

—

52

Vested

—

—

(49)

—

Exercised

—

—

—

—

Forfeited or canceled

(13)

(13)

(7)

—

June 30, 2016

2,673

2,786

398

76,109


	Six months ended June 30, 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		(446)		(25)		(160)
Forfeited or canceled		(317)		(25)		(9)
June 30, 2017		2,406		3,549		618

Quarter ended June 30, 2015


Performance-

Stock

Time-based

Exchangeable

based RSUs

options

RSUs

PNMAC units

(in thousands)

March 31, 2015

2,398


1,881


289

75,971

Granted

—

—

32

44

Vested

—

—

(40)

—

Exercised

—

—

—

—

Forfeited or canceled

(17)

(12)

(5)

—

June 30, 2015

2,381

1,869

276

76,015

Six months ended June 30, 2016


Performance-

Stock

Time-based

Exchangeable

based RSUs

options

RSUs

PNMAC units

(in thousands)

December 31, 2015

2,351


1,845


271

76,029

Granted

813

962

251

80

Vested

—

(115)

—

Exercised

—

—

—

—

Forfeited or canceled

(491)

(21)

(9)

—

June 30, 2016

2,673

2,786

398

76,109


	Six months ended June 30, 2015
	Performance-		Stock		Time-based		Exchangeable		Six months ended June 30, 2016
	based RSUs		options		RSUs		PNMAC units		Performance-		Stock		Time-based
	(in thousands)								based RSUs		options		RSUs
									(in thousands)
December 31, 2015		1,257		1,167		202		75,936		2,351		1,845		271
Granted		1,143		715		150		79		813		962		251
Vested		—		—		(71)		—
Exercised		—		—		—		—
Vested units and exercised options										—		—		(115)
Forfeited or canceled		(19)		(13)		(5)		—		(491)		(21)		(9)
June 30, 2015		2,381		1,869		276		76,015
June 30, 2016										2,673		2,786		398

~~Table of Contents~~

Note ~~19—~~18—Supplemental Cash Flow Information


	Six months ended June 30,
	2016		2015		Six months ended June 30,
	(in thousands)				2017		2016
					(in thousands)
Cash paid for interest	$	44,065	$	27,231	$	68,884	$	44,065
Cash paid for income taxes	$	43	$	1,907	$	36	$	43
Non-cash investing activity:
Mortgage servicing rights resulting from mortgage loan sales	$	233,254	$	198,960	$	273,074	$	233,254
Mortgage servicing liabilities resulting from mortgage loan sales	$	5,409	$	12,084	$	7,869	$	5,409
Unsettled portion of MSR acquisitions					$	24,323	$	—
Non-cash financing activity:
Transfer of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	3,601	$	2,565
Transfer of excess servicing spread pursuant to a recapture agreement with PennyMac Mortgage Investment Trust					$	2,953	$	3,601
Issuance of common stock in settlement of director fees	$	149	$	149	$	169	$	149

Note ~~20—~~19—Regulatory Capital and Liquidity Requirements

The Company, through PLS and PennyMac, is required to maintain specified levels of ~~liquidity~~capital and ~~equity~~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.

Table of Contents

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



	June 30, 2016				December 31, 2015				June 30, 2017						December 31, 2016
Agency–company subject to requirement	Balance (1)		Requirement		Balance (1)		Requirement		Actual (1)			Requirement			Actual (1)			Requirement
	(in thousands)
									(dollars in thousands)
Capital
Fannie Mae & Freddie Mac - PLS	$	1,034,006	$	301,900	$	835,157	$	283,655	$	1,395,498		$	407,095		$	1,289,464		$	335,883
Ginnie Mae - PLS	$	826,031	$	383,702	$	633,222	$	386,732	$	1,164,514		$	612,896		$	1,085,549		$	455,542
Ginnie Mae - PennyMac	$	1,006,192	$	422,072	$	894,731	$	425,405	$	1,356,831		$	674,186		$	1,261,565		$	501,097
HUD - PLS	$	826,031	$	2,500	$	633,222	$	2,500	$	1,164,514		$	2,500		$	1,085,549		$	2,500
Liquidity
Fannie Mae & Freddie Mac - PLS	$	162,194	$	41,221	$	145,431	$	38,936	$	217,281		$	55,623		$	179,230		$	45,930
Ginnie Mae - PLS	$	162,194	$	102,216	$	145,431	$	95,868	$	217,281		$	143,568		$	179,230		$	115,304
Tangible net worth / Total assets ratio
Fannie Mae and Freddie Mac – PLS										22	%		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. ~~PennyMac and PLS had Agency capital and liquidity in excess of the respective Agencies’ requirements at June 30, 2016.~~

Note ~~21—~~20—Commitments and Contingencies

~~Commitments to Fund and Sell Mortgage Loans~~


	~~June 30, 2016~~
	~~(in thousands)~~

~~Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust~~	$	~~2,031,517~~
~~Commitments to fund mortgage loans~~		~~1,836,713~~
	$	~~3,868,230~~

~~Table of Contents~~

Litigation

The business of the Company involves the collection of numerous accounts, as well as the validation of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of June 30, ~~2016,~~2017, 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.

Commitments to Purchase and Fund Mortgage Loans


	June 30, 2017
	(in thousands)
Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust	$	1,973,346
Commitments to fund mortgage loans		2,026,415
	$	3,999,761

Table of Contents

Leases

The Company leases office facilities. Rent expense was $4.2 million and $2.6 million for the quarters ended June 30, 2017 and 2016, respectively and $7.6 million and $5.0 milllion for the six months ended June 30, 2017 and 2016, respectively.

The following table provides a summary of future minimum lease payments required under lease agreements, which may also contain renewal options as of June 30, 2017:


Twelve months ended June 30:	Future minimum lease payments
	(in thousands)
2018	$	12,158
2019		14,296
2020		14,650
2021		13,185
2022		10,633
Thereafter		37,033
	$	101,955

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, ~~are generally~~ made quarterly.

Note 21—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. The Company ~~expects to complete~~did not repurchase any of its Class A common stock during the ~~calculation of estimated PennyMac taxable income~~quarter and ~~to determine the amount of any tax distribution obligation in September 2016.~~ six months ended June 30, 2017.

Note 22—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 ~~(“EBO”) loans~~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.

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.

5056

Table of Contents

Financial performance and results by segment are as follows:


	Quarter ended June 30, 2016
	Mortgage Banking						Investment				Quarter ended June 30, 2017
	Production		Servicing		Total		Management		Total		Mortgage Banking						Investment
	(in thousands)										Production		Servicing		Total		Management		Total
											(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	115,894	$	14,309	$	130,203	$	—	$	130,203	$	74,706	$	23,385	$	98,091	$	—	$	98,091
Mortgage loan origination fees		28,907		—		28,907		—		28,907		30,193		—		30,193		—		30,193
Fulfillment fees from PennyMac Mortgage Investment Trust		19,111		—		19,111		—		19,111		21,107		—		21,107		—		21,107
Net mortgage loan servicing fees		—		26,555		26,555		—		26,555		—		46,913		46,913		—		46,913
Management fees		—		—		—		5,730		5,730		—		—		—		6,007		6,007
Carried Interest from Investment Funds		—		—		—		244		244		—		—		—		241		241
Net interest income (expense):												—		—		—
Interest income		11,528		9,026		20,554		—		20,554		15,279		19,694		34,973		—		34,973
Interest expense		6,825		18,625		25,450		16		25,466		11,330		25,534		36,864		13		36,877
		4,703		(9,599)		(4,896)		(16)		(4,912)		3,949		(5,840)		(1,891)		(13)		(1,904)
Other		849		851		1,700		268		1,968		531		446		977		96		1,073
Total net revenue		169,464		32,116		201,580		6,226		207,806		130,486		64,904		195,390		6,331		201,721
Expenses		64,959		53,085		118,044		5,504		123,548		63,780		76,117		139,897		3,864		143,761
Income (loss) before provision for income taxes and non-segment activities		104,505		(20,969)		83,536		722		84,258
Non-segment activities		—		—		—		—		—
Income (loss) before provision for income taxes	$	104,505	$	(20,969)	$	83,536	$	722	$	84,258
Income before provision for income taxes											$	66,706	$	(11,213)	$	55,493	$	2,467	$	57,960
Segment assets at period end (2)	$	2,222,007	$	2,289,922	$	4,511,929	$	95,141	$	4,607,070	$	2,732,947	$	3,574,239	$	6,307,186	$	94,525	$	6,401,711

(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist primarily of working capital of $3.0 million.


	Quarter ended June 30, 2016
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	115,894	$	14,309	$	130,203	$	—	$	130,203
Mortgage loan origination fees		28,907		—		28,907		—		28,907
Fulfillment fees from PennyMac Mortgage Investment Trust		19,111		—		19,111		—		19,111
Net mortgage loan servicing fees		—		26,555		26,555		—		26,555
Management fees		—		—		—		5,730		5,730
Carried Interest from Investment Funds		—		—		—		244		244
Net interest income (expense):
Interest income		11,528		9,026		20,554		—		20,554
Interest expense		6,825		18,625		25,450		16		25,466
		4,703		(9,599)		(4,896)		(16)		(4,912)
Other		849		851		1,700		268		1,968
Total net revenue		169,464		32,116		201,580		6,226		207,806
Expenses		64,959		53,085		118,044		5,504		123,548
Income (loss) before provision for income taxes	$	104,505	$	(20,969)	$	83,536	$	722	$	84,258
Segment assets at period end (2)	$	2,222,007	$	2,289,922	$	4,511,929	$	95,141	$	4,607,070

(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist primarily of Deferred tax asset of $4.9 million and working capital of $4.4 million.

Table of Contents


	Six months ended June 30, 2017
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains (losses) on mortgage loans held for sale at fair value	$	137,543	$	47,504	$	185,047	$	—	$	185,047
Loan origination fees		55,767		—		55,767		—		55,767
Fulfillment fees from PennyMac Mortgage Investment Trust		37,677		—		37,677		—		37,677
Net servicing fees		—		121,076		121,076		—		121,076
Management fees		—		—		—		11,381		11,381
Carried Interest from Investment Funds		—		—		—		113		113
Net interest income (expense):		—		—				—
Interest income		28,215		30,617		58,832		—		58,832
Interest expense		20,152		46,175		66,327		24		66,351
		8,063		(15,558)		(7,495)		(24)		(7,519)
Other		1,476		917		2,393		259		2,652
Total net revenue		240,526		153,939		394,465		11,729		406,194
Expenses		126,316		151,736		278,052		8,150		286,202
Income before provision for income taxes	$	114,210	$	2,203	$	116,413	$	3,579	$	119,992
Segment assets at period end (2)	$	2,732,947	$	3,574,239	$	6,307,186	$	94,525	$	6,401,711

(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist primarily of ~~deferred tax asset~~ ~~of $4.9 million and~~ working capital of ~~$4.4~~$3.0 million.

~~Table of Contents~~


	Quarter ended June 30, 2015
	Mortgage Banking						Investment				Six months ended June 30, 2016
	Production		Servicing		Total		Management		Total		Mortgage Banking						Investment
	(in thousands)										Production		Servicing		Total		Management		Total
											(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	86,377	$	(2,422)	$	83,955	$	—	$	83,955	$	194,108	$	27,619	$	221,727	$	—	$	221,727
Mortgage loan origination fees		24,421		—		24,421		—		24,421
Loan origination fees												51,341		—		51,341		—		51,341
Fulfillment fees from PennyMac Mortgage Investment Trust		15,333		—		15,333		—		15,333		32,046		—		32,046		—		32,046
Net mortgage loan servicing fees		—		68,549		68,549		—		68,549
Net servicing fees												—		44,074		44,074		—		44,074
Management fees		—		—		—		6,963		6,963		—		—		—		11,642		11,642
Carried Interest from Investment Funds		—		—		—		182		182		—		—		—		837		837
Net interest income (expense):
Interest income		10,200		2,984		13,184		—		13,184		19,905		14,177		34,082		1		34,083
Interest expense		5,200		11,149		16,349		—		16,349		11,708		34,769		46,477		26		46,503
		5,000		(8,165)		(3,165)		—		(3,165)		8,197		(20,592)		(12,395)		(25)		(12,420)
Other		235		101		336		(223)		113		1,088		619		1,707		204		1,911
Total net revenue		131,366		58,063		189,429		6,922		196,351		286,780		51,720		338,500		12,658		351,158
Expenses		55,085		60,508		115,593		5,959		121,552		113,867		112,151		226,018		10,792		236,810
Income (loss) before provision for income taxes	$	76,281	$	(2,445)	$	73,836	$	963	$	74,799
Segment assets at period end (2)	$	1,631,661	$	1,671,371	$	3,303,032	$	88,050	$	3,391,082
Income before provision for income taxes and non-segment activities												172,913		(60,431)		112,482		1,866		114,348
Non-segment activities (2)												—		—		—		—		49
Income before provision for income taxes											$	172,913	$	(60,431)	$	112,482	$	1,866	$	114,397
Segment assets at period end (3)											$	2,222,007	$	2,289,922	$	4,511,929	$	95,141	$	4,607,070

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

~~(2)Excludes parent Company assets, which consist primarily of~~ ~~deferred tax asset~~ ~~of $34.2 million.~~

Six months ended June 30, 2016

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total

(in thousands)

Revenue: (1)



Net gains (losses) on mortgage loans held for sale at fair value

$
194,108

$
27,619

$
221,727

$
—

$
221,727

Loan origination fees

51,341

—

51,341

—

51,341

Fulfillment fees from PennyMac Mortgage Investment Trust

32,046

—

32,046

—

32,046

Net servicing fees

—

44,074

44,074

—

44,074

Management fees

—

—

—

11,642

11,642

Carried Interest from Investment Funds

—

—

—

837

837

Net interest income (expense):

Interest income

19,905

14,177

34,082

1

34,083

Interest expense

11,708

34,769

46,477

26

46,503

8,197

(20,592)

(12,395)

(25)

(12,420)

Other

1,088

619

1,707

204

1,911

Total net revenue

286,780

51,720

338,500

12,658

351,158

Expenses

113,867

112,151

226,018

10,792

236,810

Income (loss) before provision for income taxes and non-segment activities

172,913

(60,431)

112,482

1,866

114,348

Non-segment activities (2)

—

—

—

—

49

Income (loss) before provision for income taxes

$
172,913

$
(60,431)

$
112,482

$
1,866

$
114,397

Segment assets at period end (3)

$
2,222,007

$
2,289,922

$
4,511,929

$
95,141

$
4,607,070

~~Table of Contents~~

(1)

All revenues are from external customers.

(2)

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

Table of Contents

(3)

Excludes parent Company assets, which consist primarily of deferred tax asset of $4.9 million and working capital of $4.4 million.

Six months ended June 30, 2015

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total


(in thousands)

Revenue: (1)

Net gains on mortgage loans held for sale at fair value

$
163,356

$
(4,023)

$
159,333

$
—

$
159,333

Loan origination fees

41,103

—

41,103

—

41,103

Fulfillment fees from PennyMac Mortgage Investment Trust

28,199

—

28,199

—

28,199

Net servicing fees

—

95,325

95,325

—

95,325

Management fees

—

—

—

15,452

15,452

Carried Interest from Investment Funds

—

—

—

1,415

1,415

Net interest income (expense):

Interest income

16,813

5,304

22,117

—

22,117

Interest expense

8,841

19,337

28,178

—

28,178

7,972

(14,033)

(6,061)

—

(6,061)

Other

1,148

719

1,867

32

1,899

Total net revenue

241,778

77,988

319,766

16,899

336,665

Expenses

98,065

98,550

196,615

12,013

208,628

Income (loss) before provision for income taxes

$
143,713

$
(20,562)

$
123,151

$
4,886

$
128,037

Segment assets at period end (2)

$
1,631,661

$
1,671,371

$
3,303,032

$
88,050

$
3,391,082

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

~~(2)Excludes parent Company assets, which consist primarily of~~ ~~deferred tax asset~~ ~~of $34.2 million.~~

Note 23—Recently Issued Accounting Pronouncements

In ~~February 2015,~~May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU ~~2015-02,~~2014-09”), which supersedes the guidance in the ~~Consolidation (Topic 810): Amendments~~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 ~~Consolidation Analysis~~ (“guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to the new revenue standard ASU ~~2015-02”). ASU 2015-02 affects reporting entities~~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-GoodwillandOther 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.

Table of Contents

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:

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’s revenues from contracts with customers that are ~~required~~subject to ~~evaluate whether they should consolidate~~ASU 2014-09 include fulfillment fees, mortgage servicing fees, management fees, Carried Interest and certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.reimbursed overhead costs. The Company ~~adopted~~has concluded that:

The recognition and measurement of fulfillment fees, mortgage servicing fees and management fees is not expected to change as a result of the Company’s adoption of ASU 2014-09.

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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 will recharacterize its Carried Interest as financial instruments under the equity method of accounting. This change is not expected to change the timing or amount of the Company’s recognition of Carried Interest.

The effect of the adoption of ASU 2014-09 on the presentation of overhead reimbursements will be to increase Other income and the Company’s overhead expense categories by offsetting amounts. Under the Management Agreement, 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. The Company recognizes such reimbursements as expense offsets in its consolidated statements of income. ASU 2014-09 requires such reimbursements to be treated as revenues. The Company included $1.6 million and $2.4 million and $3.0 million and $5.0 million of such common overhead as expense offsets in the quarter and six month periods ended June 30, 2017 and 2016, respectively.

The Company intends to adopt ASU ~~2015-02 effective January 1, 2016.~~2014-09 using the modified retrospective method. The Company does not expect to record a cumulative effect adjustment to its beginning retained earnings as a result of adoption of ASU ~~2015-02 had no effect on the Company’s consolidated financial statements.~~2014-09.

OnIn January 5, 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.

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).

•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.~~

• 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.~~

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 ~~Company is currently assessing the potential effect that the~~ adoption of ASU 2016-01 ~~will~~is not expected to have an effect on ~~its~~the Company’s consolidated financial statements.

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OnIn February ~~25,~~ 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 ~~or not~~ 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 that the adoption of ASU 2016-02 will have on its consolidated financial statements. As shown in Note 20 - Commitments and Contingencies, the Company had approximately $102.0 million in future minimum lease payment commitments as of March 31, 2017. Were the Company to adopt ASU 2016-02 as of June 30, 2017, 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 June 30, 2017. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

In March of 2016, ~~The~~the FASB issued ASU 2016-09, Compensation—Stock Compensation ~~(Topic~~(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:

Modifies the accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) will be recognized as income tax expense 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.

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 ~~ASC~~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.

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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 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 ~~Company is currently assessing the potential effect that the~~ adoption of ASU 2016-09 ~~will~~did not have a significant effect on ~~its~~the Company’s consolidated financial statements.

~~Note 24—Subsequent Events~~

During July 2016, the Company entered into a letter of intent to acquire approximately $1.0 billion in UPB of MSRs related to defaulted government loans from a third party. The MSR acquisition by the Company is subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions. There can be no assurance that the committed amounts will ultimately be acquired or that the transaction will be completed at all.

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Note 24—Subsequent Events

The Company has evaluated the impacts of events that have occurred subsequent to June 30, 2017 through the filing date of the Consolidated Financial Statements with the SEC. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the Consolidated Financial Statements and related Notes.

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

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 entity (“GSE”). It 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”). 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 mortgage loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate mortgage 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, 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 Act of 1940, as ~~amended,~~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, PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment

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Company Act of 1940 (“Investment Company Act”), as amended, an affiliate of these Funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.”

~~Mortgage Banking~~

~~Loan Production~~

~~Our loan production segment sources mortgage loans through two channels: correspondent production and consumer direct lending.~~

In correspondent production we manage, on behalf of PMT and for our own account, the acquisition of newly originated, prime credit quality, first-lien residential mortgage loans that have been underwritten to investor guidelines. PMT acquires, from approved correspondent sellers, newly originated mortgage loans, including both conventional and government-insured or guaranteed residential mortgage loans that qualify for inclusion in securitizations that are guaranteed by the Agencies. For conventional mortgage loans, we perform fulfillment activities for PMT and earn a fulfillment fee for each mortgage loan purchased by PMT. In the case of government insured mortgage loans, we purchase them from PMT at PMT’s cost plus a sourcing fee and fulfill them for our own account.

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

For loans originated through our consumer direct lending channel, we conduct our own fulfillment, earn interest income and gains or losses during the holding period and upon the sale or securitization of these loans, and retain the associated MSRs (subject to sharing with PMT a portion of such MSRs or cash with respect to certain consumer direct originated loans that refinance loans for which the related mortgage servicing rights (“MSRs”) or excess servicing spread (“ESS”) was held by PMT).

~~Our loan production activity is summarized below:~~

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Unpaid principal balance of mortgage loans purchased and originated for sale:









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

$
9,409,399

$
8,082,764

$
15,905,121

$
12,818,138

Mortgage loans sourced through our consumer direct channel

1,501,234

1,138,269

2,708,217

2,035,267

$
10,910,633

$
9,221,033

$
18,613,338

$
14,853,405

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

$
5,174,020

$
3,579,078

$
8,433,383

$
6,469,210

~~Loan Servicing~~

Our mortgage loan servicing segment performs mortgage loan administration, collection, and default management activities, including the collection and remittance of mortgage loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions. We service a diverse portfolio of mortgage loans both as the owner of MSRs and on behalf of other MSR or mortgage owners. We provide servicing for conventional and government-insured or guaranteed mortgage loans (“prime servicing”), as well as servicing for distressed mortgage loans that have been acquired as investments by our Advised Entities (“special servicing”). As of June 30, 2016, the portfolio of mortgage loans that we serviced or subserviced

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~~totaled approximately $171.7 billion in unpaid principal balance (“UPB”).~~

~~Investment Management~~

We are an investment manager through our subsidiary, PCM. PCM currently manages the Advised Entities. The Advised Entities had combined net assets of approximately $1.6 billion as of June 30, 2016. For these activities, we earn management fees as a percentage of net assets and incentive compensation based on the entities’ performance.

~~Observations on Current Market Conditions~~

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues to grow, albeit at a slower pace, as reflected in recent economic data. During the second quarter of 2016, U.S. real gross domestic product expanded at an annual rate of 1.2% compared to 2.6% for the second quarter of 2015 and 0.8% for the first quarter of 2016. The national seasonally adjusted unemployment rate was 4.9% at June 30, 2016 compared to 5.0% at March 31, 2016 and 5.3% at June 30, 2015. Delinquency rates on residential real estate loans remain elevated compared to historical rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the first quarter of 2016, the delinquency rate on residential real estate loans held by commercial banks was 4.8%, a reduction from 6.2% during the first quarter of 2015.

Residential real estate activity appears to be expanding. The seasonally adjusted annual rate of existing home sales for June 2016 was 3.0% higher than for June 2015, and the national median existing home price for all housing types was $247,700, a 4.8% increase from June 2015 (Source: National Association of Realtors®). On a national level, foreclosure filings during the quarter ended June 30, 2016 decreased by 14% as compared to the quarter ended June 30, 2015. However, foreclosure activity is expected to remain above historical average levels through 2016 and beyond.

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Thirty-year fixed mortgage interest rates ranged from a low of 3.48% to a high of 3.66% during the second quarter of 2016 while during the second quarter of 2015, thirty-year fixed mortgage interest rates ranged from a low of 3.65% to a high of 4.04% (Source: Freddie Mac’s Weekly Primary Mortgage Market Survey). Interest rates generally declined in the second quarter of 2016 and generally increased in the second quarter of 2015. This impacted MSR and other interest rate sensitive asset valuations and production activity.

Mortgage lenders originated an estimated $510 billion of home loans during the second quarter of 2016, up 4.1% from the second quarter of 2015. Total mortgage originations are forecast to be somewhat higher in 2016 versus 2015, with current industry estimates for 2016 averaging $1.8 trillion (Source: average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

We believe there is long-term market opportunity for the production of non-Agency jumbo mortgage loans. However, most new jumbo mortgage loans are either being originated or purchased by banks, and the current market for jumbo mortgage loan securitizations is limited, as evidenced by weak demand and inconsistent pricing observed throughout 2015 and the first half of 2016. Prime jumbo MBS securitizations totaled $0.9 billion in UPB during the second quarter of 2016, a decrease from $2.8 billion during the second quarter of 2015. During the six months ended June 30, 2016, we produced approximately $13 million in UPB of jumbo loans compared to $91 million in UPB of jumbo loans produced during the six months ended June 30, 2015.

In our capacity as an investment manager, we expect to see a continued supply of distressed whole loans; however, we believe the pricing for recent transactions has been less attractive for buyers. We are transitioning PMT’s portfolio away from distressed whole loans to correspondent-related investments such as CRT and MSRs, and we continue to monitor the market to assess best execution opportunities for distressed portfolio investments held by the Advised Entities.

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Results of Operations

Our results of operations are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Revenues:
Net gains on mortgage loans held for sale at fair value	$	130,203	$	83,955	$	221,727	$	159,333	$	98,091	$	130,203	$	185,047	$	221,727
Mortgage loan origination fees		28,907		24,421		51,341		41,103		30,193		28,907		55,767		51,341
Fulfillment fees from PennyMac Mortgage Investment Trust		19,111		15,333		32,046		28,199		21,107		19,111		37,677		32,046
Net mortgage loan servicing fees		26,555		68,549		44,074		95,325		46,913		26,555		121,076		44,074
Management fees		5,730		6,963		11,642		15,452
Carried Interest from Investment Funds		244		182		837		1,415
Management fees & Carried Interest										6,248		5,974		11,494		12,479
Net interest expense		(4,912)		(3,165)		(12,370)		(6,061)		(1,904)		(4,912)		(7,519)		(12,370)
Other		1,968		113		1,910		1,899		1,073		1,968		2,652		1,910
Total net revenue		207,806		196,351		351,207		336,665		201,721		207,806		406,194		351,207
Expenses		123,548		121,552		236,810		208,628		143,761		123,548		286,202		236,810
Provision for income taxes		9,963		8,619		13,559		14,733		7,214		9,963		14,860		13,559
Net income	$	74,295	$	66,180	$	100,838	$	113,304	$	50,746	$	74,295	$	105,132	$	100,838

Income before provision for income taxes by segment:
Mortgage banking:
Production	$	104,505	$	76,281	$	172,913	$	143,713	$	66,706	$	104,505	$	114,210	$	172,913
Servicing		(20,969)		(2,445)		(60,431)		(20,562)		(11,213)		(20,969)		2,203		(60,431)
Total mortgage banking		83,536		73,836		112,482		123,151		55,493		83,536		116,413		112,482
Investment management		722		963		1,866		4,886		2,467		722		3,579		1,866
Non-segment activities (1)		—		—		49		—		—		—		—		49
	$	84,258	$	74,799	$	114,397	$	128,037	$	57,960	$	84,258	$	119,992	$	114,397
During the period:
Interest rate lock commitments issued	$	12,924,700	$	11,588,488	$	21,665,118	$	19,381,813	$	13,489,651	$	12,924,700	$	24,595,550	$	21,665,118
Fair value of mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust	$	9,933,264	$	8,524,895	$	16,783,840	$	13,514,733	$	11,227,406	$	9,933,264	$	21,244,194	$	16,783,840
Mortgage loans originated through consumer direct channel		1,512,546		1,148,435		2,730,709		2,052,648		1,292,687		1,513,858		2,353,899		2,736,621
Commercial real estate		1,312		—		5,912		—
	$	11,447,122	$	9,673,330	$	19,520,461	$	15,567,381	$	12,520,093	$	11,447,122	$	23,598,093	$	19,520,461
Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust	$	5,174,020	$	3,579,078	$	8,433,383	$	6,469,210	$	5,918,027	$	5,174,020	$	10,549,933	$	8,433,383

	June 30,		December 31,
	2016		2015
Unpaid principal balance of mortgage loan servicing portfolio:
Unpaid principal balance of mortgage loan servicing portfolio at period end:
Owned:
Mortgage servicing rights	$	117,036,803	$	110,602,704					$	157,223,909	$	117,036,803
Mortgage servicing liabilities		751,193		806,897						1,698,588		751,193
Mortgage loans held for sale		1,971,903		1,052,485						2,915,346		1,971,903
		119,759,899		112,462,086						161,837,843		119,759,899
Subserviced		51,958,636		47,810,632
Subserviced for Advised Entities										67,125,932		51,958,636
	$	171,718,535	$	160,272,718					$	228,963,775	$	171,718,535
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,360,826	$	1,496,113					$	1,454,832	$	1,360,826
Investment Funds		201,490		231,745						144,744		201,490
	$	1,562,316	$	1,727,858					$	1,599,576	$	1,562,316

(1)

Relates to parent Company interest expense eliminated in consolidation.

Net income ~~increased $8.1 million and~~ decreased ~~$12.5~~$23.5 million during the quarter ended June 30, 2017 compared to the same period in 2016 and increased $4.3 million during the six months ended June 30, ~~2016, respectively,~~2017 compared to the same ~~periods~~period in ~~2015.~~2016. These changes reflect the effects on our mortgage banking activities of ~~decreasing~~higher market interest rates during the ~~first~~ six months ~~of 2016 as~~ended June 30, 2017 compared to the same period ~~of 2015.~~ in 2016.

The ~~increase in net income during~~decrease for the quarter ended in June 30, ~~2016, compared to the same quarter ended June 30, 2015,~~2017 was primarily due to ~~an increase~~a decrease in ~~gain~~Net gains on mortgage loans held for sale at fair value ~~that was partially offset by~~ resulting froma decrease in ~~net~~our profit margin that more than offset an increase in mortgage loan ~~servicing fees.~~production volume. The decrease in net income for the six month period ended June 30, 2016, as compared to the six month period ended June 30, 2015, was due to a decrease in net mortgage loan servicing fees partly offset by an increase in gainNet gains on mortgage loans held for sale at fair ~~value.~~

value was partially

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offset by an increase in Net mortgage loan servicing fees which reflects both growth in the our servicing portfolio and reduced fair value adjustments net of hedging losses.

The increase in net income for the six months ended in June 30, 2017 was primarily due to an increase in Net mortgage loan servicing fees resulting from lower amortization and losses in change in fair value of MSRs due to less adverse interest rate movements along with an increase in mortgage loan servicing fees from a larger servicing portfolio that was partially offset by a decrease in Net gains on mortgage loans held for sale at fair value and an increase in expenses due to the larger scale of our business.

Net Gains on Mortgage Loans Held for Sale at Fair Value

Most of our mortgage loan production is centered in government-insured or guaranteed loans. Over recent periods, the margins on correspondent government-insured or guaranteed mortgage loans have tended to be higher than those on conventional correspondent production. Government-insured or guaranteed mortgage lending is not as competitive as conventional conforming mortgage lending due to the added complexity involved in the origination and servicing of government-insured or guaranteed mortgage loans. We source the majority of our government-insured or guaranteed mortgage loan production 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 mortgage loans that PMT acquires through its correspondent lending activities and pay PMT a sourcing fee ofranging from two to three and one-half basis points on the UPB of such mortgage loans.

During the quarter and six months ended June 30, ~~2016,~~2017, we recognized net gains on mortgage loans held for sale at fair value totaling $130.2 million and $221.7 million, respectively, increases of $46.2 million and $62.4 million from the same periods in 2015. The increase was due to growth in the volume of mortgage loans that we committed to purchase or originate and an improvement in production margins resulting from an increase in volume of our consumer direct channel, which earns higher margins than our correspondent production channel.

Our net gains on mortgage loans held for sale at fair value include both cash and non-cash elements. We receive proceeds on sale that include both cash and our estimate of the fair value of the MSRs and mortgage servicing liabilities created or incurred in such transactions. During the quarter and six months ended June 30, 2016, the net gains on mortgage loans held for sale at fair value included $132.5 million and $227.8 million, respectively, in fair value of MSRs received as proceeds on sales, net of mortgage servicing liabilities incurred. During the quarter and six months ended June 30, 2015, the net gains on mortgage loans held for sale at fair value included $119.8 million and $186.9 million, respectively, in fair value of MSRs received as proceeds on sale, net of mortgage servicing liabilities incurred.

We also recognize a liability for our estimate of the losses we expect to incur in the future as a result of claims made against us in connection with the representations and warranties that we made in the loan sales transactions. During the quarter and six months ended June 30, 2016, we included provisions for losses relating to the representations and warranties we provided totaling $2.3 million and $4.4 million, respectively, in our Net gains on mortgage loans held for sale at fair value~~. During the quarter~~ totaling $98.1 million and ~~six months ended June 30, 2015, we included provisions for losses relating~~$185.1 million, respectively, a decrease of $32.1 million and $36.7 million, respectively, compared to the ~~representations and warranties we provided totaling $1.7 million and $3.2 million, respectively,~~same periods in 2016. The decrease was primarily due to a decrease in our ~~Net gains~~profit margin on mortgage ~~loans held for sale at fair value.~~loan production partially offset by growth in our mortgage loan production volume.

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


	Quarter ended June 30,				Six months ended June 30,				Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(in thousands)								(in thousands)

Cash (loss) gain:
From non affiliates:
Cash gain (loss) :
Mortgage loans	$	20,830	$	(38,944)	$	42,231	$	(36,214)	$	1,904	$	20,830	$	(56,777)	$	42,231
Hedging activities		(77,593)		17,995		(150,133)		(334)		5,317		(77,593)		6,424		(150,133)
		(56,763)		(20,949)		(107,902)		(36,548)		7,221		(56,763)		(50,353)		(107,902)
Non-cash gain:
Mortgage servicing rights resulting from mortgage loan sales		132,472		129,004		233,254		198,960
Mortgage servicing liabilities resulting from mortgage loan sales		—		(9,156)		(5,409)		(12,084)
Provision for losses relating to representations and warranties on mortgage loans sold		(2,286)		(1,748)		(4,368)		(3,243)
Change in fair value relating to mortgage loans and derivative financial instruments outstanding at period end:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales										133,062		132,472		265,205		227,845
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales										(1,296)		(2,286)		(2,698)		(4,368)
Reduction in liability due to change in estimate										1,020		—		1,892		—
Change in fair value of mortgage loans and derivative financial instruments outstanding at period end:
Interest rate lock commitments		18,377		(26,654)		46,488		(4,663)		(19,849)		18,377		(13,234)		46,488
Mortgage loans		11,669		(12,120)		31,517		81		(13,326)		11,669		(5,930)		31,517
Hedging derivatives		28,649		27,034		32,014		19,575		(7,235)		28,649		(6,634)		32,014
		132,118		85,411		225,594		162,078		99,597		132,118		188,248		225,594
Recapture payable to PennyMac Mortgage Investment Trust		(1,915)		(1,456)		(3,867)		(2,745)
From PennyMac Mortgage Investment Trust - Recapture payable										(1,506)		(1,915)		(3,201)		(3,867)
	$	130,203	$	83,955	$	221,727	$	159,333	$	98,091	$	130,203	$	185,047	$	221,727
During the period:
Unpaid principal balance of mortgage loans sold	$	10,766,503	$	9,416,468	$	18,381,560	$	14,925,336	$	12,017,983	$	10,766,503	$	23,474,792	$	18,381,560
Interest rate lock commitments issued:
Conventional mortgage loans	$	847,051	$	1,652,242	$	1,394,368	$	3,436,009	$	804,501	$	847,051	$	1,473,086	$	1,394,368
Government-insured or guaranteed mortgage loans		12,077,649		9,936,246		20,270,750		15,945,804		12,685,150		12,077,649		23,122,464		20,270,750
	$	12,924,700	$	11,588,488	$	21,665,118	$	19,381,813	$	13,489,651	$	12,924,700	$	24,595,550	$	21,665,118
Period end:
At period end:
Mortgage loans held for sale at fair value	$	2,097,138	$	1,594,262					$	3,037,602	$	2,097,138
Commitments to fund and purchase mortgage loans	$	3,868,230	$	4,296,134					$	3,999,761	$	3,868,230

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 in connection with the representations and warranties we provide to the purchasers and insurers of the mortgage loans we sell 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.~~ The representations and 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 identified defects or indemnify the purchaser or ~~insurer.~~insurer against future credit losses. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent ~~lenders~~originators that sold such mortgage loans and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent ~~lender.~~seller.

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The method ~~used~~we use 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 and the probability of

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reimbursement by the correspondent mortgage loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.

We recorded provisions for losses under representations and warranties as a component of Net gains on mortgage loans held for sale at fair value totaling $276,000 and $806,000 during the quarter and six months ended June 30, 2017, respectively, compared to $2.3 million and $4.4 million during the quarter and six months ended June 30, ~~2016, respectively, compared to $1.7 million and $3.2 million during the quarter and six months ended June 30, 2015.~~2016. The ~~increase~~decrease in provision for losses under representations and warranties during the quarter and six months ended June 30, ~~2016~~2017 compared to the same periods in ~~2015~~2016 was primarily due to ~~an increase~~a $1.0 million and $1.9 million, respectively, reduction in the ~~volume~~liability estimate resulting from changes in estimates relating to better-than anticipated credit performance of seasoned mortgage loan ~~sales activity, partly offset~~pools along with additional reductions relating to mortgage loans meeting previously announced limitations on pursuit by ~~lower expected loss rates~~the Agencies of claims on ~~our new production during 2016 as compared to 2015.~~mortgage loans with certain performance histories.

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


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
During the period:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of period	$	3,540	$	2,202	$	3,470	$	1,521	$	6,288	$	3,540	$	5,599	$	3,470
New indemnifications		1,716		868		1,855		1,549		723		1,716		1,412		1,855
Less:
Indemnified mortgage loans repurchased		—		—		—		—
Indemnified mortgage loans repaid or refinanced		384		—		453		—		214		384		214		453
Mortgage loans indemnified by PFSI at end of period	$	4,872	$	3,070	$	4,872	$	3,070	$	6,797	$	4,872	$	6,797	$	4,872
Repurchase activity
Total mortgage loans repurchased by PFSI	$	4,486	$	7,291	$	11,399	$	11,781	$	6,217	$	4,486	$	11,520	$	11,399
Less:
Mortgage loans repurchased by correspondent lenders		3,075		7,756		6,340		8,276		4,827		3,075		7,410		6,340
Mortgage loans repaid by borrowers or resold with defects resolved		814		1,585		1,141		1,958		2,332		814		5,551		1,141
Net mortgage loans repurchased by PFSI with losses chargeable to liability for representations and warranties	$	597	$	(2,050)	$	3,918	$	1,547
Losses charged to liability for representations and warranties	$	218	$	180	$	702	$	245
Period end:
Net mortgage loans (repaid or resold) repurchased by PFSI with losses chargeable to liability for representations and warranties									$	(942)	$	597	$	(1,441)	$	3,918
Net losses charged to liability for representations and warranties									$	144	$	218	$	305	$	702

At period end:
Unpaid principal balance of mortgage loans subject to representations and warranties	$	72,151,175	$	44,794,166					$	106,284,973	$	72,151,175
Liability for representations and warranties	$	24,277	$	16,257					$	19,568	$	24,277

During the quarter and six months ended June 30, ~~2016,~~2017, we repurchased mortgage loans totaling ~~$4.5~~$6.2 million and ~~$11.4~~$11.5 million, respectively, in ~~UPB, respectively.~~UPB. We recorded losses of ~~$218,000~~$144,000 and ~~$702,000,~~$305,000, respectively, net of recoveries from correspondent ~~lenders,~~sellers as a result of these ~~repurchases.~~repurchases during the quarter and six months ended June 30, 2017. 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 tomay 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.~~staff ~~The liability estimate is reviewed~~ 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. ~~We did not record any adjustments to previously recorded liabilities for representations and warranties during any of the periods presented.~~

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

Other mortgage loan production-related revenues

~~Loan~~Mortgage loan origination fees increased ~~$4.5~~$1.3 million and ~~$10.2~~$4.4 million during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in ~~2015~~2016 primarily due to growth in the volume of correspondent purchases in our loan production activities.

Fulfillment fees from PMT, which represent fees we collect for services we perform on behalf of PMT in connection with its acquisition, packaging and sale of mortgage loans, are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT. Fulfillment fees increased ~~$3.8~~$2.0 million and $5.6 million during the quarter and six months ended June 30, ~~2016~~2017, respectively, compared to the same periods in ~~2015. The effect of the increase in~~2016 due to increased mortgage loan production volume ~~of mortgage loans we fulfilled for PMT was partially offset by a reduction in the average fulfillment fee rate we charged~~ during ~~2016~~2017 as compared to ~~2015 resulting from contractual discretionary reductions in fulfillment fees made to facilitate certain transactions.~~2016.

Summarized below are our fulfillment fees:


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Fulfillment fee revenue	$	19,111	$	15,333	$	32,046	$	28,199	$	21,107	$	19,111	$	37,677	$	32,046
Unpaid principal balance of mortgage loans fulfilled	$	5,174,020	$	3,579,078	$	8,433,383	$	6,469,210	$	5,918,027	$	5,174,020	$	10,549,933	$	8,433,383
Average fulfillment fee rate (in basis points)		37		43		38		44		36		37		36		38

Net mortgage loan servicing fees

Our net mortgage loan servicing fees are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates	$	92,770	$	66,867	$	184,097	$	116,968	$	112,348	$	92,770	$	218,815	$	184,097
From PennyMac Mortgage Investment Trust		16,427		12,136		27,880		22,806		10,099		16,427		20,585		27,880
From Investment Funds		723		153		1,424		1,121		543		723		1,039		1,424
Ancillary and other fees		10,818		11,850		22,270		23,035		11,202		10,818		23,068		22,270
		120,738		91,006		235,671		163,930		134,192		120,738		263,507		235,671
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread		(94,183)		(22,457)		(191,597)		(68,605)
Net loan servicing fees	$	26,555	$	68,549	$	44,074	$	95,325
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing net of hedging results										(87,279)		(94,183)		(142,431)		(191,597)
Net mortgage loan servicing fees									$	46,913	$	26,555	$	121,076	$	44,074
Average mortgage loan servicing portfolio	$	167,966,390	$	125,390,557	$	165,413,607	$	117,979,004	$	212,671,694	$	167,966,390	$	206,055,588	$	165,413,607

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



	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Amortization and realization of cash flows	$	(55,482)	$	(51,092)	$	(103,942)	$	(97,767)
Other changes, in fair value of, and reversal of (provision for) impairment of mortgage servicing rights and mortgage servicing liabilities		(36,927)		(125,467)		(24,226)		(254,375)
Change in fair value of excess servicing spread		7,156		17,428		9,929		36,877
Hedging results		(2,026)		64,948		(24,192)		123,668
Total fair value adjustments, net of hedging results		(31,797)		(43,091)		(38,489)		(93,830)
Total amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread	$	(87,279)	$	(94,183)	$	(142,431)	$	(191,597)
Average mortgage servicing rights balances:
Carried at lower of amortized cost or fair value	$	1,235,077	$	772,734	$	1,199,327	$	759,286
Carried at fair value		551,740		571,074		534,918		595,124
	$	1,786,817	$	1,343,808	$	1,734,245	$	1,354,410
Average mortgage servicing liabilities	$	15,241	$	5,286	$	15,084	$	4,130

Mortgage servicing rights at period end:
Carried at lower of amortized cost or fair value	$	1,273,158	$	764,634
Carried at fair value		678,441		526,294
	$	1,951,599	$	1,290,928
Mortgage servicing liabilities at period end	$	18,295	$	4,681

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



	June 30,		December 31,		June 30,		December 31,
	2016		2015		2017		2016
	(in thousands)				(in thousands)

Mortgage loans serviced at period end:
Mortgage loans serviced
Prime servicing:
Owned
Owned:
Mortgage servicing rights
Originated	$	71,436,178	$	59,880,349	$	105,296,264	$	89,516,155
Acquired		45,600,625		50,722,355		51,927,645		39,660,951
		117,036,803		110,602,704		157,223,909		129,177,106
Mortgage servicing liabilities–Originated		751,193		806,897
Mortgage servicing liabilities						1,698,588		2,074,896
Mortgage loans held for sale		1,971,903		1,052,485		2,915,346		2,101,283
		119,759,899		112,462,086		161,837,843		133,353,285
Subserviced for Advised Entities		48,894,531		43,963,378		64,924,592		58,327,748
Total prime servicing		168,654,430		156,425,464		226,762,435		191,681,033
Special servicing–Subserviced for Advised Entities		3,064,105		3,847,254
Special servicing – Subserviced for Advised Entities						2,201,340		2,558,969
Total mortgage loans serviced	$	171,718,535	$	160,272,718	$	228,963,775	$	194,240,002

~~Mortgage~~Net mortgage loan servicing fees increased ~~approximately $29.7~~$20.4 million and ~~$71.7~~$77.0 million during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in ~~2015,~~ ~~primarily~~2016. The increases were due to ~~an increase in~~a combination of increased mortgage loan servicing fees ~~from nonaffiliates resulting from growth in our portfolio of MSRs~~.

~~Amortization, impairment~~ and ~~change~~decreased net losses in fair value and impairment of ~~mortgage~~MSRs and MSLs, net of hedging results. Mortgage loan servicing ~~rights are summarized below:~~

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Amortization of mortgage servicing rights carried at lower of amortized cost or fair value and realization of cash flows of mortgage servicing rights carried at fair value

$
(54,126)

$
(31,384)

$
(103,822)

$
(55,488)

Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities carried at  fair value and provision for impairment of mortgage servicing rights carried at lower of amortized cost or fair value

(122,433)

44,377

(248,320)

(2,324)

Change in fair value of excess servicing spread

17,428

(7,133)

36,877

403

Hedging results

64,948

(28,317)

123,668

(11,196)

Total fair value adjustments, net of hedging results

(40,057)

8,927

(87,775)

(13,117)

Total amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread

$
(94,183)

$
(22,457)

$
(191,597)

$
(68,605)

Average mortgage servicing rights balances:

Carried at lower of amortized cost or fair value

$
772,734

$
488,354

Carried at fair value

571,074

467,328

$
1,343,808

$
955,682

June 30,

December 31,

2016

2015

Mortgage servicing rights

Carried at lower of amortized cost or fair value

$
764,634

$
751,688

Carried at fair value

526,294

660,247

$
1,290,928

$
1,411,935

~~Amortization, impairment and change in fair value of mortgage servicing rights~~fees increased ~~$71.7~~$13.5 million and ~~$123.0~~$27.8 million during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in 2016 reflecting increases in our average servicing portfolio of 26.6% and 24.6% for the quarter and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was partially offset by decreasing mortgage loan servicing fees from the Advised Entities due to activity fees we earned relating to sale of distressed mortgage loans during 2016 that have not occurred

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during 2017 and as their distressed mortgage loan portfolios continue to liquidate. The Investment Funds’ investment period ended December 31, 2011 and PMT has not acquired any distressed mortgage loans since 2015. ~~This increase was primarily due~~The decrease of $6.9 million and $49.2 million in amortization, impairment and MSR, MSL and ESS valuation adjustments during the quarter and six months ended June 30, 2017, respectively, compared to the same periods in 2016 reflect the effect of interest rates, which did not decline as steeply during 2017 compared to 2016. Higher interest rates discourage refinancings which contribute to increased amortization caused by both a growing mortgage servicing asset and a shorter amortization period resulting from increased prepayment expectations, and increased impairment of MSRs resulting from the effect on fair value of ~~the decreasing interest rate environment that prevailed during the first half of 2016.~~MSRs.

Management fees and Carried Interest

Management fees and Carried Interest are summarized below:


	Quarter ended June 30,				Six months ended June 30,				Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(in thousands)								(in thousands)

Management fees:
PennyMac Mortgage Investment Trust:
Base management	$	5,199	$	5,709	$	10,551	$	11,439	$	5,334	$	5,199	$	10,342	$	10,551
Performance incentive fee		—		70		—		1,343
Performance incentive										304		—		304		—
		5,199		5,779		10,551		12,782		5,638		5,199		10,646		10,551
Investment Funds		531		1,184		1,091		2,670		369		531		735		1,091
Total management fees		5,730		6,963		11,642		15,452		6,007		5,730		11,381		11,642
Carried Interest		244		182		837		1,415		241		244		113		837
Total management fees and Carried Interest	$	5,974	$	7,145	$	12,479	$	16,867	$	6,248	$	5,974	$	11,494	$	12,479

	June 30,		December 31,						June 30,		December 31,
	2016		2015						2017		2016
									(in thousands)
Net assets of Advised Entities at period end:
PennyMac Mortgage Investment Trust	$	1,360,826	$	1,496,113					$	1,454,832	$	1,351,114
Investment Funds		201,490		231,745						144,744		197,550
	$	1,562,316	$	1,727,858					$	1,599,576	$	1,548,664

~~Management~~Base management fees from PMT increased $135,000 and decreased ~~$580,000 and $2.2 million~~$209,000 during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in ~~2015.~~2016. The ~~decrease was~~changes were due to fluctuations in PMT’s average shareholders’ equity, upon which its base management fees are calculated. The increase of PMT’s average shareholders’ equity during the quarter ended June 30, 2017 compared to the same period in 2016 is primarily due ~~to:~~

a decrease in base management fees of $510,000 and $888,000, respectively, due primarily to the effect of a share repurchase program on PMT’s shareholders’ equity upon which its base management fee is based; and

~~a decrease in performance incentive fees of $70,000 and $1.3 million resulting from a decline in PMT’s financial performance over the four-quarter period for which incentive fees were~~to an issuance of additional equity by PMT. The performance incentive fees increased $304,000 during the quarter and six months ended June 30, 2017 resulting from an increase in PMT’s net income during the period over which incentive fees are calculated.

Management fees from the Investment Funds decreased ~~$653,000~~$162,000 and ~~$1.6 million~~$356,000, respectively, during the quarter and six months ended June 30, ~~2016, respectively,~~2017, compared to the same periods in ~~2015.~~2016. The ~~decrease was~~decreases were due to a reduction in the Investment Funds’ net asset values as a result of continued distributions to the Investment Funds’ investors following the end of the Investment Funds’ commitment period.

Carried Interest income from Investment Funds ~~increased $62,000~~decreased $3,000 and ~~decreased $578,000~~$724,000 during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in ~~2015.~~2016. The decreases were due to a decline in the performance of the Funds compared to the same periods in 2016, and to a shrinking investment base on which returns are generated.

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Other revenues

Net interest expense ~~increased $1.7~~decreased $3.0 million and ~~$6.3~~$4.9 million during the quarter and six months ended June 30, ~~2016,~~2017, respectively, compared to the same periods in ~~2015~~2016. The decrease is primarily due to an increase in interest income on mortgage loans held for sale as a result of an increase in average mortgage loan inventory and an increase in the placement fees we receive relating to the custodial funds that we manage, partially offset by an increase in interest expense incurred to fund the growth in ~~financing~~our average inventory of mortgage loans held for sale and to finance our ~~investments in non-interest earning assets, primarily~~ MSRs.

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

Quarter ended June 30,

Six months ended June 30,


2016

2015

2016

2015

(in thousands)

Dividends received from PennyMac Mortgage Investment Trust

$
36

$
46

$
71

$
138

Change in fair value of investment in PennyMac Mortgage Investment Trust

193

(290)

72

(275)

$
229

$
(244)

$
143

$
(137)

Fair value of PennyMac Mortgage Investment Trust shares at period end

$
1,217

$
1,307

Change in fair value of investment in and dividends received from PMT ~~increased $473,000 and $280,000~~decreased $153,000 during the quarter ended June 30, 2017 compared to the same period in 2016 and increased $72,000 during the six months ended June 30, ~~2016, respectively,~~2017, compared to the same ~~periods~~period in ~~2015 due to an increase~~2016. The changes reflect the share price fluctuations in ~~the fair value of~~ our investment in PMT. We held 75,000 common shares of PMT during each of the periods ended June 30, 2017 and 2016, with fair value of $1.4 million and ~~2015.~~$1.2 million, respectively, at the end of each period.

Expenses

Compensation

Our compensation expense is summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)
Salaries and wages	$	50,110	$	40,207	$	98,223	$	75,649	$	55,971	$	50,110	$	112,874	$	98,223
Incentive compensation		19,421		18,134		25,751		28,484		12,100		19,421		23,628		25,751
Taxes and benefits		8,663		7,117		17,545		13,842		10,031		8,663		21,315		17,545
Stock and unit-based compensation		4,953		4,964		9,926		10,591		4,865		4,953		10,390		9,926
	$	83,147	$	70,422	$	151,445	$	128,566	$	82,967	$	83,147	$	168,207	$	151,445
Head count:
Average		2,636		2,186		2,594		2,046		2,912		2,636		2,944		2,594
Period end		2,682		2,354						2,976		2,682

Compensation expense decreased $180,000 during the quarter ended June 30, 2017 compared to the same period in 2016 and increased ~~$12.7~~$16.8 million during the six months ended June 30, 2017 compared to the same period in 2016. The increase was primarily due to an increase in base salaries due to increased average head count resulting from the growth in our mortgage banking activities partially offset by a decrease in incentive compensation due to lower than expected attainment of profitability targets during the six months ended June 30, 2017 compared to the same period in 2016.

Servicing

Servicing expense increased $11.3 million and ~~$22.9~~$17.2 million during the quarter and six months ended June 30, ~~2016~~2017, respectively, compared to the same periods in ~~2015.~~ 2016. The ~~increase in compensation expense was~~increases were primarily due to increased early buyouts of delinquent mortgage loans from Ginnie Mae guaranteed pools for the ~~growth in our mortgage banking segments.~~

~~Incentive compensation decreased primarily due to lower attainment of profitability targets during the first~~ quarter ~~of 2016~~and six months ended June 30, 2017 as compared to the ~~first quarter~~same periods in 2016. The early buyout program reduces the ultimate cost of ~~2015.~~ servicing such 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.

~~Servicing~~Technology

Technology expense ~~decreased $15.2~~increased $3.8 million and ~~$4.0~~$8.4 million during the quarter and six months ended June 30, ~~2016 compared to the same periods in 2015.~~ The decrease was primarily due to the increase in expected losses (provision for servicing advance losses) during the second quarter of 2015 based on observed performance as compared to a more modest increase during the second quarter of 2016.

~~Technology expense increased $1.2 million and $3.2 million during the quarter and six months ended June 30, 2016,~~2017, respectively, compared to the same periods in ~~2015~~2016 primarily due to ~~increased software costs as part of~~ our continued investment in loan production and servicing infrastructure.

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Expenses Allocated to PMT

We are reimbursed by PMT for other expenses, including common overhead expenses we have incurred on PMT’s behalf, in accordance with the terms of ~~our management agreement~~the Management Agreement with PMT. We present the expense amounts in the consolidated statements of income net of these allocations.

Common overhead expense amounts allocated to PMT ~~during the periods ended June 30, 2016 and 2015~~ are summarized below:

Quarter ended June 30,

Six months ended June 30,


2016 (1)

2015

2016

2015

(in thousands)

Technology

$
1,125

$
1,178

$
2,270

$
2,316

Occupancy

512

487

1,085

966

Depreciation and amortization

407

537

806

1,109

Other

391

500

835

1,040

Total expenses

$
2,435

$
2,702

$
4,996

$
5,431

~~(1)~~

For the quarter ended June 30, 2015, reimbursement of common overhead incurred by us included a discretionary waiver, in accordance with the terms of the management agreement, of $700,000 of overhead expenses otherwise allocable to PMT. On December 15, 2015, we amended the management agreement to provide that the total overhead costs and expenses incurred by us in any quarter and reimbursable by PMT is capped at an amount equal to the product of (A) 70 basis points (0.0070), multiplied by (B) PMT’s shareholders’ equity (as defined in the management agreement) as of the last day of such quarter, divided by four (4).


	Quarter ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Technology	$	424	$	1,125	$	881	$	2,270
Occupancy		443		512		822		1,085
Depreciation and amortization		396		407		804		806
Other		330		391		520		835
Total expenses	$	1,593	$	2,435	$	3,027	$	4,996

Provision for Income Taxes

Our effective tax rates were ~~11.8% and 11.9%~~12.4% during the quarter and six months ended June 30 ~~2016, respectively,~~2017, compared to ~~11.5%~~11.8% and 11.9% during the same periods in ~~2015.~~2016, respectively. The difference between our effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into our shares, we expect an increase in allocated earnings that will be subject to corporate federal and state statutory tax rates, which will in turn increase our effective income tax rate.

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Balance Sheet Analysis

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


	June 30,		December 31,
	2016		2015		June 30,		December 31,
	(in thousands)				2017		2016
					(in thousands)
ASSETS
Cash and short-term investments	$	184,778	$	151,791	$	221,418	$	185,331
Mortgage loans held for sale at fair value		2,097,138		1,101,204		3,037,602		2,172,815
Servicing advances, net		296,581		299,354		291,907		348,306
Receivable from affiliates		173,342		170,281
Investments in and advances to affiliates						170,427		168,863
Carried Interest due from Investment Funds		70,763		69,926		71,019		70,906
Mortgage servicing rights		1,290,928		1,411,935		1,951,599		1,627,672
Mortgage loans eligible for repurchase						462,487		382,268
Other		502,790		300,803		198,279		177,741
Total assets	$	4,616,320	$	3,505,294	$	6,404,738	$	5,133,902

LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings	$	2,466,095	$	1,462,739	$	3,721,022	$	2,580,906
Payable to affiliates		558,322		679,548		482,825		555,052
Liability for mortgage loans eligible for repurchase						462,487		382,268
Other		421,050		300,657		227,152		216,320
Total liabilities		3,445,467		2,442,944		4,893,486		3,734,546
Stockholders' equity		1,170,853		1,062,350		1,511,252		1,399,356
Total liabilities and stockholders' equity	$	4,616,320	$	3,505,294	$	6,404,738	$	5,133,902

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Total assets increased ~~$1.1~~$1.3 billion from ~~$3.5~~$5.1 billion at December 31, ~~2015~~2016 to ~~$4.6~~$6.4 billion at June 30, ~~2016.~~2017. The increase was primarily due to an increase of ~~$1.0 billion~~$864.8 million in mortgage loans held for sale at fair value resulting from growth in our mortgage loan ~~production.~~production inventory, an increase of $323.9 million in our investment in MSRs reflecting continued additions from our mortgage loan production activities and servicing portfolio acquisitions and an $80.2 million increase in mortgage loans eligible for repurchase, partially offset by a $56.4 million decrease in servicing advances.

Total liabilities increased by ~~$1.0~~$1.2 billion from ~~$2.4~~$3.7 billion as of December 31, ~~2015~~2016 to ~~$3.4~~$4.9 billion as of June 30, ~~2016.~~2017. The increase was primarily attributable to an increase in borrowings to fund growth in our inventory of mortgage loans held for sale at fair value and to finance our MSRs.

Cash Flows

Our cash flows for the six months ended June 30, ~~2016~~2017 and ~~2015~~2016 are summarized below:


	Six months ended June 30,						Six months ended June 30,
	2016		2015		Change		2017		2016		Change
	(in thousands)						(in thousands)

Cash flow activities:
Operating	$	(958,795)	$	(421,410)	$	(537,385)	$	(853,044)	$	(958,795)	$	105,751
Investing		109,802		(316,047)		425,849		(274,348)		109,802		(384,150)
Financing		887,236		735,929		151,307		1,104,003		887,236		216,767
Net cash flows	$	38,243	$	(1,528)	$	39,771
Net (decrease) increase in cash							$	(23,389)	$	38,243	$	(61,632)

Our cash flows resulted in a net ~~increase~~decrease in cash of ~~$38.2~~$23.4 million during the six months ended June 30, ~~2016~~2017 as discussed below.

Operating activities

Net cash used in operating activities totaled ~~$958.8~~$853.0 million and ~~$421.4~~$958.8 million during the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, primarily due to the growth of our inventory of mortgage loans held for sale at fair value.

~~Table of Contents~~

Investing activities

Net cash used in investing activities during the six months ended June 30, 2017 totaled $274.3 million primarily due to purchases of MSRs totaling $181.6 million. Net cash provided by investing activities during the six months ended June 30, 2016 totaled $109.8 million primarily due to $138.8 million in net settlements of derivative financial instruments received in our hedging of MSRs partially offset by acquisitions of fixed assets and capitalized software. ~~Net cash used in investing activities during the six months ended June 30, 2015 totaled $316.0 million primarily due to our purchase of MSRs during the period.~~

Financing activities

Net cash provided by financing activities totaled ~~$887.2 million~~$1.1 billion and ~~$735.9~~$887.2 million during the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, primarily ~~due~~ to ~~increased financing for~~finance the growth in our inventory of mortgage loans held for sale at fair ~~value.~~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, margin calls relating to hedges, tax receivable agreement payments to exchanged Private National Mortgage Acceptance Company LLC unitholders and tax distributions to noncontrolling interest holders), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from borrowings and/or additional equity offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

Our current leverage strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of assets sold under agreements to repurchase, sales of mortgage loan participation certificates, ~~a note~~notes payable, ~~a revolving credit agreement,~~the Credit Agreement, ESS and a capital lease. ~~All~~While the GMSR term note,

Table of ~~our borrowings other than~~ Contents

ESS and the capital lease have intermediate to long-term maturities, most of our borrowings 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 June 30,				Six months ended June 30,
	2016		2015		2016		2015		Quarter ended June 30,				Six months ended June 30,
	(in thousands)								2017		2016		2017		2016
									(in thousands)				(in thousands)
Repurchase agreements outstanding:
Average balance	$	1,352,401	$	819,988	$	1,195,987	$	719,003	$	2,082,668	$	1,352,401	$	1,801,138	$	1,195,987
Maximum daily balance	$	1,803,371	$	1,264,046	$	1,863,455	$	1,264,046	$	3,617,164	$	1,803,371	$	3,617,164	$	1,863,455
Balance at period end	$	1,591,947	$	1,264,046
Balance at end of period									$	3,023,288	$	1,591,047

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~~for any calendar quarter;

a minimum in unrestricted cash and cash equivalents of ~~$20~~$40 million;

a minimum tangible net worth of ~~$200~~$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 similar to those being financed under one of our existing secured financing agreements.

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

~~Table of Contents~~

In addition to the covenants noted above, our ~~revolving credit agreement~~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;~~Credit Agreement;

a minimum of unrestricted cash and cash equivalents equal to ~~$25~~$40 million;

a minimum 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.

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.

Table of Contents

We are also subject to liquidity and net worth requirements established by FHFA ~~and GNMA~~ for Agency seller/~~servicers. Effective December 31, 2015,~~servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established ~~new~~ minimum liquidity ~~requirements~~ and ~~revised their~~ net worth requirements for ~~their~~ approved non-depository single-family sellers/servicers in the case of ~~Fannie Mae~~FHFA, and ~~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

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.

The Repurchase Program allows us to repurchase up to $50 million of the Company’s Class A common stock using open market stock purchases or privately negotiated transactions in accordance with applicable rules and regulations. The 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 Repurchase Program through cash on hand. We did not repurchase any of our Class A common stock during the quarter and six months ended June 30, 2017.

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.

~~Table of Contents~~

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of June 30, ~~2016,~~2017, we have not entered into any off-balance sheet ~~arrangements or guarantees.~~arrangements.

Contractual Obligations

As of June 30, ~~2016,~~2017, we had on-balance contractual obligations of $1.6 billion to finance assets under agreements to repurchase and $737.3 million to finance assets under our mortgage loan participation and sale agreement. We also had contractual obligations aggregating $8.3 billion, comprised of ~~$115.0 million relating~~borrowings, commitments to ~~notes payable. Additionally, we entered into ESS transactions~~purchase and originate mortgage loans, a ~~capital lease transaction secured by certain fixed assets~~payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement, and ~~capitalized software of which $22.9 million was outstanding as of June 30, 2016.~~anticipated payments related to excess servicing spread financing. We also lease our ~~primary~~ office facilities ~~under an agreement that expires on April 30, 2026~~ and we license certain software to support our loan servicing operations.

All agreements to repurchase assets and mortgage loan participation and sale agreements that matured between June 30, 2017 and the date of this Report have been renewed, extended or repaid and are described in Note 11—Borrowings in the accompanying consolidated financial statements.

Table of Contents

Payment obligations under these agreements are summarized below:


	Payments due by period										Payments due by period
			Less than		1-3		3-5		More than				Less than		1-3		3-5		More than
Contractual obligations	Total		1 year		years		years		5 years		Total		1 year		years		years		5 years
	(in thousands)										(in thousands)

Commitments to purchase and originate mortgage loans											$	3,999,761	$	3,999,761	$	—	$	—	$	—
Assets sold under agreements to repurchase	$	1,591,947	$	1,591,947	$	—	$	—	$	—		3,023,288		3,023,288		—		—		—
Mortgage loan participation and sale agreements		737,319		737,319		—		—		—		243,707		243,707		—		—		—
Notes payable		115,006		115,006		—		—		—		433,865		33,865		400,000		—		—
Obligations under capital lease		22,886		8,743		14,143		—		—		26,641		12,475		14,166		—		—
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust (1)		294,551		—		—		—		294,551		261,796		—		—		—		261,796
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		74,850		—		—		—		74,850		73,084		1,078		18,051		10,906		43,049
Anticipated interest payments related to excess servicing spread financing at fair value		120,495		18,004		28,829		21,559		52,103		98,511		15,073		24,322		18,160		40,956
Software licenses (2)		3,280		3,280		—		—		—		35,423		15,181		20,242		—		—
Office leases		82,195		7,864		20,923		21,019		32,389		101,955		12,158		28,946		23,818		37,033
Total	$	3,042,529	$	2,482,163	$	63,895	$	42,578	$	453,893	$	8,298,031	$	7,356,586	$	505,727	$	52,884	$	382,834

(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 ~~rate~~ due to PMT.

(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 ~~$820,000~~$1.3 million per month. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately ~~902,000~~1.0 million at June 30, ~~2016.~~2017. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the six months ended June 30, ~~2016,~~2017, software license fees totaled ~~$6.6~~$9.9 million. ~~All figures contained in this footnote are in actual amounts and not in thousands (in contrast to the table above).~~

~~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 accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of June 30, ~~2016:~~2017:


			~~Weighted average~~
			~~maturity of~~
			~~advances under~~
~~Counterparty~~	~~Amount at risk~~		~~repurchase agreement~~	~~Facility Maturity~~
	~~(in thousands)~~

~~Credit Suisse First Boston Mortgage Capital LLC~~	$	~~754,830~~	~~September 27, 2016~~	~~September 27, 2016~~
~~Credit Suisse First Boston Mortgage Capital LLC~~	$	~~43,002~~	~~September 8, 2016~~	~~March 30, 2017~~
~~Bank of America, N.A.~~	$	~~40,601~~	~~September 22, 2016~~	~~March 28, 2017~~
~~Morgan Stanley Bank, N.A.~~	$	~~15,071~~	~~August 24, 2016~~	~~August 26, 2016~~
~~Citibank, N.A.~~	$	~~13,851~~	~~August 8, 2016~~	~~October 20, 2016~~
~~Barclays Bank PLC~~	$	~~3,931~~	~~September 22, 2016~~	~~December 2, 2016~~


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility Maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	91,587	April 27, 2018	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC	$	48,987	August 1, 2017	April 27, 2018
Bank of America, N.A.	$	69,343	September 19, 2017	May 25, 2018
JP Morgan Chase Bank, N.A.	$	41,179	August 19, 2017	October 13, 2017
Barclays Bank PLC	$	13,758	September 19, 2017	December 1, 2017
Citibank, N.A.	$	10,631	August 2, 2017	March 2, 2018
Morgan Stanley Bank, N.A.	$	9,914	August 17, 2017	August 25, 2017
Royal Bank of Canada	$	7,406	September 12, 2017	September 18, 2017

~~Management Agreements~~

~~PMT Management Agreement~~

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

~~The management agreement provides that:~~

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

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

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

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

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

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

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~~the target yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.~~

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

Under our management agreement, we are entitled to reimbursement of our organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf. Additionally, on December 15, 2015, we amended our management agreement to provide that the total overhead costs and expenses incurred by us in any quarter and reimbursable by PMT is capped at an amount equal to the product of (A) 70 basis points (0.0070), multiplied by (B) PMT’s shareholders’ equity (as defined in the management agreement) as of the last day of such quarter, divided by four (4).

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

In the event of termination by PMT, we may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by us, in each case during the 24-month period before termination.

~~Investment Funds Management Agreements~~

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

~~Loan Servicing Agreements~~

~~PMT Loan Servicing Agreement~~

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

The base servicing fee rates for distressed whole mortgage loans are charged based on a monthly per‑loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or whether the underlying mortgage property has become REO. Presently, the base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $125 per month for mortgage loans that are in foreclosure. The base servicing fee rate for REO and REO rentals is $75 and $30 per month, respectively. To the extent that we rent PMT’s REO under its REO rental program, we collect an REO rental fee of $30 per month per REO, an REO lease renewal fee of $100 per lease renewed, and a property management fee in an amount equal to our cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if we provide property management services directly. We are also entitled to retain any tenant paid application fees, late rent fees and to seek reimbursement for certain third party vendor fees

The base servicing fee rates for non‑distressed mortgage loans subserviced by us on PMT’s behalf are also calculated through a monthly per‑loan dollar amount, with the actual dollar amount for each mortgage loan based on whether the mortgage loan is a fixed‑rate or adjustable‑rate loan. The base servicing fee rates for mortgage loans subserviced on PMT’s behalf are $7.50 per month for fixed‑rate mortgage loans and $8.50 per month for adjustable rate mortgage loans. To the extent that these mortgage loans become delinquent, we are entitled to an additional servicing fee per mortgage loan falling within a range of $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the mortgage loan or $75 per month if the underlying mortgaged property becomes REO.

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

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

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

~~Investment Funds Loan Servicing Agreements~~

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

~~Mortgage Banking and Warehouse Services Agreement~~

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

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

Presently, the applicable fulfillment fee percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans saleable in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, and (iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that we may, in our sole discretion, reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction may only be credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

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

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

In consideration for the mortgage banking services provided by us with respect to PMT’s acquisition of mortgage loans under PLS’s early purchase program, we are entitled to fees (i) accruing at a rate equal to $1,500 per year per early purchase facility administered by us, and (ii) in the amount of $35 for each mortgage loan PMT acquires thereunder. In consideration for the warehouse services provided by us with respect to mortgage loans that PMT finances for its warehouse lending clients, with respect to each facility, we are entitled to fees (i) accruing at a rate equal to $40,000 per annum for each of the first twenty (20) warehouse lending facilities active in any month and $10,000 per annum for each additional warehouse lending facility active in any month, and (ii) in the amount of $50 for each mortgage loan that PMT finances thereunder. Where PMT has entered into both an early purchase agreement and a warehouse lending agreement with the same client, we shall only be entitled to the applicable warehouse lending fees.

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

~~MSR Recapture Agreement~~

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

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

~~Spread Acquisition and MSR Servicing Agreements~~

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

To the extent we 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 we transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month was less than $200,000, we were, at our 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, we reacquired from PMT all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by us to PMT and then subject to such 2/1/13 Spread Acquisition Agreement.

On December 19, 2014, we entered into a second master spread acquisition and MSR servicing agreement with PMT (the “12/19/14 Spread Acquisition Agreement”). The terms of the 12/19/14 Spread Acquisition Agreement are

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~~substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only intend to sell ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.~~

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

On February 29, 2016, we reacquired from PMT all of its right, title and interest in and to all of the Freddie Mae ESS previously sold by us 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 April 30, 2015, we amended and restated a third master spread acquisition and MSR servicing agreement with PMT (the “4/30/15 Spread Acquisition Agreement”). The terms of the 4/30/15 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 we only intend to sell ESS relating to Ginnie Mae MSRs under the 4/30/15 Spread Acquisition Agreement. The primary purpose of the amendment and restatement to the 4/30/15 Spread Agreement was to evidence the ownership of the ESS under participation certificates and to otherwise incorporate the terms of previously executed amendments.

To the extent we refinance any of the mortgage loans relating to the ESS we sell to PMT, the 4/30/15 Spread Acquisition Agreement also contains recapture provisions requiring that we transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. However, under the 4/30/15 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the UPB of the refinanced mortgage loans, we are also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the UPB of the modified mortgage loans, the 4/30/15 Spread Acquisition Agreement contains provisions that require us to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair value of the aggregate ESS to be transferred for the applicable month is less than $200,000, we may, at our option, pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.

In connection with our entry into the 4/30/15 Spread Acquisition Agreement, we were also required to (i) amend and restate the terms of a loan and security agreement (the “LSA”) with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), pursuant to which we pledged to CSFB all of our rights and interests in the Ginnie Mae MSRs we own or acquire, enabling us to finance certain of such MSRs and servicing advance receivables, and (ii) enter into a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and us. Under the terms of the amendment and restatement to the LSA, the maximum loan amount was increased from $257 million to $407 million. The $150 million increase was implemented for the purpose of facilitating the financing of ESS by PMT. On November 10, 2015, the LSA was further amended and restated to convert the form of the borrowing into a repurchase agreement (as amended and restated, the “MSR Repo”). The aggregate loan amount outstanding under the MSR Repo and relating to advances outstanding with PMT is guaranteed in full by PMT.

Separately, as a condition to permitting us to transfer to PMT the ESS relating to a portion of our pledged Ginnie Mae MSRs, CSFB required PMT to enter into a Security and Subordination Agreement (the “Security Agreement”), pursuant to which PMT pledged to CSFB its rights under the 4/30/15 Spread Acquisition Agreement and its interest in any ESS purchased thereunder. CSFB’s lien on the ESS remains subordinate to the rights and interests of Ginnie Mae pursuant to the provisions of the 4/30/15 Spread Acquisition Agreement and the terms of the acknowledgement agreement.

The Security Agreement permits CSFB to liquidate PMT’s ESS along with the related MSRs to the extent there exists an event of default under the MSR Repo, and it contains certain trigger events, including breaches of representations, warranties or covenants and defaults under other of PMT’s credit facilities, that would require us to either (i) repay in full the outstanding loan amount under the MSR Repo or (ii) repurchase the ESS from PMT at fair value. To the extent we are unable to repay the loan under the MSR Repo or repurchase the ESS, an event of default would exist under the MSR Repo, thereby entitling CSFB to liquidate the ESS and the related MSRs. In the event the

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~~ESS is liquidated as a result of certain actions or inactions by us, PMT generally would be entitled to seek indemnity from us under the 4/30/15 Spread Acquisition Agreement.~~

~~Note Receivable from PMT~~

In connection with certain of the amendments and restatements described above, we entered into an underlying loan and security agreement with PMT, dated as of April 30, 2015, pursuant to which PMT may borrow up to $150 million from us for the purpose of financing ESS (the “Underlying LSA”).

The principal amount of the borrowings under the Underlying LSA is 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 us a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings.

We have agreed with PMT in connection with the Underlying LSA that PMT is required to repay us the principal amount of borrowings plus accrued interest to the date of such repayment, and we are required, in turn, to repay CSFB the corresponding amount under the MSR Repo. Interest accrues on the note receivable from PMT 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 us a fee for the structuring of the Underlying LSA in an amount equal to the portion of the corresponding fee paid by us to CSFB allocable to the increase in the maximum loan amount under the MSR Repo resulting from the ESS financing.

~~Loan Purchase Agreements~~

We have entered into a mortgage loan purchase agreement and a flow commercial mortgage loan purchase agreement with PMT. Currently, we use the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans and conventional mortgage loans eligible for delivery into Agency credit risk transfer securities, in each case originated by us through our consumer direct lending business. We use the flow commercial mortgage loan purchase agreement for the purpose of selling to PMT small balance commercial mortgage loans, including multifamily mortgage loans, originated by us as part of our commercial lending business. Each of the loan purchase agreements contains customary terms and provisions, including representations and warranties, covenants, repurchase remedies and indemnities. The purchase prices paid to us by PMT for such loans are market-based.

~~Commercial Mortgage Servicing Oversight Agreement~~

We have also entered into a commercial mortgage servicing oversight agreement with PMT that governs our oversight of the master and/or special servicing performed by third party servicers in connection with certain commercial mortgage loans acquired by PMT. For the oversight services performed under this agreement, we are entitled to collect a fee equal to 5 basis points per annum based on the UPB of the related commercial mortgage loans for which we provide oversight servicing.

~~Reimbursement Agreement~~

In connection with the IPO of PMT’s common shares on August 4, 2009, we entered into an agreement with PMT pursuant to which PMT agreed to reimburse us for the $2.9 million payment that it made to the underwriters in such offering (the “Conditional Reimbursement”) if PMT satisfied certain performance measures over a specified period of time. Effective February 1, 2013, the parties amended the terms of the reimbursement agreement to provide for the reimbursement to us of the Conditional Reimbursement if PMT is required to pay us performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12 month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million.

In the event the termination fee is payable to us under the management agreement and we have not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. The term of the reimbursement agreement expires on February 1, 2019.

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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 and sale agreements, two 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.

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Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of June 30, ~~2016,~~2017, 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.

~~All of the~~The borrowings ~~discussed above~~ have ~~short-term~~ maturities ~~that expire~~ as follows:


	Outstanding		Total		Committed			Outstanding		Total		Committed
Lender	indebtedness (4)		facility size		Facility		Maturity date	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)
	(dollar amounts in thousands)							(dollar amounts in thousands)
Assets sold under agreements to repurchase ~~(1)~~
Credit Suisse First Boston Mortgage Capital LLC	$	407,000	$	407,000	$	407,000	September 27, 2016	$	773,496	$	850,000	$	293,000	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC(3)	$	448,963	$	500,000	$	300,000	March 30, 2017	$	457,827	$	650,000	$	407,000	April 27, 2018
Bank of America, N.A.(5)	$	372,742	$	500,000	$	225,000	March 28, 2017	$	766,544	$	800,000	$	225,000	May 25, 2018
Morgan Stanley Bank, N.A.	$	168,200	$	200,000	$	125,000	August 26, 2016	$	131,399	$	500,000	$	175,000	August 25, 2017
JP Morgan Chase Bank, N.A.								$	489,474	$	500,000	$	50,000	October 13, 2017
Citibank, N.A.	$	157,201	$	200,000	$	150,000	October 20, 2016	$	175,878	$	700,000	$	275,000	March 2, 2018
Barclays Bank PLC (2)	$	37,842	$	200,000	$	—	December 2, 2016
Barclays Bank PLC (4)								$	135,757	$	370,000	$	—	December 1, 2017
Royal Bank of Canada								$	92,913	$	135,000	$	75,000	September 18, 2017
Mortgage loan participation and sale agreements
Bank of America, N.A.	$	737,319	$	800,000	$	—	March 28, 2017	$	243,707	$	250,000	$	—	May 25, 2018
Barclays Bank PLC (2)	$	—	$	—	$	—	December 2, 2016
Notes payable (3)
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)								$	33,865	$	130,000	$	130,000	December 1, 2017
Credit Suisse AG	$	50,000	$	100,000	$	100,000	December 28, 2016	$	—	$	150,000	$	150,000	November 17, 2017
Barclays Bank PLC (2)	$	65,006	$	100,000	$	100,000	December 2, 2016
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	22,886	$	25,000	$	25,000	December 9, 2019	$	26,641	$	—	$	—	March 22, 2020

(1)

~~The borrowing with Credit Suisse First Boston Mortgage Capital LLC (with a committed amount~~Outstanding indebtedness as of $407 million) is in the form of sales of participation certificates representing beneficial ownership in MSRs and ESS under agreements to repurchase. The other borrowings are in the form of sales of mortgage loans under agreements to repurchase.June 30, 2017.

(2)

~~The borrowings with Barclays Bank PLC are subject to a total aggregate~~Total facility ~~amount~~size, committed facility and maturity date include contractual changes through the date of ~~$300 million, of which $100 million represents the maximum amount for MSRs.~~this Report.

(3)

The ~~borrowing with~~ Credit Suisse ~~AG (with~~First Boston Mortgage Capital LLC facility size is a ~~committed amount~~total of ~~$100 million)~~$1.5 billion that the Company can allocate as needed. The borrowing of $458 million is in the form of a ~~revolving credit~~sale of a variable funding note under an agreement ~~which is secured by cash~~to repurchase, with a maximum allowable borrowing of $650 million through September 28, 2017, declining to a maximum allowable borrowing of $407 million thereafter.

(4)

Pursuant to amendments of a master repurchase agreement and ~~carried interest~~a loan and ~~classified~~security agreement, each dated as ~~a note payable. The borrowing with~~of June 16, 2017, Barclays Bank PLC ~~(with a total~~agreed to temporarily increase the maximum aggregate facility ~~size~~amount to $500 million from $300 million until September 30, 2017 of ~~$100 million) is in~~which $130 million represents the ~~form of a note payable secured by~~maximum amount for MSRs. The aggregate facility amount will be reset to $300 million after September 30, 2017.

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~~(4)~~(5)

~~Except with respect~~Pursuant to ~~the Credit Suisse AG note payable, which is secured primarily by cash collateral, amounts shown represent outstanding indebtedness reduced by cash collateral~~an amendment of a master repurchase agreement dated as of ~~June 30, 2016.~~May 23, 2017, Bank of America, N.A. agreed to temporarily increase the maximum aggregate principal amount to $800 million from $500 million until August 31, 2017, at which time the aggregate principal amount will be reset to $500 million.

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.

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of June 30, ~~2016,~~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%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)

Fair value	$	821,558		$	792,059		$	778,100		$	751,636		$	739,083		$	715,229		$	1,384,405		$	1,326,599		$	1,299,443		$	1,248,305		$	1,224,210		$	1,178,710
Change in fair value:
$	$	56,924		$	27,425		$	13,466		$	(12,998)		$	(25,551)		$	(49,405)		$	111,041		$	53,235		$	26,078		$	(25,059)		$	(49,154)		$	(94,654)
%		7.4	%		3.6	%		1.8	%		(1.7)	%		(3.3)	%		(6.5)	%		8.7	%		4.2	%		2.0	%		(2.0)	%		(3.9)	%		(7.4)	%


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

Fair value	$	1,360,597		$	1,315,460		$	1,294,052		$	1,253,361		$	1,234,008		$	1,197,128
Change in fair value:
$	$	87,233		$	42,095		$	20,687		$	(20,003)		$	(39,356)		$	(76,236)
%		6.9	%		3.3	%		1.6	%		(1.6)	%		(3.1)	%		(6.0)	%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
846,911

$
803,848

$
783,790

$
746,322

$
728,804

$
695,960

Change in fair value:

$

$
82,277

$
39,214

$
19,157

$
(18,312)

$
(35,830)

$
(68,674)

%

10.8
%

5.1
%

2.5
%

(2.4)
%

(4.7)
%

(9.0)
%


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	$	791,356		$	777,995		$	771,314		$	757,954		$	751,273		$	737,912		$	1,313,222		$	1,293,293		$	1,283,329		$	1,263,400		$	1,253,435		$	1,233,506
Change in fair value:
$	$	26,722		$	13,361		$	6,680		$	(6,680)		$	(13,361)		$	(26,722)		$	39,858		$	19,929		$	9,964		$	(9,965)		$	(19,930)		$	(39,858)
%		3.5	%		1.8	%		0.9	%		(0.9)	%		(1.8)	%		(3.5)	%		3.1	%		1.6	%		0.8	%		(0.8)	%		(1.6)	%		(3.1)	%

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of June 30, ~~2016,~~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%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)

Fair value	$	563,250		$	544,128		$	535,058		$	517,822		$	509,629		$	494,026		$	733,094		$	704,682		$	691,305		$	666,060		$	654,138		$	631,576
Change in fair value:
$	$	36,956		$	17,834		$	8,764		$	(8,472)		$	(16,665)		$	(32,268)		$	54,654		$	26,242		$	12,865		$	(12,381)		$	(24,302)		$	(46,865)
%		7.0	%		3.4	%		1.7	%		(1.6)	%		(3.2)	%		(6.1)	%		8.1	%		3.9	%		1.9	%		(1.8)	%		(3.6)	%		(6.9)	%

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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	$	579,638		$	551,785		$	538,762		$	514,348		$	502,893		$	481,348		$	728,344		$	702,487		$	690,250		$	667,037		$	656,019		$	635,066
Change in fair value:
$	$	53,344		$	25,491		$	12,468		$	(11,946)		$	(23,401)		$	(44,946)		$	49,903		$	24,047		$	11,809		$	(11,403)		$	(22,421)		$	(43,374)
%		10.1	%		4.8	%		2.4	%		(2.3)	%		(4.5)	%		(8.5)	%		7.4	%		3.5	%		1.7	%		(1.7)	%		(3.3)	%		(6.4)	%


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	$	551,864		$	539,079		$	532,687		$	519,901		$	513,509		$	500,724		$	705,020		$	691,730		$	685,085		$	671,795		$	665,150		$	651,860
Change in fair value:
$	$	25,570		$	12,875		$	6,393		$	(6,393)		$	(12,785)		$	(25,570)		$	26,580		$	13,290		$	6,645		$	(6,645)		$	(13,290)		$	(26,580)
%		4.9	%		2.4	%		1.2	%		(1.2)	%		(2.4)	%		(4.9)	%		3.9	%		2.0	%		1.0	%		(1.0)	%		(2.0)	%		(3.9)	%

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 June 30, ~~2016,~~2017, 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%
	(dollar amounts in thousands)

Fair value	$	271,706		$	266,661		$	264,207		$	259,427		$	257,100		$	252,567
Change in fair value:
$	$	9,910		$	4,866		$	2,411		$	(2,369)		$	(4,696)		$	(9,229)
%		3.8	%		1.9	%		0.9	%		(0.9)	%		(1.8)	%		(3.5)	%


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

Fair value	$	309,154		$	301,676		$	298,071		$	291,114		$	287,757		$	281,272		$	288,188		$	274,418		$	267,972		$	255,873		$	250,190		$	239,488
Change in fair value:
$	$	14,602		$	7,125		$	3,520		$	(3,437)		$	(6,794)		$	(13,280)		$	26,392		$	12,622		$	6,176		$	(5,922)		$	(11,606)		$	(22,308)
%		5.0	%		2.4	%		1.2	%		(1.2)	%		(2.3)	%		(4.5)	%		10.1	%		4.8	%		2.4	%		(2.3)	%		(4.4)	%		(8.5)	%

Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%


(dollar amounts in thousands)

Fair value

$
328,642

$
310,782

$
302,476

$
286,983

$
279,751

$
266,211

Change in fair value:

$

$
34,091

$
16,231

$
7,925

$
(7,568)

$
(14,800)

$
(28,340)

%

11.6
%

5.5
%

2.7
%

(2.6)
%

(5.0)
%

(9.6)
%

Item 3. Quantitative and Qualitative Disclosures About Market ~~Ris~~Riskk

In response to this Item 3, the information set forth on pages 79 toand 80 of this Report is incorporated herein by reference.

Item 4. Controls and ~~Procedure~~Proceduress

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

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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 six months ended June 30, ~~2016~~2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER ~~INFORMATIO~~INFORMATIONN

Item 1. Legal ~~Proceeding~~Proceedingss

From time to time, we may be involved in various legal ~~proceedings,~~actions, claims and ~~actions~~proceedings arising in the ordinary course of business. As of June 30, ~~2016,~~2017, 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 ~~Factor~~Factorss

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, ~~2015,~~2016, filed with the SEC on March ~~10, 2016~~9, 2017 and our Quarterly Reports on Form 10-Q filed thereafter.

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

~~None.~~Repurchases of our Common Stock

The following table summarizes the stock repurchase activity for the three months ended June, 2017 and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program.

In June 2017, the our Board of Directors authorized a stock repurchase program under which we may repurchase up to $50 million of our outstanding Class A common stock. We did not repurchase any of our Class A common stock during the three months ended June 30, 2017.


	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)
April 1, 2017 – April 30, 2017		—	$	—		—	$	50,000,000
May 1, 2017 – May 31, 2017		—	$	—		—	$	50,000,000
June 1, 2017 – June 30, 2017		—	$	—		—	$	50,000,000
Total		—	$	—		—	$	50,000,000

(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 common stock. We have not conducted any repurchases of shares of our common stock under the stock repurchase program. 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 ~~Securitie~~Securitiess

None.

Item 4. Mine Safety ~~Disclosure~~Disclosuress

Not applicable.

Item 5. Other ~~Informatio~~Informationn

None.

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Item 6. Exhibits


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

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

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

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

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

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

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

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

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

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

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

10.9†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.9 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).

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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).

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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).

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

~~10.16~~		~~Amendment No. 1 to Mortgage Banking and Warehouse Services~~Employment Agreement, dated as of ~~March 1, 2013,~~April 5, 2017, by and ~~between~~among Private National Mortgage Acceptance Company, LLC, PennyMac ~~Loan~~Financial Services, ~~LLC~~Inc. and ~~PennyMac Corp. (incorporated by reference to Exhibit 10.31 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).~~

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

~~10.18~~		~~Amendment No. 3 to Mortgage Banking and Warehouse Services Agreement, dated as of December 15, 2015, by and between PennyMac Loan Services, LLC and PennyMac Corp.~~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 ~~November 16, 2015)~~April 7, 2017).

~~10.19~~10.17		Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

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

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

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

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~~10.23~~		Amendment No. 4 to Second Amended and Restated Flow Servicing Agreement, dated as of March 31, 2015, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).

~~10.24~~		~~Amendment No. 5 to Second Amended and Restated Flow Servicing~~Management Agreement, dated as of September 1, 2015, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

~~10.25~~		~~Amendment No. 6 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1,~~12, 2016, ~~between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.~~

~~10.26~~		MSR Recapture Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.11 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.27~~		Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

~~10.28~~		Amended and Restated Management Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

~~10.29~~		~~Amendment Number One to Amended and Restated Management Agreement, dated as of December 15, 2015,~~ 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 ~~December 18, 2015)~~September 12, 2016).

~~10.30~~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		Amendment No. 1 to Amended and Restated Mortgage Banking Services Agreement, dated as of May 25, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.

10.21		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).

10.22		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).

~~10.31~~10.23		~~Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of April 30, 2015, by and between PennyMac Loan Services, LLC and PennyMac Holdings, 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 6, 2015).~~

~~10.32~~		Amendment No. 1 to Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of August 26, 2015, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.37 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

~~10.33~~		Amendment No. 2 to Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of November 10, 2015, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.40 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

~~10.34~~		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~~(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).

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~~10.35~~Exhibit Number		Exhibit Description
10.24		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~~(incorporated by reference to Exhibit 10.38 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).

~~10.36~~10.25		Second Amended and Restated ~~Flow~~Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, by and between ~~PNMAC Mortgage Co., LLC and~~ PennyMac Loan Services, LLC, ~~dated August 1, 2010~~and PennyMac Holdings, LLC (incorporated by reference to Exhibit ~~10.14~~10.7 of the Registrant’s ~~Amendment No. 1 to~~Current Report on Form ~~S-1 Registration Statement~~8-K as filed with the SEC on ~~March 26, 2013)~~December 21, 2016).

~~10.37~~		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).

~~10.38~~10.26		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).

~~10.39~~10.27		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).

~~10.40~~10.28		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).

10.29		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).

10.30		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).

~~10.41~~10.31		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).

~~10.42~~		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).

~~10.43~~10.32		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).

~~10.44~~10.33		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).
10.34		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).

Table of Contents

~~10.45~~
Exhibit Number		Exhibit Description
10.35		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~~

~~10.46~~10.36		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).

~~10.47~~10.37		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).

~~10.48~~10.38		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).

~~10.49~~10.39		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).

~~10.50~~10.40		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).

~~10.51~~10.41		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).

~~10.52~~10.42		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).

~~10.53~~10.43		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).

~~10.54~~10.44		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).
10.45		Amendment No. 11 to Master Repurchase Agreement, dated as of May 23, 2017, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 30, 2017).

Table of Contents


~~10.55~~Exhibit Number		Exhibit Description
10.46		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).

~~10.56~~10.47		Amended and Restated Master Repurchase Agreement, dated as of ~~June 26, 2012, by~~March 3, 2017, among Citibank, N.A. and ~~between~~ PennyMac Loan Services, LLC ~~and Citibank, N.A. (incorporated by reference to Exhibit 10.20 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).~~

~~Table of Contents~~

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

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

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

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

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

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

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

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

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

~~10.66~~		Amendment Number Ten to the Master Repurchase Agreement, dated July 6, 2015, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.69 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

~~10.67~~		~~Amendment Number Eleven to the Master Repurchase Agreement, dated August 3, 2015, by and between PennyMac Loan Services, LLC and Citibank, 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 5, 2015)~~March 8, 2017).

~~10.68~~10.48		Amendment Number ~~Twelve~~One to ~~the~~Amended and Restated Master Repurchase Agreement, dated ~~September 7, 2015, by~~as of June 19, 2017, between Citibank, N.A. and ~~between~~ PennyMac Loan Services, LLC ~~and Citibank, N.A.~~ (incorporated by reference to Exhibit ~~10.72~~10.4 of the Registrant’s ~~Quarterly~~Current Report on Form ~~10-Q for~~8-K filed with the ~~quarter ended September 30, 2015)~~SEC on June 21, 2017).

~~10.69~~		Amendment Number Thirteen to the Master Repurchase Agreement, dated October 22, 2015, between PennyMac Loan Services, LLC and Citibank, 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 October 28, 2015).

~~10.70~~		~~Amendment Number Fourteen to the Master Repurchase Agreement, dated July 25, 2016, between PennyMac Loan Services, LLC and Citibank, N.A.~~

~~Table of Contents~~

~~10.71~~10.49		Guaranty Agreement, dated as of June 26, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Citibank, N.A (incorporated by reference to Exhibit 10.61 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

~~10.72~~10.50		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~~(incorporated by reference to Exhibit 10.189 ~~of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015)~~.

~~10.73~~		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).

~~10.74~~		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).

~~10.75~~		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).

~~10.76~~10.51		~~Amendment No. 3 to Loan~~Master Repurchase Agreement (Participation Certificates and ~~Security Agreement,~~Servicing), dated as of ~~December 15,~~November 10, 2015, ~~by and~~ among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and ~~PennyMac Holdings,~~Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit ~~10.93~~10.1 of the Registrant’s ~~Annual~~Current Report on Form ~~10-K for~~8-K filed with the ~~quarter ended December 31,~~SEC on November 16, 2015).

~~10.77~~10.52		Amendment No. 41 to ~~Loan and Security~~Master Repurchase Agreement, dated as of ~~January 28,~~December 19, 2016, ~~by and~~ among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, PennyMac Loan Services, LLC and ~~PennyMac Holdings,~~Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit ~~10.94~~10.74 of the Registrant’s Annual Report on Form 10-K ~~for~~filed with the ~~quarter ended December 31, 2015)~~SEC on March 9, 2017).

~~10.78~~		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).

~~10.79~~		Second Amended and Restated Guaranty, dated as of March 27, 2015, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on April 2, 2015).

~~10.80~~10.53		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).

~~10.81~~10.54		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).

~~Table of Contents~~

~~10.82~~		~~Second~~Third Amended and Restated Master Repurchase Agreement, dated as of ~~March 31, 2016,~~April 28, 2017, 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 8-K as filed with the SEC on ~~April 6, 2016)~~May 3, 2017).

~~10.83~~10.55		Amendment No. 1 to Third Amended and Restated Master Repurchase Agreement, dated as of June 1, 2017, 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.

10.56		Amended and Restated Guaranty, dated as of ~~August 14, 2009,~~April 28, 2017, by Private National Mortgage Acceptance ~~Company,~~ LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit ~~10.77~~10.2 of the Registrant’s ~~Annual~~Current Report on Form ~~10-K for~~8-K as filed with the ~~year ended December 31, 2014)~~SEC on May 3, 2017).

~~10.84~~10.57		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).

Table of Contents

~~10.85~~
Exhibit Number		Exhibit Description
10.58		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).

~~10.86~~10.59		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).

~~10.87~~10.60		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).

~~10.88~~10.61		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).

~~10.89~~10.62		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).

~~10.90~~10.63		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).

~~10.91~~10.64		Amendment Number Seven to the Master Repurchase Agreement, dated July 26, ~~2015,~~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).

~~10.92~~10.65		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).

10.66		Amendment Number Nine to the Master Repurchase Agreement, dated June 20, 2017, by and between PennyMac Loan Services, LLC, Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 21, 2017).

10.67		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).

~~10.93~~10.68		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~~

~~10.94~~10.69		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).

Table of Contents

~~10.95~~
Exhibit Number		Exhibit Description
10.70		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).

~~10.96~~10.71		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).

10.72		Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2017, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

10.73		Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 23, 2017, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

~~10.97~~10.74		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).

~~10.98~~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).

~~10.99~~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).

~~10.100~~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).

~~10.101~~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).

~~10.102~~10.79		Amended and Restated Commercial Mortgage ~~Service~~Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, ~~LLC.~~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).

~~10.103~~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~~(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).

~~10.104~~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).

Table of Contents


Exhibit Number		Exhibit Description
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).

10.83		Amendment Number Three to Master Repurchase Agreement, dated as of May 3, 2017, 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 filed with the SEC on May 5, 2017).

10.84		Amendment Number Four to Master Repurchase Agreement, dated as of June 16, 2017, 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 filed with the SEC on June 21, 2017).

10.85		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).

~~10.105~~10.86		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).

10.87		Amendment Number Two to Mortgage Loan Participation Purchase and Sale Agreement, dated as of May 3, 2017, 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 filed with the SEC on May 5, 2017).

10.88		Amendment Number Three to Mortgage Loan Participation Purchase and Sale Agreement, dated as of June 16, 2017, 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 filed with the SEC on June 21, 2017).

10.89		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~~(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).

~~Table of Contents~~

~~10.106~~10.90		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~~(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).

~~10.107~~10.91		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).

10.92		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).

Table of Contents


Exhibit Number		Exhibit Description
10.93		Amendment Number Four to the Loan and Security Agreement, dated as of June 16, 2017, among Barclays Bank PLC, 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 filed with the SEC on June 21, 2017).

10.94		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~~(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).

~~10.108~~10.95		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~~(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).

~~10.109~~10.96		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).

~~10.110~~10.97		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).

~~10.111~~10.98		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).

10.99		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).

10.100		Guaranty, dated as of December 9, 2015, by PennyMac Loan Services, LLC in favor of Banc of America Leasing & Capital, LLC ~~(incorporated~~(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).

~~10.112~~10.101		Amended and Restated Credit Agreement, dated ~~December 30, 2015,~~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 ~~December 30, 2015)~~November 22, 2016).

~~10.113~~10.102		Amended and Restated Collateral and Guaranty Agreement, dated ~~December 30, 2015,~~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~~(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).

10.103		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).

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Exhibit Number		Exhibit Description
10.104		First Amendment to Master Repurchase Agreement, dated as of May 23, 2017, 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 May 30, 2017).

10.105		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).

10.106		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).

10.107		Amendment No. 1 to Master Repurchase Agreement, dated as of May 3, 2017, between Royal Bank of Canada and PennyMac Loan Services, LLC.

10.108		Base Indenture, dated as of December 19, 2016, 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 December 21, 2016).

10.109		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).

10.110		Series 2016-MSRVF1 Indenture Supplement to Indenture, dated as of December 19, 2016, 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 8-K as filed with the SEC on December ~~30, 2015)~~21, 2016).

10.111		Series 2016-MBSADV1 Indenture Supplement to Indenture, dated as of December 19, 2016, 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 March 9, 2017).

10.112		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).

10.113		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).

10.114		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).

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Exhibit Number		Exhibit Description
10.115		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).

10.116		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).

10.117		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).

10.118		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).

10.119		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).

10.120		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).

10.121		Master Repurchase Agreement, dated as of December 19, 2016, 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 8-K as filed with the SEC on December 21, 2016).

10.122		Guaranty, dated as of December 19, 2016, 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).

10.123		Master Repurchase Agreement, dated as of November 1, 2016, among JPMorgan Chase Bank, National Association, 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).

10.124		Guaranty, dated as of November 1, 2016, by 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).

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

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

32.2*		~~Certification of Anne D. McCallion~~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.

9293

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Exhibit Number		Exhibit Description
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 June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (ii) the Consolidated Statements of Income for the quarters ended June 30, ~~2016~~2017 and June 30, ~~2015,~~2016, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended June 30, ~~2016~~2017 and June ~~31, 2015,~~30, 2016, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, ~~2016~~2017 and June 30, ~~2015~~2016 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.

9394

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SIGNATURES

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

	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)

Dated: August ~~9, 2016~~7, 2017	By:	/~~S/ STANFORD L. KURLAND~~s/ DAVID A. SPECTOR
		~~Stanford L. Kurland~~David A. Spector
		~~Chairman of the Board of Directors~~President and Chief Executive Officer

Dated: August ~~9, 2016~~7, 2017	By:	/~~S/ ANNE D. McCALLION~~s/ ANDREW S. CHANG
		~~Anne D. McCallion~~Andrew S. Chang
		Chief Financial Officer

9495


	Quarter ended June 30,				Six months ended June 30,
	2016 (1)		2015		2016		2015
	(in thousands)

Technology	$	1,125	$	1,178	$	2,270	$	2,316
Occupancy		512		487		1,085		966
Depreciation and amortization		407		537		806		1,109
Other		391		500		835		1,040
Total expenses	$	2,435	$	2,702	$	4,996	$	5,431