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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

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

For the quarterly period ended September 30, ~~2019~~2020

☐

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

☐~~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: 001-38727

PennyMac Financial Services, Inc.

(formerly known as New PennyMac Financial Services, Inc.)

(Exact name of registrant as specified in its charter)


Delaware		83-1098934
(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)~~ (818) 224-7442

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value		PFSI		New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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


Large accelerated filer ☐		Accelerated filer ☒
~~Large accelerated filer~~ ☐		~~Accelerated filer~~ ☒
Non-accelerated filer ☐		Smaller reporting company ☐
~~Non-accelerated filer~~ ☐		~~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 November 4, 2020
~~Class~~		~~Outstanding at November 1, 2019~~
Common Stock, $0.0001 par value		~~78,448,596~~72,444,213

SPECIAL NOTE REGARDING ~~FORWARD‑LOOKING~~FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain ~~forward‑looking~~forward-looking statements that are subject to various risks and uncertainties. ~~Forward‑looking~~Forward-looking statements are generally identifiable by use of ~~forward‑looking~~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~~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~~forward-looking information. Examples of ~~forward‑looking~~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 exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as COVID-19;

●

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~~government-sponsored entities and changes in their current roles or their guarantees or guidelines;

●

changes to government mortgage modification programs;

●

~~certain banking regulations that may limit our business activities;~~

foreclosure delays and changes in foreclosure practices;

●

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

●

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

●

changes in macroeconomic and U.S. real estate market conditions;

Table of Contents

●

difficulties inherent in growing loan production volume;

●

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

●

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

including compliance with financial covenants;

●

changes in prevailing interest rates;

●

increases in loan delinquencies and defaults;

●

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

●

our obligation to indemnify ~~third‑party~~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 exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

●

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

●

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

●

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

●

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

●

conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;

●

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;

●

our ability to effectively deploy new information technology applications and infrastructure;

●

our ability to mitigate cybersecurity risks and cyber incidents;

●

our ~~exposure~~ability to ~~risks of loss resulting from adverse weather conditions~~pay dividends to our stockholders; and ~~man-made or natural disasters; and~~

●

our organizational structure and certain requirements in our charter documents.

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

December 31,


2019

2018

(in thousands, except share amounts)
ASSETS

Cash (includes $101,773 and $108,174 pledged to creditors)

$
201,268

$
155,289
Short-term investments at fair value

90,663

117,824
Loans held for sale at fair value (includes $4,481,210 and $2,478,858 pledged to creditors)

4,522,971

2,521,647
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

107,678

131,025
Derivative assets

232,948

96,347
Servicing advances, net (includes valuation allowance of $73,024 and $70,582; $181,747 and $162,895 pledged to creditors)

271,501

313,197
Mortgage servicing rights at fair value (includes $2,550,602 and $2,807,333 pledged to creditors)

2,556,253

2,820,612
Real estate acquired in settlement of loans

20,328

2,250
Operating lease right-of-use assets

53,384

—
Furniture, fixtures, equipment and building improvements, net (includes $22,172 and $16,281 pledged to creditors)

32,221

33,374
Capitalized software, net (includes $14,090 and $1,017 pledged to creditors)

57,975

39,748
Investment in PennyMac Mortgage Investment Trust at fair value

1,667

1,397
Receivable from PennyMac Mortgage Investment Trust

39,744

33,464
Loans eligible for repurchase

892,631

1,102,840
Other

221,967

109,559
Total assets

$
9,303,199

$
7,478,573
LIABILITIES

Assets sold under agreements to repurchase

$
3,538,889

$
1,933,859
Mortgage loan participation purchase and sale agreements

514,625

532,251
Obligations under capital lease

23,881

6,605
Notes payable

1,293,625

1,292,291
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

183,141

216,110
Derivative liabilities

14,035

3,064
Operating lease liabilities

72,160

—
Accounts payable and accrued expenses

215,379

156,212
Mortgage servicing liabilities at fair value

34,294

8,681
Payable to PennyMac Mortgage Investment Trust

61,862

104,631
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

46,537

46,537
Income taxes payable

480,559

400,546
Liability for loans eligible for repurchase

892,631

1,102,840
Liability for losses under representations and warranties

19,968

21,155
Total liabilities

7,391,586

5,824,782

Commitments and contingencies  –  Note 14

STOCKHOLDERS’ EQUITY

Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 78,434,556 and 77,494,332 shares, respectively

8

8
Additional paid-in capital

1,328,166

1,310,648
Retained earnings

583,439

343,135
Total stockholders' equity

1,911,613

1,653,791
Total liabilities and stockholders’ equity

$
9,303,199

$
7,478,573


	September 30,		December 31,
	2020		2019

	(in thousands, except share amounts)
ASSETS
Cash (includes $52,599 pledged to creditors at December 31, 2019)	$	529,166	$	188,291
Short-term investments at fair value		102,136		74,611
Loans held for sale at fair value (includes $9,011,545 and $4,846,138 pledged to creditors)		9,126,172		4,912,953
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		86,958		107,512
Derivative assets		578,254		159,686
Servicing advances, net (includes valuation allowance of $141,964 and $82,157; $232,519 and $207,460 pledged to creditors)		393,654		331,169
Mortgage servicing rights at fair value (includes $2,330,600 and $2,920,603 pledged to creditors)		2,333,821		2,926,790
Operating lease right-of-use assets		72,133		73,090
Investment in PennyMac Mortgage Investment Trust at fair value		991		1,672
Receivable from PennyMac Mortgage Investment Trust		122,478		48,159
Loans eligible for repurchase		17,183,873		1,046,527
Other (includes $207,547 and $32,598 pledged to creditors)		651,229		333,557
Total assets	$	31,180,865	$	10,204,017

Assets sold under agreements to repurchase	$	7,259,188	$	4,141,053
Mortgage loan participation purchase and sale agreements		535,063		497,948
Obligations under capital lease		13,957		20,810
Notes payable secured by mortgage servicing assets		1,295,143		1,294,070
Unsecured senior notes		492,358		—
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		142,990		178,586
Derivative liabilities		24,537		22,330
Mortgage servicing liabilities at fair value		31,698		29,140
Operating lease liabilities		92,005		91,320
Accounts payable and accrued expenses		278,403		175,273
Payable to PennyMac Mortgage Investment Trust		77,136		73,280
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		35,784		46,158
Income taxes payable		673,149		504,569
Liability for loans eligible for repurchase		17,183,873		1,046,527
Liability for losses under representations and warranties		28,504		21,446
Total liabilities		28,163,788		8,142,510

Commitments and contingencies – Note 15

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 72,400,490 and 78,515,047 shares, respectively		7		8
Additional paid-in capital		1,116,428		1,335,107
Retained earnings		1,900,642		726,392
Total stockholders' equity		3,017,077		2,061,507
Total liabilities and stockholders’ equity	$	31,180,865	$	10,204,017

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Quarter ended September 30,

Nine months ended September 30,

2019

2018

2019

2018

(in thousands, except earnings per share)
Revenues

Net gains on loans held for sale at fair value:

From non-affiliates

$
175,070

$
38,349

$
345,045

$
143,396
From PennyMac Mortgage Investment Trust

60,662

18,565

122,996

45,878

235,732

56,914

468,041

189,274
Loan origination fees:

From non-affiliates

45,212

24,366

100,721

70,607
From PennyMac Mortgage Investment Trust

4,222

2,119

9,567

4,869

49,434

26,485

110,288

75,476
Fulfillment fees from PennyMac Mortgage Investment Trust

45,149

26,256

102,313

52,759
Net loan servicing fees:

Loan servicing fees:

From non-affiliates

185,967

147,182

533,510

421,536
From PennyMac Mortgage Investment Trust

12,964

10,071

35,102

30,521
From Investment Funds

—

—

—

3
Other fees

26,018

17,009

74,043

44,817

224,949

174,262

642,655

496,877
Change in fair value of mortgage servicing rights and mortgage servicing liabilities

(162,584)

(63,450)

(448,240)

(147,670)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust

3,864

(1,109)

11,519

(9,026)

(158,720)

(64,559)

(436,721)

(156,696)
Net loan servicing fees

66,229

109,703

205,934

340,181
Net interest income:

Interest income:

From non-affiliates

81,925

59,152

207,670

152,997
From PennyMac Mortgage Investment Trust

1,527

1,812

5,015

5,686

83,452

60,964

212,685

158,683
Interest expense:

To non-affiliates

54,089

35,035

138,723

96,552
To PennyMac Mortgage Investment Trust

2,291

3,740

8,124

11,584

56,380

38,775

146,847

108,136
Net interest income

27,072

22,189

65,838

50,547
Management fees, net:

From PennyMac Mortgage Investment Trust

10,098

6,482

26,178

17,906
From Investment Funds

—

(11)

—

4

10,098

6,471

26,178

17,910
Carried Interest from Investment Funds

—

(17)

—

(365)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

66

129

377

419
Results of real estate acquired in settlement of loans

188

194

1,205

179
Other

2,379

2,605

6,855

7,048
Total net revenues

436,347

250,929

987,029

733,428
Expenses

Compensation

141,132

103,364

362,449

303,917
Servicing

47,909

40,797

107,210

95,586
Loan origination

34,851

7,203

72,419

14,462
Technology

20,385

15,273

52,431

45,047
Occupancy and equipment

7,257

7,117

21,075

20,001
Professional services

9,682

7,117

21,876

18,442
Other

8,934

8,361

23,491

26,582
Total expenses

270,150

189,232

660,951

524,037
Income before provision for income taxes

166,197

61,697

326,078

209,391
Provision for income taxes

44,724

5,545

85,774

17,908
Net income

121,473

56,152

240,304

191,483
Less: Net income attributable to noncontrolling interest

—

41,663

—

142,538
Net income attributable to PennyMac Financial Services, Inc. common stockholders

$
121,473

$
14,489

$
240,304

$
48,945

Earnings per share

Basic

$
1.55

$
0.58

$
3.08

$
1.99
Diluted

$
1.51

$
0.57

$
3.01

$
1.94
Weighted average shares outstanding

Basic

78,361

25,125

78,119

24,644
Diluted

80,382

78,913

79,821

78,954
Dividend declared per share of Class A common stock

$
—

$
0.40

$
—

$
0.40


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands, except per share amounts)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	865,044	$	175,070	$	1,819,175	$	345,045
From PennyMac Mortgage Investment Trust		(9,775)		60,662		62,549		122,996
		855,269		235,732		1,881,724		468,041
Loan origination fees:
From non-affiliates		69,496		45,212		177,747		100,721
From PennyMac Mortgage Investment Trust		6,076		4,222		14,344		9,567
		75,572		49,434		192,091		110,288
Fulfillment fees from PennyMac Mortgage Investment Trust		54,839		45,149		149,594		102,313
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		203,696		185,967		601,527		533,510
From PennyMac Mortgage Investment Trust		18,752		12,964		48,806		35,102
Other		27,920		26,018		85,218		74,043
		250,368		224,949		735,551		642,655
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(127,217)		(412,730)		(1,368,219)		(1,036,123)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		3,135		3,864		18,293		11,519
Hedging results		6,521		250,146		1,027,327		587,883
		(117,561)		(158,720)		(322,599)		(436,721)
Net loan servicing fees		132,807		66,229		412,952		205,934
Net interest (expense) income:
Interest income:
From non-affiliates		52,276		81,925		170,148		207,670
From PennyMac Mortgage Investment Trust		676		1,527		2,686		5,015
		52,952		83,452		172,834		212,685
Interest expense:
To non-affiliates		61,109		54,089		171,482		138,723
To PennyMac Mortgage Investment Trust		2,070		2,291		6,416		8,124
		63,179		56,380		177,898		146,847
Net interest (expense) income		(10,227)		27,072		(5,064)		65,838
Management fees from PennyMac Mortgage Investment Trust		8,508		10,098		25,851		26,178
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(288)		66		(602)		377
Results of real estate acquired in settlement of loans		1,214		188		803		1,205
Other		2,298		2,379		6,102		6,855
Total net revenues		1,119,992		436,347		2,663,451		987,029
Expenses
Compensation		202,440		141,132		550,762		362,449
Servicing		71,110		47,909		169,779		107,210
Loan origination		53,752		34,851		150,677		72,419
Technology		28,964		20,385		69,976		52,431
Professional services		18,307		9,682		44,211		21,876
Occupancy and equipment		8,491		7,257		24,822		21,075
Other		8,637		8,934		29,841		23,491
Total expenses		391,701		270,150		1,040,068		660,951
Income before provision for income taxes		728,291		166,197		1,623,383		326,078
Provision for income taxes		193,131		44,724		429,303		85,774
Net income	$	535,160	$	121,473	$	1,194,080	$	240,304
Earnings per share
Basic	$	7.39	$	1.55	$	15.65	$	3.08
Diluted	$	7.03	$	1.51	$	15.00	$	3.01
Weighted average shares outstanding
Basic		72,439		78,361		76,292		78,119
Diluted		76,138		80,382		79,618		79,821
Dividend declared per share	$	0.15	$	—	$	0.39	$	—

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Quarter ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2020	72,358	$	7	$	1,113,412	$	1,365,774	$	2,479,193
Net income	—		—		—		535,160		535,160
Stock-based compensation	159		—		9,895		—		9,895
Issuance of common stock in settlement of directors' fees	1		—		48		—		48
Repurchase of common stock	(118)		—		(6,927)		—		(6,927)
Common stock dividend ($0.15 per share)	—		—		—		(292)		(292)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077

Quarter ended September 30, 2019

Additional

Total

Number of

Par

paid-in

Retained

stockholders'


shares

value

capital

earnings

equity

(in thousands)
Balance, June 30, 2019

78,305

$
8

$
1,317,023

$
461,966

$
1,778,997
Net income

—

—

—

121,473

121,473
Stock-based compensation

128

—

11,095

—

11,095
Issuance of common stock in settlement of directors' fees

2

—

48

—

48
Balance, September 30, 2019

78,435

$
8

$
1,328,166

$
583,439

$
1,911,613


	Quarter ended September 30, 2019
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2019	78,305	$	8	$	1,317,023	$	461,966	$	1,778,997
Net income	—		—		—		121,473		121,473
Stock-based compensation	128		—		11,095		—		11,095
Issuance of common stock in settlement of directors' fees	2		—		48		—		48
Balance, September 30, 2019	78,435	$	8	$	1,328,166	$	583,439	$	1,911,613


	Nine months ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2019	78,515	$	8	$	1,335,107	$	726,392	$	2,061,507
Net income	—		—		—		1,194,080		1,194,080
Stock-based compensation	1,212		—		29,386		—		29,386
Issuance of common stock in settlement of directors' fees	4		—		144		—		144
Repurchase of common stock	(7,331)		(1)		(248,209)		—		(248,210)
Common stock dividends ($0.39 per share)	—		—		—		(19,830)		(19,830)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077


	Nine months ended September 30, 2019
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2018	77,494	$	8	$	1,310,648	$	343,135	$	1,653,791
Net income	—		—		—		240,304		240,304
Stock-based compensation	984		—		18,390		—		18,390
Issuance of common stock in settlement of directors' fees	8		—		184		—		184
Repurchase of common stock	(51)		—		(1,056)		—		(1,056)
Balance, September 30, 2019	78,435	$	8	$	1,328,166	$	583,439	$	1,911,613

Quarter ended September 30, 2018

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, June 30, 2018

25,009

$
3

$
229,941

$
299,951

$
1,332,049

$
1,861,944
Net income

—

—

—

14,489

41,663

56,152
Stock and unit-based compensation

55

—

2,944

—

6,472

9,416
Class A common stock dividends ($0.40 per share)

—

—

—

(10,054)

—

(10,054)
Issuance of Class A common stock in settlement of directors' fees

—

—

28

—

57

85
Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.

131

—

4,377

—

(4,377)

—
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.

—

—

(833)

—

—

(833)
Balance, September 30, 2018

25,195

$
3

$
236,457

$
304,386

$
1,375,864

$
1,916,710

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

PENNYMAC FINANCIAL SERVICES, INC.

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


	Nine months ended September 30,
	2020		2019

	(in thousands)
Cash flow from operating activities
Net income	$	1,194,080	$	240,304
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value		(1,881,724)		(468,041)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		1,349,926		1,024,604
Mortgage servicing rights hedging gains		(1,027,327)		(587,883)
Capitalization of interest and advance on loans held for sale at fair value		(55,920)		(56,800)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust		6,416		8,124
Amortization of net debt issuance costs and (premiums)		12,163		(6,601)
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		681		(270)
Results of real estate acquired in settlement in loans		(803)		(1,205)
Stock-based compensation expense		26,220		19,124
Provision for servicing advance losses		79,402		19,973
Depreciation and amortization		17,126		10,650
Amortization of right-of-use assets		9,176		7,258
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(43,721,458)		(32,619,639)
Origination of loans held for sale		(20,580,388)		(7,249,762)
Purchase of loans held for sale from non-affiliates		(2,515,624)		(1,132,749)
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(5,980,081)		(4,172,281)
Sale to non-affiliates and principal payments of loans held for sale		67,209,239		39,084,441
Sale of loans held for sale to PennyMac Mortgage Investment Trust		2,248,896		4,095,079
Repurchase of loans subject to representations and warranties		(43,664)		(15,427)
Settlement of repurchase agreement derivatives		8,270		31,993
Increase in servicing advances		(156,964)		(9,871)
Increase in receivable from PennyMac Mortgage Investment Trust		(80,531)		(9,598)
Sale of real estate acquired in settlement of loans		27,842		17,141
Increase in other assets		(305,100)		(22,415)
Decrease in operating lease liabilities		(10,378)		(9,234)
Increase in accounts payable and accrued expenses		102,789		78,800
Decrease in payable to PennyMac Mortgage Investment Trust		(14,001)		(45,869)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(10,374)		—
Increase in income taxes payable		168,580		80,013
Net cash used in operating activities		(3,923,531)		(1,690,141)
Cash flow from investing activities
(Increase) decrease in short-term investments		(27,525)		27,161
Net change in assets purchased from PMT under agreement to resell		20,554		23,347
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights		1,000,865		542,139
Purchase of mortgage servicing rights		(25,473)		(227,445)
Purchase of furniture, fixtures, equipment and leasehold improvements		(5,584)		(5,534)
Acquisition of capitalized software		(38,443)		(22,190)
Decrease (increase) in margin deposits		205		(168,062)
Net cash provided by investing activities		924,599		169,416
Cash flow from financing activities
Sale of assets under agreements to repurchase		68,122,809		41,296,345
Repurchase of assets sold under agreements to repurchase		(64,997,443)		(39,692,086)
Issuance of mortgage loan participation purchase and sale certificates		17,814,845		17,498,589
Repayment of mortgage loan participation purchase and sale certificates		(17,777,414)		(17,516,431)
Advance of obligations under capital lease		—		25,123
Repayment of obligations under capital lease		(6,853)		(7,847)
Issuance of unsecured senior notes		500,000		—
Repayment of excess servicing spread financing		(25,112)		(30,901)
Payment of debt issuance costs		(26,362)		(4,489)
Issuance of common stock pursuant to exercise of stock options		8,431		3,900
Payment of withholding taxes relating to stock-based compensation		(5,265)		(4,634)
Payment of dividend to holders of common stock		(19,830)		—
Repurchase of common stock		(248,210)		(1,056)
Net cash provided by financing activities		3,339,596		1,566,513
Net increase in cash and restricted cash		340,664		45,788
Cash and restricted cash at beginning of period		188,578		155,924
Cash and restricted cash at end of period	$	529,242	$	201,712
Cash and restricted cash at end of period are comprised of the following:
Cash	$	529,166	$	201,268
Restricted cash included in Other assets		76		444
	$	529,242	$	201,712

Nine months ended September 30, 2019

Additional

Total

Number of

Par

paid-in

Retained

stockholders'


shares

value

capital

earnings

equity

(in thousands)
Balance, December 31, 2018

77,494

$
8

$
1,310,648

$
343,135

$
1,653,791
Net income

—

—

—

240,304

240,304
Stock-based compensation

984

—

18,390

—

18,390
Issuance of common stock in settlement of directors' fees

8

—

184

—

184
Repurchase of common stock

(51)

—

(1,056)

—

(1,056)
Balance, September 30, 2019

78,435

$
8

$
1,328,166

$
583,439

$
1,911,613

Nine months ended September 30, 2018

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, December 31, 2017

23,530

$
2

$
204,103

$
265,306

$
1,250,263

$
1,719,674
Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value

—

—

—

189

587

776
Balance, January 1, 2018

23,530

2

204,103

265,495

1,250,850

1,720,450
Net income

—

—

—

48,945

142,538

191,483
Stock and unit-based compensation

285

—

7,400

—

18,084

25,484
Class A common stock dividends ($0.40 per share)

—

—

—

(10,054)

—

(10,054)
Issuance of Class A common stock in settlement of directors' fees

—

—

79

—

166

245
Repurchase of Class A common stock

(236)

—

(1,554)

—

(3,272)

(4,826)
Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.

1,616

1

32,501

—

(32,502)

—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

—

—

(6,072)

—

—

(6,072)
Balance, September 30, 2018

25,195

$
3

$
236,457

$
304,386

$
1,375,864

$
1,916,710

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

PENNYMAC FINANCIAL SERVICES, INC.

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

Nine months ended September 30,

2019

2018

(in thousands)
Cash flow from operating activities

Net income

$
240,304

$
191,483
Adjustments to reconcile net income to net cash used in operating activities:

Net gains on loans held for sale at fair value

(468,041)

(189,274)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

436,721

156,696
Capitalization of interest on loans held for sale at fair value

(56,800)

(67,025)
Accrual of interest on excess servicing spread financing

8,124

11,584
Amortization of net debt issuance (premiums) and costs

(6,601)

(19,198)
Carried Interest from Investment Funds

—

365
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

(270)

(313)
Results of real estate acquired in settlement in loans

(1,205)

(179)
Stock-based compensation expense

19,124

20,766
Provision for servicing advance losses

19,973

24,046
Depreciation and amortization

10,650

9,046
Amortization of right-of-use assets

7,258

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

(32,619,639)

(28,584,762)
Origination of loans held for sale

(7,249,762)

(3,640,045)
Purchase of loans held for sale from nonaffiliates

(1,132,749)

(409,546)
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale

(4,172,281)

(3,342,029)
Sale to non-affiliates and principal payments of loans held for sale

39,084,441

34,208,217
Sale of loans held for sale to PennyMac Mortgage Investment Trust

4,095,079

2,336,162
Repurchase of loans subject to representations and warranties

(15,427)

(24,891)
Settlement of repurchase agreement derivatives

31,993

19,460
(Increase) decrease in servicing advances

(9,871)

35,813
Sale of real estate acquired in settlement of loans

17,141

3,004
Increase in receivable from PennyMac Mortgage Investment Trust

(9,598)

(2,825)
(Increase) decrease in other assets

(22,415)

9,291
Decrease in operating lease liabilities

(9,234)

—
Increase in accounts payable and accrued expenses

78,800

14,021
Decrease in payable to PennyMac Mortgage Investment Trust

(45,869)

(46,731)
Increase in income taxes payable

80,013

19,448
Net cash (used in) provided by operating activities

(1,690,141)

732,584
Cash flow from investing activities

Decrease in short-term investments

27,161

24,604
Net change in assets purchased from PMT under agreement to resell

23,347

11,000
Net settlement of derivative financial instruments used for hedging

542,139

(182,402)
Purchase of mortgage servicing rights

(227,445)

(180,139)
Purchase of furniture, fixtures, equipment and leasehold improvements

(5,534)

(8,919)
Acquisition of capitalized software

(22,190)

(13,091)
Increase in margin deposits

(168,062)

(836)
Net cash provided by (used in) investing activities

169,416

(349,783)
Cash flow from financing activities

Sale of assets under agreements to repurchase

41,296,345

31,318,277
Repurchase of assets sold under agreements to repurchase

(39,692,086)

(31,960,304)
Issuance of mortgage loan participation purchase and sale certificates

17,498,589

19,398,281
Repayment of mortgage loan participation purchase and sale certificates

(17,516,431)

(19,401,301)
Advance of obligations under capital lease

25,123

—
Repayment of obligations under capital lease

(7,847)

(11,341)
Advance on notes payable

—

1,300,000
Repayment of notes payable

—

(900,000)
Repayment of excess servicing spread financing

(30,901)

(35,852)
Payment of debt issuance costs

(4,489)

(15,320)
Issuance of common stock pursuant to exercise of stock options

3,900

4,718
Repurchase of common stock

(1,056)

(4,826)
Payment of withholding taxes relating to stock-based compensation

(4,634)

—
Payment of dividend to Class A common stockholders

—

(10,054)
Net cash provided by (used in) financing activities

1,566,513

(317,722)
Net increase in cash and restricted cash

45,788

65,079
Cash and restricted cash at beginning of period

155,924

38,173
Cash and restricted cash at end of period

$
201,712

$
103,252
Cash and restricted cash at end of period are comprised of the following:

Cash

$
201,268

$
102,627
Restricted cash included in Other assets

444

625

$
201,712

$
103,252

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

~~PENNYMAC FINANCIAL SERVICES, INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, 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 ~~and home equity~~ loan production and ~~loan~~ servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of anPennyMac Mortgage Investment Trust (“PMT”), a real estate mortgage investment ~~vehicle~~trust that invests primarily in ~~residential mortgage and home equity loans and related~~mortgage-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 a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”). The Investment Funds were dissolved during 2018.

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

PMT.

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

●

PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management agreement with PMT.

On November 1, 2018, the Company completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place before the Reorganization. The predecessor holding company became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, the predecessor holding company's historical consolidated financial statements remain the Company’s historical financial statements. The details of the Reorganization are more fully described in Note 1 – ~~Organization~~ ~~to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.~~

Note 2—Basis of Presentation and Recently ~~Issued~~Adopted Accounting ~~Pronouncements~~Pronouncement

Basis of Presentation

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the ~~SEC’s~~Securities and Exchange Commission’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. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

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 presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, ~~2019.~~2020. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

Certain asset amounts separately presented in prior periods have been reclassified to Other assets to conform to the current period presentation. Such amounts are detailed in Note 11—Other Assets.

Table of Contents

Accounting Change

Effective January 1, ~~2019,~~2020, the Company adopted FASB Accounting Standards Update ~~2016-02,~~ ~~Leases~~2016-13, Financial Instruments-Credit Losses (Topic ~~842)~~326): Measurement of Credit Losses on Financial Instruments,as amended (“ASU ~~2016-02”~~2016-13”), using the modified retrospective approach. As the result of this adoption, the Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not adjust amounts reported in the prior comparative period. The adoption of ASU ~~2016-02~~2016-13 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.

~~As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:~~

~~to retain its existing classification of existing leases; and~~

~~to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to 12 months.~~

~~The Company determines if an arrangement is a lease at inception. Operating leases are included in~~ ~~Operating lease right-of-use assets~~ ~~and~~ ~~Operating lease liabilities~~ in its consolidated balance sheet. Operating lease right-of-use assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to make the payments required by the leases.

As most of the Company’s leases do not provide an implicit discount rate, PFSI uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also reflect any lease payments made and are reduced by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.

The Company has lease agreements that include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease component. Detailed lease disclosures are included in Note 10~~‒Leases~~.

Note 3—Concentration of Risk

A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan ~~servicing~~origination and fulfillment fees, loan ~~origination fees, fulfillment~~servicing fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled ~~32%~~7% and ~~25%~~32% of total net revenue for the quarters ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~31%~~12% and ~~19%~~31% for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

~~Table of Contents~~

Note 4—Related Party Transactions ~~with Affiliates~~

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. ~~Historically, the~~The Company has ~~used~~typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans. ~~In the third quarter of 2017, the Company began selling conventional conforming balance mortgage loans to PMT under the agreement.~~

~~Pursuant~~Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, ~~which was amended and restated effective September 12, 2016,~~ if the Company ~~refinances~~refinanced mortgage loans for which PMT previously held the MSRs, the Company iswas generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. ~~The~~On June 30, 2020, the MSR recapture 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.~~

~~Pursuant to a mortgage banking services agreement, which~~ was amended and restated ~~effective September 12, 2016,~~for a term of five years (the “2020 MSR Recapture Agreement”).

Effective July 1, 2020, the 2020 MSR Recapture agreement changes the recapture fee payable by the Company to a tiered amount equal to:

●

40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

●

35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15% and up to 30%; and

●

30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has further agreed to allocate sufficient resources to target a recapture rate of 15%.

The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee. ~~Pursuant~~

Table of Contents

Through June 30, 2020, pursuant to the terms of ~~the~~a mortgage banking services agreement, the monthly fulfillment fee iswas an amount ~~that shall~~ equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. to:

no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus

in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage-Backed Securities (“MBS”) Guide.

PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company ~~currently~~ purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and, through June 30, 2020, a sourcing fee ranging from ~~two~~2 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. While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.

Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows:

●

Fulfillment fees shall not exceed the following:

(i)

the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii)

$315 multiplied by the number of purchased loans up to the and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus

(iii)

$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that 0 fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans.

●

Sourcing fees charged to PLS range from 1 to 2 basis points, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

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


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Net gains on loans held for sale at fair value:
Net gains on loans held for sale to PMT	$	1	$	62,558	$	81,295	$	127,423
Mortgage servicing rights and excess servicing spread recapture incurred		(9,776)		(1,896)		(18,746)		(4,427)
	$	(9,775)	$	60,662	$	62,549	$	122,996
Sale of loans held for sale to PMT	$	27	$	1,876,358	$	2,248,896	$	4,095,079

Tax service fees earned from PMT included in Loan origination fees	$	6,076	$	4,222	$	14,344	$	9,567

Fulfillment fee revenue	$	54,839	$	45,149	$	149,594	$	102,313

Sourcing fees paid to PMT	$	1,658	$	4,206	$	9,143	$	9,355
Unpaid principal balance of loans purchased from PMT	$	16,690,482	$	14,022,222	$	41,641,327	$	31,183,950

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Net gains on loans held for sale at fair value:

Net gains on loans held for sale to PMT

$
62,558

$
19,722

$
127,423

$
49,396
Mortgage servicing rights and excess servicing spread recapture incurred

(1,896)

(1,157)

(4,427)

(3,518)

$
60,662

$
18,565

$
122,996

$
45,878
Sale of loans held for sale to PMT

$
1,876,358

$
908,525

$
4,095,079

$
2,336,162

Tax service fees earned from PMT included in Loan origination fees

$
4,222

$
2,119

$
9,567

$
4,869

Fulfillment fee revenue

$
45,149

$
26,256

$
102,313

$
52,759
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees

$
16,647,172

$
7,517,883

$
35,523,802

$
17,139,884

Sourcing fees paid to PMT

$
4,206

$
2,689

$
9,355

$
8,221
Unpaid principal balance of loans purchased from PMT

$
14,022,222

$
8,916,654

$
31,183,950

$
27,404,022

~~Mortgage~~ Loan Servicing

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), ~~which was amended and restated effective September 12, 2016 and~~ pursuant to which the Company provides servicing for PMT’s portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The Servicing Agreement provides for servicing fees of ~~per‑loan~~per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced 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 relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

Prime Servicing

●

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

●

To the extent that non-distressed loans become delinquent, the Company is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

●

Effective July 1, 2020, the Company also receives certain fees for COVID-19-related forbearance and modification activities provided for under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Special Servicing (Distressed loans)

●

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

●

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

●

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

●

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.

Table of Contents

●

Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a 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; provided, however, that with respect to any such incentive payments paid to the Company in connection with a loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

The Company is also entitled to certain activity-based fees for distressed whole loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or 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 loan in any 18-month period.

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 loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

~~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 loan servicing and property management fees earned from PMT:


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Loan type serviced:
Loans acquired for sale at fair value	$	507	$	316	$	1,131	$	739	$	452	$	507	$	1,595	$	1,131
Loans at fair value		858		1,271		1,938		5,528		187		858		675		1,938
Mortgage servicing rights		11,599		8,484		32,033		24,254		18,113		11,599		46,536		32,033
	$	12,964	$	10,071	$	35,102	$	30,521
									$	18,752	$	12,964	$	48,806	$	35,102
Property management fees received from PMT included in Other income	$	70	$	122	$	295	$	333	$	—	$	70	$	—	$	295

On June 30, 2020, the Servicing Agreement was amended and restated for a term of five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include the fees described above relating to COVID-19 related forbearance and modification activities provided for under the CARES Act.

Investment Management Activities

The Company has a management agreement with PMT (“Management Agreement”), ~~which was amended and restated effective September 12, 2016. Pursuant~~pursuant to ~~the Management Agreement,~~which the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which itPFSI collects 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 average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

●

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling ~~four‑quarter~~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.”

Table of Contents

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

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other ~~non‑cash~~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~~four-quarter period.

~~Table of Contents~~

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~~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.~~0. 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~~then-current cumulative high watermark amount, and a performance incentive fee is earned.

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

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

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Base management	$	7,914	$	5,799	$	20,862	$	17,223	$	8,508	$	7,914	$	25,851	$	20,862
Performance incentive		2,184		683		5,316		683		—		2,184		—		5,316
	$	10,098	$	6,482	$	26,178	$	17,906

									$	8,508	$	10,098	$	25,851	$	26,178

Expense Reimbursement

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company ~~shall be~~was reimbursed $120,000 per fiscal quarter ~~such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.~~through June 30, 2020.

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

1514

(1)

~~(1)~~

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

Table of Contents

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

~~Table~~Common Shares of ~~Contents~~Beneficial Interest of PennyMac Mortgage Investment Trust

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

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	1,527	$	1,812	$	5,015	$	5,686	$	676	$	1,527	$	2,686	$	5,015
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received	$	36	$	35	$	107	$	106	$	31	$	36	$	79	$	107
Change in fair value of investment		30		94		270		313		(319)		30		(681)		270
	$	66	$	129	$	377	$	419
									$	(288)	$	66	$	(602)	$	377


					September 30,		December 31,
					2020		2019

	September 30,		December 31,
	2019		2018
	(in thousands)
					(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	107,678	$	131,025	$	86,958	$	107,512
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,667	$	1,397	$	991	$	1,672
Number of shares		75		75		75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

~~On December 19, 2016, the~~The Company ~~amended and restated~~has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), which was amended and restated effective December 19, 2016, pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.

To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the 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 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equal 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 equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 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, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.

1716

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Excess servicing spread financing:
Balance at beginning of period									$	151,206	$	194,156	$	178,586	$	216,110
Issuance pursuant to recapture agreement	$	377	$	499	$	1,327	$	1,983		531		377		1,393		1,327
Accrual of interest										2,070		2,291		6,416		8,124
Repayment	$	9,819	$	11,543	$	30,901	$	35,852		(7,682)		(9,819)		(25,112)		(30,901)
Gain (loss) recognized	$	3,864	$	(1,109)	$	11,519	$	(9,026)
Interest expense	$	2,291	$	3,740	$	8,124	$	11,584
Change in fair value										(3,135)		(3,864)		(18,293)		(11,519)
Balance at end of period									$	142,990	$	183,141	$	142,990	$	183,141
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value	$	429	$	597	$	1,311	$	1,951	$	525	$	429	$	1,441	$	1,311

					September 30,		December 31,
					2019		2018
					(in thousands)
Excess servicing spread financing at fair value					$	183,141	$	216,110

Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


					September 30,		December 31,
					2020		2019

	September 30,		December 31,
	2019		2018
	(in thousands)
					(in thousands)
Receivable from PMT:
Margin settlements relating to loan sales					$	48,243	$	—
Allocated expenses and expenses incurred on PMT's behalf						30,207		3,724
Fulfillment fees	$	14,409	$	10,006		18,060		18,285
Correspondent production fees						11,285		10,606
Management fees		10,230		6,559		8,509		10,579
Correspondent production fees		5,501		2,071
Servicing fees		4,768		4,841		6,121		4,659
Allocated expenses and expenses incurred on PMT's behalf		4,166		9,066
Conditional Reimbursement		582		801
Interest on assets purchased under agreements to resell		88		120		43		85
	$	39,744	$	33,464
Conditional reimbursement						10		221
					$	122,478	$	48,159
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	56,869	$	100,554
Amounts advanced by PMT to fund its servicing advances					$	58,264	$	70,520
Mortgage servicing rights recapture payable		162		179		197		149
Other		4,831		3,898		18,675		2,611
	$	61,862	$	104,631
					$	77,136	$	73,280

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders of 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 exchanges of ownership interests in PennyMac 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.

Although ~~the Reorganization~~a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock prior to the closing of the ~~Reorganization in November 2018.~~reorganization.

(1)

~~(1)~~

Net of guarantee fees paid to the Agencies.

(1)	~~(1)~~Includes delinquent loans in COVID-19 related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(2)

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

(1)

~~(1)~~

Certain of the loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s loan servicing platform.

~~(2)~~

Note 6—Fair Value

Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. 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 significant 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.

●

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

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

The Company identified ~~all of~~ its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trustunder agreements to resell, 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. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	September 30, 2020
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	102,136	$	—	$	—	$	102,136
Loans held for sale at fair value		—		6,351,175		2,774,997		9,126,172
Derivative assets:
Interest rate lock commitments		—		—		544,151		544,151
Forward purchase contracts		—		72,640		—		72,640
Forward sales contracts		—		21,652		—		21,652
MBS put options		—		27,336		—		27,336
MBS call options		—		4,255		—		4,255
Swaptions		—		5,568		—		5,568
Put options on interest rate futures purchase contracts		5,910		—		—		5,910
Call options on interest rate futures purchase contracts		1,570		—		—		1,570
Total derivative assets before netting		7,480		131,451		544,151		683,082
Netting		—		—		—		(104,828)
Total derivative assets		7,480		131,451		544,151		578,254
Mortgage servicing rights at fair value		—		—		2,333,821		2,333,821
Investment in PennyMac Mortgage Investment Trust		991		—		—		991
	$	110,607	$	6,482,626	$	5,652,969	$	12,141,374
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	142,990	$	142,990
Derivative liabilities:
Interest rate lock commitments		—		—		2,706		2,706
Forward purchase contracts		—		15,903		—		15,903
Forward sales contracts		—		98,765		—		98,765
Total derivative liabilities before netting		—		114,668		2,706		117,374
Netting		—		—		—		(92,837)
Total derivative liabilities		—		114,668		2,706		24,537
Mortgage servicing liabilities at fair value		—		—		31,698		31,698
	$	—	$	114,668	$	177,394	$	199,225

September 30, 2019


Level 1

Level 2

Level 3

Total

(in thousands)
Assets:

Short-term investments

$
90,663

$
—

$
—

$
90,663
Loans held for sale at fair value

—

4,437,954

85,017

4,522,971
Derivative assets:

Interest rate lock commitments

—

—

147,400

147,400
Repurchase agreement derivatives

—

—

8,187

8,187
Forward purchase contracts

—

17,943

—

17,943
Forward sales contracts

—

6,141

—

6,141
MBS put options

—

10,040

—

10,040
Put options on interest rate futures purchase contracts

6,266

—

—

6,266
Call options on interest rate futures purchase contracts

2,414

—

—

2,414
Total derivative assets before netting

8,680

34,124

155,587

198,391
Netting

—

—

—

34,557
Total derivative assets

8,680

34,124

155,587

232,948
Mortgage servicing rights at fair value

—

—

2,556,253

2,556,253
Investment in PennyMac Mortgage Investment Trust

1,667

—

—

1,667

$
101,010

$
4,472,078

$
2,796,857

$
7,404,502
Liabilities:

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

$
—

$
—

$
183,141

$
183,141
Derivative liabilities:

Interest rate lock commitments

—

—

2,276

2,276
Forward purchase contracts

—

51,585

—

51,585
Forward sales contracts

—

34,498

—

34,498
Total derivative liabilities before netting

—

86,083

2,276

88,359
Netting

—

—

—

(74,324)
Total derivative liabilities

—

86,083

2,276

14,035
Mortgage servicing liabilities at fair value

—

—

34,294

34,294

$
—

$
86,083

$
219,711

$
231,470

Table of Contents


	December 31, 2019
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	74,611	$	—	$	—	$	74,611
Loans held for sale at fair value		—		4,529,075		383,878		4,912,953
Derivative assets:
Interest rate lock commitments		—		—		138,511		138,511
Repurchase agreement derivatives		—		—		8,187		8,187
Forward purchase contracts		—		12,364		—		12,364
Forward sales contracts		—		17,097		—		17,097
MBS put options		—		3,415		—		3,415
Swaptions		—		2,409		—		2,409
Put options on interest rate futures purchase contracts		3,945		—		—		3,945
Call options on interest rate futures purchase contracts		1,469		—		—		1,469
Total derivative assets before netting		5,414		35,285		146,698		187,397
Netting		—		—		—		(27,711)
Total derivative assets		5,414		35,285		146,698		159,686
Mortgage servicing rights at fair value		—		—		2,926,790		2,926,790
Investment in PennyMac Mortgage Investment Trust		1,672		—		—		1,672
	$	81,697	$	4,564,360	$	3,457,366	$	8,075,712
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	178,586	$	178,586
Derivative liabilities:
Interest rate lock commitments		—		—		1,861		1,861
Forward purchase contracts		—		19,040		—		19,040
Forward sales contracts		—		18,045		—		18,045
Total derivative liabilities before netting		—		37,085		1,861		38,946
Netting		—		—		—		(16,616)
Total derivative liabilities		—		37,085		1,861		22,330
Mortgage servicing liabilities at fair value		—		—		29,140		29,140
	$	—	$	37,085	$	209,587	$	230,056

December 31, 2018


Level 1

Level 2

Level 3

Total

(in thousands)
Assets:

Short-term investments

$
117,824

$
—

$
—

$
117,824
Loans held for sale at fair value

—

2,261,639

260,008

2,521,647
Derivative assets:

Interest rate lock commitments

—

—

50,507

50,507
Repurchase agreement derivatives

—

—

26,770

26,770
Forward purchase contracts

—

35,916

—

35,916
Forward sales contracts

—

437

—

437
MBS put options

—

720

—

720
MBS call options

—

2,135

—

2,135
Put options on interest rate futures purchase contracts

866

—

—

866
Call options on interest rate futures purchase contracts

5,965

—

—

5,965
Total derivative assets before netting

6,831

39,208

77,277

123,316
Netting

—

—

—

(26,969)
Total derivative assets

6,831

39,208

77,277

96,347
Mortgage servicing rights at fair value

—

—

2,820,612

2,820,612
Investment in PennyMac Mortgage Investment Trust

1,397

—

—

1,397

$
126,052

$
2,300,847

$
3,157,897

$
5,557,827
Liabilities:

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

$
—

$
—

$
216,110

$
216,110
Derivative liabilities:

Interest rate lock commitments

—

—

1,169

1,169
Forward purchase contracts

—

215

—

215
Forward sales contracts

—

26,762

—

26,762
Total derivative liabilities before netting

—

26,977

1,169

28,146
Netting

—

—

—

(25,082)
Total derivative liabilities

—

26,977

1,169

3,064
Mortgage servicing liabilities at fair value

—

—

8,681

8,681

$
—

$
26,977

$
225,960

$
227,855

As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of ~~these items~~assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented for ~~each of~~ the quarter and nine month periods ended September 30, ~~2019~~2020 and ~~2018:~~2019:


	Quarter ended September 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total

	(in thousands)
Balance, June 30, 2020	$	661,719	$	368,064	$	8,187	$	2,213,539	$	3,251,509
Purchases (purchase adjustment) and issuances, net		2,734,321		593,065		—		(287)		3,327,099
Capitalization of interest and advances		22,262		—		—		—		22,262
Sales and repayments		(88,955)		—		(8,270)		—		(97,225)
Mortgage servicing rights resulting from loan sales		—		—		—		245,946		245,946
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,029		—		—		—		42,029
Other factors		—		311,790		83		(125,377)		186,496
		42,029		311,790		83		(125,377)		228,525
Transfers from Level 3 to Level 2		(597,134)		—		—		—		(597,134)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers of interest rate lock commitments to loans held for sale		—		(731,474)		—		—		(731,474)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2020	$	38,217	$	541,445	$	—	$	(125,377)	$	454,285

Quarter ended September 30, 2019

Net interest

Repurchase

Mortgage

Loans held

rate lock

agreement

servicing

Assets

for sale

commitments (1)

derivatives

rights

Total

(in thousands)

Balance, June 30, 2019

$
217,998

$
111,776

$
16,015

$
2,720,335

$
3,066,124

Purchases and issuances, net

1,861,769

199,274

1,502

46

2,062,591

Sales and repayments

(1,582,564)

—

(9,422)

—

(1,591,986)

Mortgage servicing rights resulting from loan sales

—

—

—

246,757

246,757

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

4,252

—

—

—

4,252

Other factors

—

92,138

92

(410,885)

(318,655)

4,252

92,138

92

(410,885)

(314,403)

Transfers from Level 3 to Level 2

(416,062)

—

—

—

(416,062)

Transfers to real estate acquired in settlement of loans

(376)

—

—

—

(376)

Transfers of interest rate lock commitments to loans held for sale

—

(258,064)

—

—

(258,064)

Balance, September 30, 2019

$
85,017

$
145,124

$
8,187

$
2,556,253

$
2,794,581

Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019

$
(2,328)

$
145,124

$
41

$
(410,885)

$
(268,048)

(1)

~~(1)~~

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

Quarter ended September 30, 2019

Excess

servicing

Mortgage

spread

servicing

Liabilities

financing

liabilities

Total


(in thousands)

Balance, June 30, 2019

$
194,156

$
12,948

$
207,104

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

377

—

377

Accrual of interest

2,291

—

2,291

Repayments

(9,819)

—

(9,819)

Mortgage servicing liabilities resulting from loan sales

—

19,501

19,501

Changes in fair value included in income

(3,864)

1,845

(2,019)

Balance, September 30, 2019

$
183,141

$
34,294

$
217,435

Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2019

$
(3,864)

$
1,845

$
(2,019)


	Quarter ended September 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, June 30, 2020	$	151,206	$	29,858	$	181,064
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		531		—		531
Accrual of interest		2,070		—		2,070
Repayments		(7,682)		—		(7,682)
Changes in fair value included in income		(3,135)		1,840		(1,295)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2020	$	(3,135)	$	1,840	$	(1,295)

2524

Table of Contents


	Quarter ended September 30, 2019
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights			Total

	(in thousands)
Balance, June 30, 2019	$	217,998	$	111,776	$	16,015	$	2,720,335	$	3,066,124
Purchases and issuances, net		1,861,769		199,274		1,502		46		2,062,591
Sales and repayments		(1,582,564)		—		(9,422)		—		(1,591,986)
Mortgage servicing rights resulting from loan sales		—		—		—		246,757		246,757
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		4,252		—		—		—		4,252
Other factors		—		92,138		92		(410,885)		(318,655)
		4,252		92,138		92		(410,885)		(314,403)
Transfers from Level 3 to Level 2		(416,062)		—		—		—		(416,062)
Transfers to real estate acquired in settlement of loans		(376)		—		—		—		(376)
Transfers of interest rate lock commitments to loans held for sale		—		(258,064)		—		—		(258,064)
Balance, September 30, 2019	$	85,017	$	145,124	$	8,187	$	2,556,253	$	2,794,581
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019	$	(2,328)	$	145,124	$	41	$	(410,885)	$	(268,048)

Quarter ended September 30, 2018

Net interest

Repurchase

Mortgage

Loans held

rate lock

agreement

servicing

Assets

for sale

commitments (1)

derivatives

rights


Total

(in thousands)

Balance, June 30, 2018

$
334,166

$
55,689

$
25,781

$
2,486,157

$
2,901,793

Purchases and issuances, net

1,008,662

41,721

12,903

163,511

1,226,797

Sales and repayments

(231,921)

—

(11,982)

—

(243,903)

Mortgage servicing rights resulting from loan sales

—

—

—

149,000

149,000

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

84

—

—

—

84

Other factors

—

10,696

(227)

(12,704)

(2,235)

84

10,696

(227)

(12,704)

(2,151)

Transfers from Level 3 to Level 2

(744,324)

—

—

—

(744,324)

Transfers to real estate acquired in settlement of loans

(1,364)

—

—

—

(1,364)

Transfers of interest rate lock commitments to loans held for sale

—

(70,943)

—

—

(70,943)

Balance, September 30, 2018

$
365,303

$
37,163

$
26,475

$
2,785,964

$
3,214,905

Changes in fair value recognized during the quarter relating to assets still held at September 30, 2018

$
(4,811)

$
37,163

$
—

$
(12,704)

$
19,648

(1)

~~(1)~~

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


	Quarter ended September 30, 2018
	Excess
	servicing		Mortgage
	spread		servicing

							Quarter ended September 30, 2019
							Excess
							servicing		Mortgage
							spread		servicing
Liabilities	financing		liabilities		Total		financing		liabilities		Total
	(in thousands)
Balance, June 30, 2018	$	229,470	$	10,253	$	239,723
							(in thousands)
Balance, June 30, 2019							$	194,156	$	12,948	$	207,104
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		499		—		499		377		—		377
Accrual of interest		3,740		—		3,740		2,291		—		2,291
Repayments		(11,543)		—		(11,543)		(9,819)		—		(9,819)
Mortgage servicing liabilities resulting from loan sales		—		1,741		1,741		—		19,501		19,501
Changes in fair value included in income		1,109		(2,225)		(1,116)		(3,864)		1,845		(2,019)
Balance, September 30, 2018	$	223,275	$	9,769	$	233,044
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2018	$	1,109	$	(2,225)	$	(1,116)
Balance, September 30, 2019							$	183,141	$	34,294	$	217,435
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2019							$	(3,864)	$	1,845	$	(2,019)

Table of Contents


	Nine months ended September 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total

	(in thousands)
Balance, December 31, 2019	$	383,878	$	136,650	$	8,187	$	2,926,790	$	3,455,505
Purchases and issuances, net		4,664,408		1,431,194		—		25,473		6,121,075
Capitalization of interest and advances		55,283		—		—		—		55,283
Sales and repayments		(888,247)		—		(8,270)		—		(896,517)
Mortgage servicing rights resulting from loan sales		—		—		—		753,795		753,795
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		35,638		—		—		—		35,638
Other factors		—		808,906		83		(1,372,237)		(563,248)
		35,638		808,906		83		(1,372,237)		(527,610)
Transfers from Level 3 to Level 2		(1,476,027)		—		—		—		(1,476,027)
Transfers to real estate acquired in settlement of loans		(691)		—		—		—		(691)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers of interest rate lock commitments to loans held for sale		—		(1,835,305)		—		—		(1,835,305)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the period relating to assets still held at September 30, 2020	$	31,389	$	541,445	$	—	$	(1,372,237)	$	(799,403)

Nine months ended September 30, 2019

Net interest

Repurchase

Mortgage

Loans held

rate lock

agreement

servicing

Assets

for sale

commitments (1)

derivatives

rights

Total


(in thousands)

Balance, December 31, 2018

$
260,008

$
49,338

$
26,770

$
2,820,612

$
3,156,728

Purchases and issuances, net

3,537,177

376,137

15,019

227,445

4,155,778

Sales and repayments

(2,414,899)

—

(31,994)

—

(2,446,893)

Mortgage servicing rights resulting from loan sales

—

—

—

545,839

545,839

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

(2,025)

—

—

—

(2,025)

Other factors

—

248,889

(1,608)

(1,037,643)

(790,362)

(2,025)

248,889

(1,608)

(1,037,643)

(792,387)

Transfers from Level 3 to Level 2

(1,292,824)

—

—

—

(1,292,824)

Transfers to real estate acquired in settlement of loans

(2,420)

—

—

—

(2,420)

Transfers of interest rate lock commitments to loans held for sale

—

(529,240)

—

—

(529,240)

Balance, September 30, 2019

$
85,017

$
145,124

$
8,187

$
2,556,253

$
2,794,581

Changes in fair value recognized during the period relating to assets still held at September 30, 2019

$
(2,478)

$
145,124

$
165

$
(1,037,643)

$
(894,832)

(1)

~~(1)~~

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


	Nine months ended September 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2019	$	178,586	$	29,140	$	207,726
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,393		—		1,393
Accrual of interest		6,416		—		6,416
Repayments		(25,112)		—		(25,112)
Mortgage servicing liabilities resulting from loan sales		—		6,576		6,576
Changes in fair value included in income		(18,293)		(4,018)		(22,311)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2020	$	(18,293)	$	(4,018)	$	(22,311)

Nine months ended September 30, 2019

Excess

servicing

Mortgage

spread

servicing

Liabilities

financing

liabilities

Total

(in thousands)
Balance, December 31, 2018

$
216,110

$
8,681

$
224,791
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

1,327

—

1,327
Accrual of interest

8,124

—

8,124
Repayments

(30,901)

—

(30,901)
Mortgage servicing liabilities resulting from loan sales

—

27,133

27,133
Changes in fair value included in income

(11,519)

(1,520)

(13,039)
Balance, September 30, 2019

$
183,141

$
34,294

$
217,435
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2019

$
(11,519)

$
(1,520)

$
(13,039)

Table of Contents


	Nine months ended September 30, 2019
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total

	(in thousands)
Balance, December 31, 2018	$	260,008	$	49,338	$	26,770	$	2,820,612	$	3,156,728
Purchases and issuances, net		3,537,177		376,137		15,019		227,445		4,155,778
Sales and repayments		(2,414,899)		—		(31,994)		—		(2,446,893)
Mortgage servicing rights resulting from loan sales		—		—		—		545,839		545,839
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(2,025)		—		—		—		(2,025)
Other factors		—		248,889		(1,608)		(1,037,643)		(790,362)
		(2,025)		248,889		(1,608)		(1,037,643)		(792,387)
Transfers from Level 3 to Level 2		(1,292,824)		—		—		—		(1,292,824)
Transfers to real estate acquired in settlement of loans		(2,420)		—		—		—		(2,420)
Transfers of interest rate lock commitments to loans held for sale		—		(529,240)		—		—		(529,240)
Balance, September 30, 2019	$	85,017	$	145,124	$	8,187	$	2,556,253	$	2,794,581
Changes in fair value recognized during the period relating to assets still held at September 30, 2019	$	(2,478)	$	145,124	$	165	$	(1,037,643)	$	(894,832)

Nine months ended September 30, 2018

Net interest

Repurchase

Mortgage

Loans held

rate lock

agreement

servicing

Assets

for sale

commitments (1)

derivatives

rights

Total

(in thousands)
Balance, December 31, 2017

$
782,211

$
58,272

$
10,656

$
638,010

$
1,489,149
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting

—

—

—

1,482,426

1,482,426
Balance, January 1, 2018

782,211

58,272

10,656

2,120,436

2,971,575
Purchases and issuances, net

2,480,523

157,649

36,624

193,640

2,868,436
Sales and repayments

(1,122,448)

—

(19,460)

—

(1,141,908)
Mortgage servicing rights resulting from loan sales

—

—

—

448,604

448,604
Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

(4,944)

—

—

—

(4,944)
Other factors

—

(28,627)

(1,345)

23,284

(6,688)

(4,944)

(28,627)

(1,345)

23,284

(11,632)
Transfers from Level 3 to Level 2

(1,765,854)

—

—

—

(1,765,854)
Transfers to real estate acquired in settlement of loans

(4,185)

—

—

—

(4,185)
Transfers of interest rate lock commitments to loans held for sale

—

(150,131)

—

—

(150,131)
Balance, September 30, 2018

$
365,303

$
37,163

$
26,475

$
2,785,964

$
3,214,905
Changes in fair value recognized during the period relating to assets still held at September 30, 2018

$
(4,912)

$
37,163

$
—

$
23,284

$
55,535

(1)

~~(1)~~

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

Nine months ended September 30, 2018

Excess

servicing

Mortgage

spread

servicing

Liabilities

financing

liabilities

Total

(in thousands)
Balance, December 31, 2017

$
236,534

$
14,120

$
250,654
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

1,983

—

1,983
Accrual of interest

11,584

—

11,584
Repayments

(35,852)

—

(35,852)
Mortgage servicing liabilities resulting from loan sales

—

5,548

5,548
Changes in fair value included in income

9,026

(9,899)

(873)
Balance, September 30, 2018

$
223,275

$
9,769

$
233,044
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2018

$
9,026

$
(9,899)

$
(873)

The information used in the preceding roll forwards represents activity for any assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the end of the periods presented.


	Nine months ended September 30, 2019
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2018	$	216,110	$	8,681	$	224,791
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,327		—		1,327
Accrual of interest		8,124		—		8,124
Repayments		(30,901)		—		(30,901)
Mortgage servicing liabilities resulting from loan sales		—		27,133		27,133
Changes in fair value included in income		(11,519)		(1,520)		(13,039)
Balance, September 30, 2019	$	183,141	$	34,294	$	217,435
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2019	$	(11,519)	$	(1,520)	$	(13,039)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase or funding of the respective loans and from the return to salability in the active secondary market of certain loans held for sale.

2827

Table of Contents

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

Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:


													Quarter ended September 30,
													2020						2019
													Net gains on		Net				Net gains on		Net
													loans held		loan				loans held		loan
													for sale at		servicing				for sale at		servicing
													fair value		fees		Total		fair value		fees		Total

	Quarter ended September 30,
	2019						2018
	Net		Net gains on				Net		Net gains on
	loan		loans held				loan		loans held
	servicing		for sale at				servicing		for sale at
	fees		fair value		Total		fees		fair value		Total
	(in thousands)

Assets:
Loans held for sale	$	—	$	263,339	$	263,339	$	—	$	67,709	$	67,709	$	773,313	$	—	$	773,313	$	263,339	$	—	$	263,339
Mortgage servicing rights		(410,885)		—		(410,885)		(12,704)		—		(12,704)		—		(125,377)		(125,377)		—		(410,885)		(410,885)
	$	(410,885)	$	263,339	$	(147,546)	$	(12,704)	$	67,709	$	55,005
													$	773,313	$	(125,377)	$	647,936	$	263,339	$	(410,885)	$	(147,546)
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	3,864	$	—	$	3,864	$	(1,109)	$	—	$	(1,109)	$	—	$	3,135	$	3,135	$	—	$	3,864	$	3,864
Mortgage servicing liabilities		(1,845)		—		(1,845)		2,225		—		2,225		—		(1,840)		(1,840)		—		(1,845)		(1,845)
	$	2,019	$	—	$	2,019	$	1,116	$	—	$	1,116

													$	—	$	1,295	$	1,295	$	—	$	2,019	$	2,019


													Nine months ended September 30,
													2020						2019
													Net gains on		Net				Net gains on		Net
													loans held		loan				loans held		loan
													for sale at		servicing				for sale at		servicing
													fair value		fees		Total		fair value		fees		Total

	Nine months ended September 30,
	2019						2018
	Net		Net gains on				Net		Net gains on
	loan		loans held				loan		loans held
	servicing		for sale at				servicing		for sale at
	fees		fair value		Total		fees		fair value		Total
	(in thousands)

Assets:
Loans held for sale	$	—	$	538,086	$	538,086	$	—	$	118,452	$	118,452	$	1,911,828	$	—	$	1,911,828	$	538,086	$	—	$	538,086
Mortgage servicing rights		(1,037,643)		—		(1,037,643)		23,284		—		23,284		—		(1,372,237)		(1,372,237)		—		(1,037,643)		(1,037,643)
	$	(1,037,643)	$	538,086	$	(499,557)	$	23,284	$	118,452	$	141,736
													$	1,911,828	$	(1,372,237)	$	539,591	$	538,086	$	(1,037,643)	$	(499,557)
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	11,519	$	—	$	11,519	$	(9,026)	$	—	$	(9,026)	$	—	$	18,293	$	18,293	$	—	$	11,519	$	11,519
Mortgage servicing liabilities		1,520		—		1,520		9,899		—		9,899		—		4,018		4,018		—		1,520		1,520
	$	13,039	$	—	$	13,039	$	873	$	—	$	873
													$	—	$	22,311	$	22,311	$	—	$	13,039	$	13,039

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


	September 30, 2019						December 31, 2018
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon

													September 30, 2020						December 31, 2019
															Principal						Principal
															amount						amount
													Fair		due upon				Fair		due upon
Loans held for sale	value		maturity		Difference		value		maturity		Difference		value		maturity		Difference		value		maturity		Difference
	(in thousands)
													(in thousands)
Current through 89 days delinquent	$	4,478,965	$	4,275,981	$	202,984	$	2,324,203	$	2,220,371	$	103,832	$	8,670,895	$	8,279,163	$	391,732	$	4,628,333	$	4,431,854	$	196,479
90 days or more delinquent:
Not in foreclosure		20,972		22,145		(1,173)		143,631		144,011		(380)		392,866		404,183		(11,317)		236,650		241,958		(5,308)
In foreclosure		23,034		25,126		(2,092)		53,813		56,254		(2,441)		62,411		66,327		(3,916)		47,970		50,194		(2,224)
	$	4,522,971	$	4,323,252	$	199,719	$	2,521,647	$	2,420,636	$	101,011

													$	9,126,172	$	8,749,673	$	376,499	$	4,912,953	$	4,724,006	$	188,947

2928

Table of Contents

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets that were measured at fair value on a nonrecurring basis:

Real estate acquired in settlement of loans

Level 1

Level 2

Level 3

Total


(in thousands)
September 30, 2019

$
—

$
—

$
8,575

$
8,575
December 31, 2018

$
—

$
—

$
2,150

$
2,150


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2020	$	—	$	—	$	7,346	$	7,346
December 31, 2019	$	—	$	—	$	9,850	$	9,850

The following table summarizes the ~~total~~(losses) gains ~~(losses)~~recognized on assets ~~measured~~when they were remeasured at fair value on a nonrecurring basis:

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Real estate acquired in settlement of loans

$
139

$
(41)

$
162

$
(72)


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Real estate acquired in settlement of loans	$	(825)	$	139	$	(2,059)	$	162

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, ~~Notes payable~~ ~~and~~ Obligations under capital lease, Notes payable secured by mortgage servicing assets and Unsecured senior notes are carried at amortized cost.

These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these assets and liabilities other than the 2018-GTI Notes and 2018-GT2 Notes (the “2018 Term ~~Notes~~Notes”) included in Notes payable secured by mortgage servicing assets and the Unsecured Notes (as hereafter defined) approximate their carrying values due to their short terms and/or variable interest rates.

The Company estimates the fair value of the 2018 Term Notes ~~at September 30, 2019 was~~and the Unsecured Notes based on non-affiliate broker indications of fair value. The fair value of Term Notes at December 31, 2018 was estimated using a discounted cash flow approach using indications of market pricing spreads provided by non-affiliate brokers to develop an appropriate discount rate. The fair value and carrying value of ~~the Term Notes~~these notes are summarized below:

Term Notes

September 30, 2019

December 31, 2018

(in thousands)
Fair value

$
1,306,828

$
1,285,894
Carrying value

$
1,293,625

$
1,292,291


	September 30, 2020				December 31, 2019
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
2018 Term Notes	$	1,259,619	$	1,295,143	$	1,303,047	$	1,294,070
Unsecured Notes	$	510,000	$	492,358	$	—	$	—

Valuation Governance

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

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company 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 assets and liabilities other than IRLCs.

3029

Table of Contents

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. ~~The~~As of September 30, 2020, the Company’s senior management valuation committee includes the Company’s ~~executive chairman, chief executive,~~ chief financial, ~~chief~~investment and risk officers as well as other senior members of the Company’s finance, capital markets and ~~deputy chief financial officers.~~risk management staffs.

The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

The Company has assigned responsibility for developing the fair values of IRLCs 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.

Valuation Techniques and Inputs

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

Loans Held for Sale

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

Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:

●

~~Certain delinquent government~~Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase ~~delinquent~~ government guaranteed or insured loans arises as the result of the ~~borrower’s failure to make payments for~~loan being at least three ~~consecutive~~ months ~~preceding~~delinquent on the ~~month~~date 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 loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s ~~terms.~~

terms or after six months of timely payments following the completion of certain types of payment deferral programs.

●

~~Certain of the Company’s loans held for sale~~Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.

●

Home equity lines of credit held for sale to PMT. At present, an active market with observable inputs that are significant to the estimation of fair value of home equity lines of credit does not exist.

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

3130

(1)

~~(1)~~

Weighted average inputs are based on the fair value of the “Level 3” loans.

(2)

~~(2)~~

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

(3)

~~(3)~~

Total prepayment speed is measured using Life Total ~~CPR.~~

CPR, which includes both voluntary and involuntary prepayments/resale and defaults.

(1)

~~(1)~~

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

(2)

~~(2)~~

Weighted average inputs are based on the committed amounts.

(1)

~~(1)~~

Weighted average inputs are based on the UPB of the underlying loans.

(2)

~~(2)~~

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”)/swap curve for purposes of discounting cash flows relating to MSRs.

(3)

~~(3)~~

~~Prepayment~~Annual total prepayment speed is measured using Life Total ~~CPR.~~

CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

(1)

~~(1)~~

Weighted average inputs are based on the UPB of the underlying loans.

(2)

~~(2)~~

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

(3)

~~(3)~~

~~Prepayment~~Annual total prepayment speed is measured using Life Total ~~CPR.~~

CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

(1)

~~(1)~~

Weighted average inputs are based on the UPB of the underlying loans.

(2)

~~(2)~~

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

(3)

~~(3)~~

~~Prepayment~~Annual total prepayment speed is measured using Life Total ~~CPR.~~

CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

(1)

~~(1)~~

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

(2)

~~(2)~~

~~Prepayment~~Annual total prepayment speed is measured using Life Total ~~CPR.~~

CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.

Note 7—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:


	September 30,		December 31,

					September 30,		December 31,
Loan type	2019		2018		2020		2019
	(in thousands)
					(in thousands)
Government-insured or guaranteed	$	4,148,681	$	2,116,126	$	5,219,448	$	4,222,010
Conventional conforming		289,273		144,872		1,131,727		307,065
Jumbo		—		641
Home equity lines of credit		14		—
Purchased from Ginnie Mae pools serviced by the Company		76,105		250,585		2,759,032		374,121
Repurchased pursuant to representations and warranties		8,898		9,423		15,965		9,244
	$	4,522,971	$	2,521,647
Home equity lines of credit						—		513
					$	9,126,172	$	4,912,953
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase	$	3,939,161	$	1,923,857	$	8,453,522	$	4,322,789
Mortgage loan participation purchase and sale agreements		542,049		555,001		558,023		523,349
	$	4,481,210	$	2,478,858
					$	9,011,545	$	4,846,138

Note 8—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:

●

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

●

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

The Company also engages in interest rate risk management activities in an effort to ~~reduce~~moderate the ~~variability~~effect of ~~earnings caused by~~ changes in market interest ~~rates.~~rates on the fair value of certain of the its assets. 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 loans held for sale and the portion of its MSRs not financed with ESS.

Table of Contents

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


	Quarter ended September 30, 2019
	Notional			Notional
	amount			amount
	beginning of		Dispositions/	end of

					Notional amounts, quarter ended September 30, 2020
					Beginning of		Dispositions/	End of
Instrument	quarter	Additions	expirations	quarter	quarter	Additions	expirations	quarter
	(in thousands)
					(in thousands)
Forward purchase contracts	19,497,698	100,139,970	(103,807,843)	15,829,825	20,709,914	143,902,517	(133,168,648)	31,443,783
Forward sale contracts	14,276,156	122,174,329	(121,333,675)	15,116,810	25,302,147	175,642,745	(158,506,649)	42,438,243
MBS put options	12,775,000	29,575,000	(32,300,000)	10,050,000	11,200,000	29,850,000	(28,100,000)	12,950,000
MBS call options	2,250,000	—	(2,250,000)	—	—	1,850,000	—	1,850,000
Swaption purchase contracts					3,375,000	3,625,000	(3,875,000)	3,125,000
Swaption sale contracts					—	3,875,000	(3,875,000)	—
Put options on interest rate futures purchase contracts	2,835,000	9,850,000	(8,335,000)	4,350,000	350,000	3,325,000	(1,400,000)	2,275,000
Call options on interest rate futures purchase contracts	3,687,500	1,750,000	(4,837,500)	600,000	1,800,000	1,200,000	(2,050,000)	950,000
Put options on interest rate futures sale contracts	—	8,335,000	(8,335,000)	—	—	1,400,000	(1,400,000)	—
Call options on interest rate futures sale contracts	—	4,837,500	(4,837,500)	—	—	2,050,000	(2,050,000)	—
Treasury futures purchase contracts	486,100	5,132,000	(4,209,600)	1,408,500	925,000	1,561,500	(1,486,500)	1,000,000
Treasury futures sale contracts	1,550,000	3,792,100	(4,209,600)	1,132,500	450,000	1,486,500	(1,486,500)	450,000
Interest rate swap futures purchase contracts	2,900,000	1,800,000	(790,000)	3,910,000	3,460,000	1,200,000	(1,075,000)	3,585,000
Interest rate swap futures sales contracts	—	790,000	(790,000)	—	—	1,075,000	(1,075,000)	—


	Notional amounts, quarter ended September 30, 2019
	Beginning of		Dispositions/	End of
Instrument	quarter	Additions	expirations	quarter

	(in thousands)
Forward purchase contracts	19,497,698	100,139,970	(103,807,843)	15,829,825
Forward sale contracts	14,276,156	122,174,329	(121,333,675)	15,116,810
MBS put options	12,775,000	29,575,000	(32,300,000)	10,050,000
MBS call options	2,250,000	—	(2,250,000)	—
Put options on interest rate futures purchase contracts	2,835,000	9,850,000	(8,335,000)	4,350,000
Call options on interest rate futures purchase contracts	3,687,500	1,750,000	(4,837,500)	600,000
Put options on interest rate futures sale contracts	—	8,335,000	(8,335,000)	—
Call options on interest rate futures sale contracts	—	4,837,500	(4,837,500)	—
Treasury futures purchase contracts	486,100	5,132,000	(4,209,600)	1,408,500
Treasury futures sale contracts	1,550,000	3,792,100	(4,209,600)	1,132,500
Interest rate swap futures purchase contracts	2,900,000	1,800,000	(790,000)	3,910,000
Interest rate swap futures sale contracts	—	790,000	(790,000)	—


	Notional amounts, nine months ended September 30, 2020
	Beginning of		Dispositions/	End of
Instrument	period	Additions	expirations	period

	(in thousands)
Forward purchase contracts	13,618,361	370,704,328	(352,878,906)	31,443,783
Forward sale contracts	16,220,526	444,965,072	(418,747,355)	42,438,243
MBS put options	6,100,000	79,600,000	(72,750,000)	12,950,000
MBS call options	—	1,850,000	—	1,850,000
Swaption purchase contracts	1,750,000	14,700,000	(13,325,000)	3,125,000
Swaption sale contracts	—	13,325,000	(13,325,000)	—
Put options on interest rate futures purchase contracts	2,250,000	12,025,000	(12,000,000)	2,275,000
Call options on interest rate futures purchase contracts	750,000	9,740,000	(9,540,000)	950,000
Put options on interest rate futures sale contracts	—	12,000,000	(12,000,000)	—
Call options on interest rate futures sale contracts	—	9,540,000	(9,540,000)	—
Treasury futures purchase contracts	1,276,000	5,516,700	(5,792,700)	1,000,000
Treasury futures sale contracts	1,010,000	5,232,700	(5,792,700)	450,000
Interest rate swap futures purchase contracts	3,210,000	4,150,000	(3,775,000)	3,585,000
Interest rate swap futures sales contracts	—	3,775,000	(3,775,000)	—

Quarter ended September 30, 2018

Notional

Notional

amount

amount

beginning of

Dispositions/

end of
Instrument

quarter

Additions

expirations

quarter

(in thousands)
Forward purchase contracts

6,617,888

47,038,415

(46,540,682)

7,115,621
Forward sale contracts

7,107,202

58,521,199

(58,917,204)

6,711,197
MBS put options

2,675,000

8,375,000

(6,900,000)

4,150,000
MBS call options

—

1,250,000

—

1,250,000
Put options on interest rate futures purchase contracts

1,852,500

4,922,300

(4,549,800)

2,225,000
Call options on interest rate futures purchase contracts

800,000

950,000

(1,350,000)

400,000
Put options on interest rate futures sale contracts

—

4,849,800

(4,549,800)

300,000
Call options on interest rate futures sale contracts

—

1,350,000

(1,350,000)

—
Treasury futures purchase contracts

835,000

2,557,100

(2,557,100)

835,000
Treasury futures sale contracts

1,450,000

2,557,100

(2,557,100)

1,450,000
Interest rate swap futures purchase contracts

465,000

420,000

(885,000)

—
Interest rate swap futures sales contracts

—

885,000

(260,000)

625,000

Nine months ended September 30, 2019

Notional





Notional

amount

amount

beginning of

Dispositions/

end of
Instrument

period

Additions

expirations

period

(in thousands)
Forward purchase contracts

6,657,026

237,370,321

(228,197,522)

15,829,825
Forward sale contracts

6,890,046

275,749,351

(267,522,587)

15,116,810
MBS put options

4,635,000

77,185,000

(71,770,000)

10,050,000
MBS call options

1,450,000

6,750,000

(8,200,000)

—
Put options on interest rate futures purchase contracts

3,085,000

19,422,500

(18,157,500)

4,350,000
Call options on interest rate futures purchase contracts

1,512,500

13,127,800

(14,040,300)

600,000
Put options on interest rate futures sale contracts

—

27,297,800

(27,297,800)

—
Call options on interest rate futures sale contracts

—

4,837,500

(4,837,500)

—
Treasury futures purchase contracts

835,000

11,943,400

(11,369,900)

1,408,500
Treasury futures sale contracts

1,450,000

11,052,400

(11,369,900)

1,132,500
Interest rate swap futures purchase contracts

625,000

4,075,000

(790,000)

3,910,000
Interest rate swap futures sale contracts

—

790,000

(790,000)

—

Nine months ended September 30, 2018

Notional





Notional

amount

amount

beginning of

Dispositions/

end of
Instrument

period

Additions

expirations

period

(in thousands)
Forward purchase contracts

4,920,883

140,158,865

(137,964,127)

7,115,621
Forward sale contracts

5,204,796

174,562,881

(173,056,480)

6,711,197
MBS put options

4,925,000

17,250,000

(18,025,000)

4,150,000
MBS call options

—

12,375,000

(11,125,000)

1,250,000
Put options on interest rate futures purchase contracts

2,125,000

16,624,800

(16,524,800)

2,225,000
Call options on interest rate futures purchase contracts

100,000

2,400,000

(2,100,000)

400,000
Put options on interest rate futures sale contracts

—

16,824,800

(16,524,800)

300,000
Call options on interest rate futures sale contracts

—

2,100,000

(2,100,000)

—
Treasury futures purchase contracts

100,000

7,453,300

(6,718,300)

835,000
Treasury futures sale contracts

—

8,829,600

(7,379,600)

1,450,000
Interest rate swap futures purchase contracts

1,400,000

885,000

(2,285,000)

—
Interest rate swap futures sales contracts

—

2,285,000

(1,660,000)

625,000


	Notional amounts, nine months ended September 30, 2019
	Beginning of		Dispositions/	End of
Instrument	period	Additions	expirations	period

	(in thousands)
Forward purchase contracts	6,657,026	237,370,321	(228,197,522)	15,829,825
Forward sale contracts	6,890,046	275,749,351	(267,522,587)	15,116,810
MBS put options	4,635,000	77,185,000	(71,770,000)	10,050,000
MBS call options	1,450,000	6,750,000	(8,200,000)	—
Put options on interest rate futures purchase contracts	3,085,000	19,422,500	(18,157,500)	4,350,000
Call options on interest rate futures purchase contracts	1,512,500	13,127,800	(14,040,300)	600,000
Put options on interest rate futures sale contracts	—	27,297,800	(27,297,800)	—
Call options on interest rate futures sale contracts	—	4,837,500	(4,837,500)	—
Treasury futures purchase contracts	835,000	11,943,400	(11,369,900)	1,408,500
Treasury futures sale contracts	1,450,000	11,052,400	(11,369,900)	1,132,500
Interest rate swap futures purchase contracts	625,000	4,075,000	(790,000)	3,910,000
Interest rate swap futures sale contracts	—	790,000	(790,000)	—

Derivative Balances and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


													September 30, 2020						December 31, 2019
													Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
													amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
													recognized		consolidated		consolidated		recognized		consolidated		consolidated
													assets		balance sheet		balance sheet		assets		balance sheet		balance sheet

	September 30, 2019						December 31, 2018
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)
													(in thousands)
Derivatives not subject to master netting arrangements:
Interest rate lock commitments	$	147,400	$	—	$	147,400	$	50,507	$	—	$	50,507	$	544,151	$	—	$	544,151	$	138,511	$	—	$	138,511
Repurchase agreement derivatives		8,187		—		8,187		26,770		—		26,770		—		—		—		8,187		—		8,187
		155,587		—		155,587		77,277		—		77,277
														544,151		—		544,151		146,698		—		146,698
Derivatives subject to master netting arrangements:
Forward purchase contracts		17,943		—		17,943		35,916		—		35,916		72,640		—		72,640		12,364		—		12,364
Forward sale contracts		6,141		—		6,141		437		—		437		21,652		—		21,652		17,097		—		17,097
MBS put options		10,040		—		10,040		720		—		720		27,336		—		27,336		3,415		—		3,415
MBS call options		—		—		—		2,135		—		2,135		4,255		—		4,255		—		—		—
Swaption purchase contracts														5,568		—		5,568		2,409		—		2,409
Put options on interest rate futures purchase contracts		6,266		—		6,266		866		—		866		5,910		—		5,910		3,945		—		3,945
Call options on interest rate futures purchase contracts		2,414		—		2,414		5,965		—		5,965		1,570		—		1,570		1,469		—		1,469
Netting		—		34,557		34,557		—		(26,969)		(26,969)		—		(104,828)		(104,828)		—		(27,711)		(27,711)
		42,804		34,557		77,361		46,039		(26,969)		19,070
	$	198,391	$	34,557	$	232,948	$	123,316	$	(26,969)	$	96,347
														138,931		(104,828)		34,103		40,699		(27,711)		12,988
													$	683,082	$	(104,828)	$	578,254	$	187,397	$	(27,711)	$	159,686

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

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


																	September 30, 2020								December 31, 2019
																			Gross amount not								Gross amount not
																			offset in the								offset in the
																			consolidated								consolidated
																	Net amount		balance sheet						Net amount		balance sheet
																	of assets in the				Cash				of assets in the				Cash
																	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
																	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount

	September 30, 2019								December 31, 2018
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
																	(in thousands)
Interest rate lock commitments	$	147,400	$	—	$	—	$	147,400	$	50,507	$	—	$	—	$	50,507	$	544,151	$	—	$	—	$	544,151	$	138,511	$	—	$	—	$	138,511
JPMorgan Chase Bank, N.A.		32,450		—		—		32,450		1,399		—		—		1,399		18,772		—		—		18,772		2,196		—		—		2,196
Citibank, N.A.		15,951		—		—		15,951		2,488		—		—		2,488
Morgan Stanley Bank, N.A.		11,842		—		—		11,842		—				—		—
RJ O'Brien		8,680		—		—		8,680		6,831		—		—		6,831		7,480		—		—		7,480		5,414		—		—		5,414
Deutsche Bank		8,187		—		—		8,187		26,770		—		—		26,770
Wells Fargo Bank, N.A.		5,728		—		—		5,728		3,707		—		—		3,707		5,256		—		—		5,256		—		—		—		—
Goldman Sachs		2,252		—		—		2,252		—		—		—		—		1,148		—		—		1,148		2,548		—		—		2,548
Bank of America, N.A.		—		—		—		—		2,781		—		—		2,781
Deutsche Bank																		—		—		—		—		9,138		—		—		9,138
Mizuho Securities																		—		—		—		—		1,597		—		—		1,597
Others		458		—		—		458		1,864		—		—		1,864		1,447		—		—		1,447		282		—		—		282
	$	232,948	$	—	$	—	$	232,948	$	96,347	$	—	$	—	$	96,347
																	$	578,254	$	—	$	—	$	578,254	$	159,686	$	—	$	—	$	159,686

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.


													September 30, 2020						December 31, 2019
																	Net						Net
																	amount						amount
													Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
													amount of		offset in the		in the		amount of		offset in the		in the
													recognized		consolidated		consolidated		recognized		consolidated		consolidated
													liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet

	September 30, 2019						December 31, 2018
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)
													(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	2,276	$	—	$	2,276	$	1,169	$	—	$	1,169	$	2,706	$	—	$	2,706	$	1,861	$	—	$	1,861
Derivatives subject to a master netting arrangement:
Forward purchase contracts		51,585		—		51,585		215		—		215		15,903		—		15,903		19,040		—		19,040
Forward sale contracts		34,498		—		34,498		26,762		—		26,762		98,765		—		98,765		18,045		—		18,045
Netting		—		(74,324)		(74,324)		—		(25,082)		(25,082)		—		(92,837)		(92,837)		—		(16,616)		(16,616)
		86,083		(74,324)		11,759		26,977		(25,082)		1,895
														114,668		(92,837)		21,831		37,085		(16,616)		20,469
Total derivatives		88,359		(74,324)		14,035		28,146		(25,082)		3,064		117,374		(92,837)		24,537		38,946		(16,616)		22,330
Assets sold under agreements to repurchase:
Amount outstanding		3,539,459		—		3,539,459		1,935,200		—		1,935,200		7,267,046		—		7,267,046		4,141,680		—		4,141,680
Unamortized debt issuance premiums and costs, net		(570)		—		(570)		(1,341)		—		(1,341)
		3,538,889		—		3,538,889		1,933,859		—		1,933,859
	$	3,627,248	$	(74,324)	$	3,552,924	$	1,962,005	$	(25,082)	$	1,936,923
Unamortized debt issuance cost, net														(7,858)		—		(7,858)		(627)		—		(627)
														7,259,188		—		7,259,188		4,141,053		—		4,141,053
													$	7,376,562	$	(92,837)	$	7,283,725	$	4,179,999	$	(16,616)	$	4,163,383

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

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


																	September 30, 2020								December 31, 2019
																			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

	September 30, 2019								December 31, 2018
			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)
																	(in thousands)
Interest rate lock commitments	$	2,276	$	—	$	—	$	2,276	$	1,169	$	—	$	—	$	1,169	$	2,706	$	—	$	—	$	2,706	$	1,861	$	—	$	—	$	1,861
Credit Suisse First Boston Mortgage Capital LLC		1,000,098		(999,713)		—		385		691,030		(690,766)		—		264		3,613,132		(3,607,746)		—		5,386		1,235,430		(1,235,430)		—		—
Morgan Stanley Bank, N.A.																		784,434		(784,434)		—		—		582,941		(582,941)		—		—
Bank of America, N.A.		506,553		(497,335)		—		9,218		170,820		(170,820)		—		—		767,391		(767,391)		—		—		379,400		(374,190)		—		5,210
JPMorgan Chase Bank, N.A.		711,619		(711,619)		—		—		54,326		(54,326)		—		—		741,341		(741,341)		—		—		936,172		(936,172)		—		—
Morgan Stanley Bank, N.A.		551,027		(551,027)		—		—		77,687		(77,687)		—		—
Citibank, N.A.		461,496		(461,496)		—		—		14,960		(14,960)		—		—		637,347		(632,928)		—		4,419		655,831		(653,170)		—		2,661
BNP Paribas		192,534		(192,534)		—		—		149,675		(149,482)		—		193		370,013		(370,013)		—		—		183,880		(183,880)		—		—
Royal Bank of Canada		125,735		(125,735)		—		—		35,181		(35,181)		—		—		363,193		(363,193)		—		—		175,897		(175,897)		—		—
Deutsche Bank		—		—		—		—		741,978		(741,978)		—		—
Federal National Mortgage Association		685		—		—		685		—		—		—		—
Federal Home Loan Mortgage Corporation																		5,755		—		—		5,755		—		—		—		—
Mizuho Securities																		2,366		—		—		2,366		—		—		—		—
Barclays Capital																		1,648		—		—		1,648		—		—		—		—
Wells Fargo Bank, N.A.																		—		—		—		—		11,212		—		—		11,212
Others		1,471		—		—		1,471		1,438		—		—		1,438		2,257		—		—		2,257		1,386		—		—		1,386
	$	3,553,494	$	(3,539,459)	$	—	$	14,035	$	1,938,264	$	(1,935,200)	$	—	$	3,064
																	$	7,291,583	$	(7,267,046)	$	—	$	24,537	$	4,164,010	$	(4,141,680)	$	—	$	22,330

Table of Contents

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

Quarter ended September 30,

Nine months ended September 30,
Derivative activity

Income statement line

2019

2018

2019

2018

(in thousands)
Interest rate lock commitments

Net gains on loans held for sale at fair value

$
33,347

$
(18,526)

$
95,785

$
(21,109)
Repurchase agreement derivatives

Interest expense

$
92

$
(227)

$
(1,608)

$
(1,345)
Hedged item:

Interest rate lock commitments and loans held for sale

Net gains on loans held for sale at fair value

$
(55,540)

$
10,820

$
(157,362)

$
100,422
Mortgage servicing rights

Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities

$
250,146

$
(52,971)

$
587,883

$
(180,853)


		Quarter ended September 30,				Nine months ended September 30,
Derivative activity	Income statement line	2020		2019		2020		2019

		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	173,381	$	33,347	$	404,795	$	95,785
Repurchase agreement derivatives	Interest expense	$	83	$	92	$	83	$	(1,608)
Hedged item (2):
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	(77,320)	$	(55,540)	$	(403,992)	$	(157,362)
Mortgage servicing rights	Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	6,521	$	250,146	$	1,027,327	$	587,883

(1)

Represents net increase in fair value of IRLCs from the beginning to the end of the reporting period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans are shown in the rollforward of IRLCs for the period in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.

~~Table of Contents~~

(2)	All the hedging derivatives are interest rate derivatives and are used as economic hedges.

Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Balance at beginning of period	$	2,213,539	$	2,720,335	$	2,926,790	$	2,820,612
Additions:
Resulting from loan sales		245,946		246,757		753,795		545,839
Purchases (purchase adjustments), net		(287)		46		25,473		227,445
		245,659		246,803		779,268		773,284
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		(26,208)		(286,880)		(1,040,751)		(704,967)
Other changes in fair value (2)		(99,169)		(124,005)		(331,486)		(332,676)
Total change in fair value		(125,377)		(410,885)		(1,372,237)		(1,037,643)
Balance at end of period	$	2,333,821	$	2,556,253	$	2,333,821	$	2,556,253

					September 30,		December 31,
					2020		2019

					(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets					$	2,330,600	$	2,920,603

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Balance at beginning of period

$
2,720,335

$
2,486,157

$
2,820,612

$
638,010
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting

—

—

—

1,482,426
Balance after reclassification

2,720,335

2,486,157

2,820,612

2,120,436
Additions:

Resulting from loan sales

246,757

149,000

545,839

448,604
Purchases

46

163,511

227,445

193,640

246,803

312,511

773,284

642,244
Change in fair value due to:

Changes in inputs used in valuation model (1)

(286,880)

64,293

(704,967)

239,538
Other changes in fair value (2)

(124,005)

(76,997)

(332,676)

(216,254)
Total change in fair value

(410,885)

(12,704)

(1,037,643)

23,284
Balance at end of period

$
2,556,253

$
2,785,964

$
2,556,253

$
2,785,964

September 30,

December 31,

2019

2018

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

$
2,550,602

$
2,807,333

(1)

~~(1)~~

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

and servicing cost inputs.

(2)

~~(2)~~

Represents changes due to realization of cash flows.

Table of Contents

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Balance at beginning of period	$	29,858	$	12,948	$	29,140	$	8,681
Mortgage servicing liabilities resulting from loan sales		—		19,501		6,576		27,133
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		10,822		8,630		24,927		14,687
Other changes in fair value (2)		(8,982)		(6,785)		(28,945)		(16,207)
Total change in fair value		1,840		1,845		(4,018)		(1,520)
Balance at end of period	$	31,698	$	34,294	$	31,698	$	34,294

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Balance at beginning of period

$
12,948

$
10,253

$
8,681

$
14,120
Mortgage servicing liabilities resulting from loan sales

19,501

1,741

27,133

5,548
Changes in fair value due to:

Changes in valuation inputs used in valuation model (1)

8,630

3,410

14,687

8,590
Other changes in fair value (2)

(6,785)

(5,635)

(16,207)

(18,489)
Total change in fair value

1,845

(2,225)

(1,520)

(9,899)
Balance at end of period

$
34,294

$
9,769

$
34,294

$
9,769

(1)

~~(1)~~

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

(2)

~~(2)~~

Represents changes due to realization of cash flows.

~~Table of Contents~~

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Contractual servicing fees	$	185,967	$	147,182	$	533,510	$	421,536	$	203,696	$	185,967	$	601,527	$	533,510
Other fees:
Late charges		12,430		5,087		31,258		19,595		7,615		12,430		28,718		31,258
Other		4,846		1,244		9,119		4,620		6,960		4,846		17,781		9,119
	$	203,243	$	153,513	$	573,887	$	445,751
									$	218,271	$	203,243	$	648,026	$	573,887

Table of Contents

Note 10—Leases

The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of these operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.

The Company’s lease agreements are summarized below:

Quarter ended

Nine months ended

September 30, 2019

September 30, 2019

(dollars in thousands)
Lease expense:

Operating leases
$
3,356

$
9,817
Short-term leases

213

644
Sublease income

(35)

(94)
Net lease expense included in Occupancy and equipment
$
3,534

$
10,367

Other information:

Cash payments for operating leases
$
4,063

$
11,793
Operating lease right-of-use assets recognized

Upon adoption of ASU 2016-02
$
—

$
58,713
New leases

1,929

1,929

$
1,929

$
60,642
Period end:

Weighted averages:

Remaining lease term (in years)

5.8
Discount rate

4.6%



	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(dollars in thousands)
Lease expense:
Operating leases	$	4,144	$	3,356	$	12,110	$	9,817
Short-term leases		457		213		937		644
Sublease income		—		(35)		—		(94)
Net lease expense included in Occupancy and equipment	$	4,601	$	3,534	$	13,047	$	10,367

Other information:
Cash payments for operating leases	$	4,418	$	4,063	$	13,212	$	11,793
Operating lease right-of-use assets recognized:
Upon adoption Accounting Standards Update 2016-02, Leases (Topic 842)	$	—	$	—	$	—	$	58,713
New leases		1,721		1,929		8,219		1,929
	$	1,721	$	1,929	$	8,219	$	60,642
Period end weighted averages:
Remaining lease term (in years)		6.4		5.8
Discount rate		4.2%		4.6%

~~The maturities~~Lease payments of the Company’s operating lease liabilities are summarized below:

Twelve months ended September 30,

Operating leases

(in thousands)
2020

$
17,246
2021

14,754
2022

12,170
2023

11,580
2024

9,123
Thereafter

17,628
Total lease payments

82,501
Less imputed interest

(10,341)
Total

$
72,160


Twelve months ended September 30,	Operating leases
	(in thousands)
2021	$	18,586
2022		16,405
2023		16,792
2024		14,474
2025		13,296
Thereafter		27,224
Total lease payments		106,777
Less imputed interest		(14,772)
Total	$	92,005

Table of Contents

As of September 30, 2019, the Company had one operating lease that has not yet commenced with an undiscounted minimum payment commitment totaling $1.5 million. The lease is expected to commence in May 2020.

Note 11—~~Borrowings~~Other Assets

Other assets are summarized below:


		September 30,		December 31,
	2020		2019

	(in thousands)
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets	$	192,597	$	—
Margin deposits		90,156		84,118
Capitalized software, net		91,237		63,130
Furniture, fixture, equipment and building improvements, net		29,274		30,480
Real estate acquired in settlement of loans		14,395		20,326
Other		233,570		135,503
	$	651,229	$	333,557
Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets	$	192,597	$	—
Assets pledged to secure Obligation under capital lease:
Capitalized software, net		8,862		12,192
Furniture, fixture, equipment and building improvements, net		6,088		20,406
	$	207,547	$	32,598

Note 12—Borrowings

The borrowing facilities described throughout this Note 1112 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 September 30, ~~2019.~~2020.

Assets Sold Under Agreements to Repurchase

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

On April 1, 2020, the Company issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as buyer (the “GMSR Servicing Advances Repurchase Agreement”).

The GMSR Servicing Advance Notes leverage the GNMA MSR Facility to support a separately defined servicing advance facility within the existing structure and provide the Company enhanced ability to finance its servicing advance obligations to Ginnie Mae and its security holders as necessary. Specifically, the GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.

The borrowing capacity under the GMSR Servicing Advances Repurchase Agreement, shared with VFN financing capacity, is $600 million, all of which is committed and may be used to finance the servicing advances related to delinquent FHA, VA, and USDA loans, including delinquencies caused by forbearance in accordance with the CARES Act.

Table of Contents

Assets sold under agreements to repurchase are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	3,363,140		$	2,098,208		$	2,669,336		$	1,861,086
Weighted average interest rate (1)		2.68	%		3.66	%		3.06	%		4.08	%
Total interest expense (2)	$	27,322		$	19,429		$	70,493		$	47,709
Maximum daily amount outstanding	$	7,267,046		$	3,539,459		$	7,267,046		$	3,539,459


		September 30,			December 31,
	2020			2019

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	7,267,046		$	4,141,680
Unamortized debt issuance costs		(7,858)			(627)
	$	7,259,188		$	4,141,053
Weighted average interest rate		1.85	%		3.29	%
Available borrowing capacity (3):
Committed	$	17,072		$	125,810
Uncommitted		2,940,882			782,510
	$	2,957,954		$	908,320
Fair value of assets securing repurchase agreements:
Loans held for sale	$	8,453,522		$	4,322,789
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	86,958		$	107,512
Servicing advances (4)	$	232,519		$	207,460
Mortgage servicing rights (4)	$	2,283,876		$	2,902,721
Deposits (4)	$	192,597		$	—
Margin deposits placed with counterparties (5)	$	4,375		$	5,000

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(dollars in thousands)

Average balance of assets sold under agreements to repurchase

$
2,098,208

$
1,563,053

$
1,861,086

$
1,618,008

Weighted average interest rate (1)

3.66
%

3.91
%

4.08
%

3.72
%
Total interest expense (2)

$
19,429

$
4,676

$
47,709

$
15,943

Maximum daily amount outstanding

$
3,539,459

$
2,201,880

$
3,539,459

$
2,380,121

September 30,

December 31,

2019

2018

(dollars in thousands)

Carrying value:

Unpaid principal balance

$
3,539,459

$
1,935,200

Unamortized debt issuance premiums and costs, net

(570)

(1,341)

$
3,538,889

$
1,933,859

Weighted average interest rate

3.53
%

4.22
%
Available borrowing capacity (3):

Committed

$
2,665

$
695,767

Uncommitted

1,292,876

2,354,033

$
1,295,541

$
3,049,800

Fair value of assets securing repurchase agreements:

Loans held for sale

$
3,939,161

$
1,923,857

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

$
107,678

$
131,025

Servicing advances (4)

$
181,747

$
162,895

Mortgage servicing rights (4)

$
2,532,369

$
2,807,333

Margin deposits placed with counterparties (5)

$
5,000

$
3,750

(1)

~~(1)~~

Excludes the effect of amortization of net issuance costs of $4.8 million and $9.2 million for the quarter and nine months ended September 30, 2020, respectively, and net issuance costs and premiums ~~totaling~~of $0.2 million and $9.2 million for the quarter and nine months ended September 30, 2019, ~~respectively, and net premiums totaling $10.9 million and $29.7 million for the quarter and nine months ended September 30, 2018,~~ respectively.

(2)

~~(2)~~

In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $1.6 million and ~~$12.8~~$14.7 million of such incentives as reductions in Interest expense during the ~~quarters ended September 30, 2019~~quarter and ~~2018, respectively, and $14.7 million and $35.5 million during the~~ nine

~~Table of Contents~~

months ended September 30, 2019, ~~and 2018,~~ respectively. The master repurchase agreement expired on August 21, 2019.

(3)

~~(3)~~

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 financed.

(4)

~~(4)~~

Beneficial interests in the Ginnie Mae MSRs, ~~and~~ servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, ~~2018-GT1~~GMSR Servicing Advance Notes, ~~and 2018-GT2~~the 2018 Term Notes described in Notes ~~Payable~~payable secured by mortgage servicing assets. The VFN financing isand the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and ~~2018-GT1 Notes and 2018-GT2~~the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance ~~sheet.~~

sheets.

(5)

~~(5)~~

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

sheets.

Table of Contents

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


Remaining maturity at September 30, 2019	Balance
	(dollars in thousands)

Remaining maturity at September 30, 2020			Unpaid principal balance
			(dollars in thousands)
Within 30 days	$	276,113	$	1,490,837
Over 30 to 90 days		3,041,052		5,365,208
Over 90 to 180 days		122,294		361,001
Over 180 days to one year		100,000		50,000
Total assets sold under agreements to repurchase	$	3,539,459	$	7,267,046
Weighted average maturity (in months)		2.5		2.0

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, ~~2019:~~2020:


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC (1)	$	1,092,694	April 23, 2021	April 23, 2021
Credit Suisse First Boston Mortgage Capital LLC	$	460,264	October 19, 2020	April 23, 2021
Bank of America, N.A.	$	410,222	November 2, 2020	March 11, 2021
JP Morgan Chase Bank, N.A.	$	192,579	December 2, 2020	January 7, 2021
Morgan Stanley Bank, N.A.	$	62,630	November 3, 2020	November 3, 2020
Citibank, N.A.	$	48,231	December 15, 2020	August 3, 2021
Royal Bank of Canada	$	33,343	October 30, 2020	October 30, 2020
BNP Paribas	$	27,646	December 16, 2020	July 30, 2021

(1)

The calculation of the amount at risk includes the VFN and the 2018 Term Notes because beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018 Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets sold under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.

Weighted average

maturity of advances

under repurchase

Counterparty

Amount at risk

agreement

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC

$
1,313,083

April 26, 2020

April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC

$
231,656

December 2, 2019

April 24, 2020
Bank of America, N.A.

$
82,942

October 28, 2019

October 28, 2019
JP Morgan Chase Bank, N.A.

$
79,142

October 9, 2019

October 11, 2019
Citibank, N.A.

$
41,279

December 17, 2019

August 4, 2020
Morgan Stanley Bank, N.A.

$
40,511

December 16, 2019

August 21, 2020
BNP Paribas

$
12,363

December 17, 2019

July 31, 2020
Royal Bank of Canada

$
9,804

December 31, 2019

December 31, 2019

The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.

Mortgage Loan Participation Purchase and Sale Agreements

Certain of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a 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.

~~Table of Contents~~

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

Table of Contents

The mortgage loan participation purchase and sale agreements are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Average balance	$	235,713		$	258,169		$	227,460		$	249,023
Weighted average interest rate (1)		1.40	%		3.36	%		1.98	%		3.55	%
Total interest expense	$	999		$	2,304		$	3,870		$	7,034
Maximum daily amount outstanding	$	538,074		$	524,095		$	540,977		$	548,038

Quarter ended September 30,

Nine months ended September 30,


2019

2018


2019

2018

(dollars in thousands)
Average balance

$
258,169

$
289,008

$
249,023

$
250,599

Weighted average interest rate (1)

3.36
%

3.31
%

3.55
%

3.14
%
Total interest expense

$
2,304

$
2,533

$
7,034

$
6,450

Maximum daily amount outstanding

$
524,095

$
722,611

$
548,038

$
722,611

(1)

~~(1)~~

Excludes the effect of amortization of ~~facility fees~~debt issuance costs totaling ~~$135,000~~$172,000 and ~~$92,000~~$135,000 for the quarters ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$405,000~~$490,000 and ~~$475,000~~$405,000 for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.


							September 30,			December 31,
							2020			2019

	September 30,			December 31,
	2019			2018
	(dollars in thousands)
							(dollars in thousands)
Carrying value:
Unpaid principal balance	$	514,625		$	532,466		$	535,378		$	497,948
Unamortized debt issuance costs		—			(215)			(315)			—
	$	514,625		$	532,251
							$	535,063		$	497,948
Weighted average interest rate		3.27	%		3.77	%		1.40	%		3.05	%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements	$	542,049		$	555,001		$	558,023		$	523,349

Obligations Under Capital Lease

The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Average balance	$	15,179		$	25,812		$	17,253		$	13,380
Weighted average interest rate		2.16	%		4.47	%		2.69	%		4.48	%
Total interest expense	$	83		$	274		$	354		$	476
Maximum daily amount outstanding	$	16,749		$	28,295		$	20,810		$	28,295


	September 30,			December 31,
	2020			2019

	(dollars in thousands)
Unpaid principal balance	$	13,957		$	20,810
Weighted average interest rate		2.15	%		3.74	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	6,088		$	20,406
Capitalized software	$	8,862		$	12,192

Table of Contents

Notes Payable Secured by Mortgage Servicing Assets

2018 Term Notes

~~On February 28, 2018, the~~The Company, through the Issuer Trust, issued ~~an aggregate principal amount of $650 million in~~the 2018 Term Notes ~~(the “2018-GT1 Notes”)~~ to qualified institutional buyers under Rule 144A of the Securities ~~Act.~~Act of 1933, as amended (the “Securities Act”). The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1 Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with issuance of the 2018-GT1 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.

~~On August 10,~~ 2018 the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 2.65% per annum. The 2018-GT2 Notes will mature on August 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with the issuance of the 2018-GT2 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.

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

Following is a summary of the issued and outstanding 2018 Term Notes:


Issuance Date	Principal		Stated interest rate (1)	Maturity date (2)
	(in thousands)		(Annually)
February 28, 2018 (the "2018-GT1 Notes")	$	650,000	2.85%	2/25/2023
August 10, 2018 (the "2018-GT2 Notes")		650,000	2.65%	8/25/2023
	$	1,300,000

(1)	Spread over one-month LIBOR.

~~Table of Contents~~

(2)	The 2018 Term Notes indentures provide the Company with the option to extend the maturity of the 2018 Term Notes by two years after the stated maturity.

~~Corporate Revolving Line of Credit~~

On November 1, 2018, the Company, through its subsidiary, PennyMac (the “Borrower”), entered into amendments (the "Amendments") to that certain (i) amended and restated credit agreement, dated as of November 18, 2016, by and among the Borrower, the lenders that are parties thereto and Credit Suisse AG, as administrative agent and collateral agent, and Credit Suisse Securities (USA) LLC, as sole bookrunner and sole lead arranger (the “Credit Agreement”); and (ii) amended and restated collateral and guaranty agreement, dated as of November 18, 2016, by and among the Borrower, as grantor, Credit Suisse AG, Cayman Islands Branch (“CS Cayman”), as collateral agent, and PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) and certain of its subsidiaries, PCM, PLS and PNMAC Opportunity Fund Associates, LLC (“Associates”), as guarantors and grantors (“the “Guaranty”).

Pursuant to the Credit Agreement, the lenders have agreed to make revolving loans to the Borrower in an amount not to exceed $150 million. Interest on the loans shall accrue at a per annum rate of interest equal to, at the election of the Borrower, 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 default rate. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Borrower and its subsidiaries.

The primary purposes of the Amendments were to (i) extend the maturity date of the Credit Agreement to October 31, 2019; (ii) name the Company as an additional guarantor under the Credit Agreement; and (iii) release Associates from its obligations as a guarantor under the Credit Agreement. Accordingly, the obligations of the Borrower under the Credit Agreement are now guaranteed by PFSI, PNMAC Holdings, Inc., PCM and PLS, and secured by a grant by each of the referenced grantors of its respective right, title and interest in and to limited and otherwise unencumbered (other than specified permitted encumbrances) specified contract rights, specified deposit accounts, all documents and instruments related to such specified contract rights and specified deposit accounts, and any and all proceeds and products thereof. All other terms and conditions of the Credit Agreement and Guaranty remain the same in all material respects.

MSR Note Payable

On February 1, 2018, the Company issued a note payable ~~in favor of CS Cayman~~ that is secured by ~~Fannie Mae and~~ Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on ~~February 1,~~October 21, 2020. The maximum amount that the Company may borrow under the note payable is ~~$400~~$600 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the VFN. The Company did not borrow under this note payable during the ~~quarter and nine months ended September 30, 2019 or 2018.~~periods presented.

Notes payable are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Average balance	$	1,300,000		$	1,300,000		$	1,300,000		$	1,300,000
Weighted average interest rate (1)		2.99	%		5.11	%		3.57	%		5.21	%
Total interest expense	$	10,177		$	17,044		$	36,131		$	52,118
Maximum daily amount outstanding	$	1,300,000		$	1,300,000		$	1,300,000		$	1,300,000

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(dollars in thousands)

Average balance

$
1,300,000

$
1,234,783

$
1,300,000

$
1,125,458

Weighted average interest rate (1)

5.11
%

5.07
%

5.21
%

5.29
%
Total interest expense

$
17,525

$
21,369

$
53,559

$
55,939

Maximum daily amount outstanding

$
1,300,000

$
1,300,000

$
1,300,000

$
1,300,000

(1)

~~(1)~~

Excludes the effect of amortization of debt issuance costs totaling $459,000 and ~~non-utilization fees totaling $0.9 million and $2.0 million~~$445,000 for the quarters ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$2.7~~$1.4 million and ~~$2.8~~$1.3 million for the nine ~~months~~month periods ended September 30, 2020 and 2019, ~~and 2018, respectively, as well as unamortized debt issuance costs of $3.4 million and $8.0 million, recognized in~~ ~~Interest expense~~ ~~due to repayments of certain previously issued notes during the quarter and nine months ended September 30, 2018,~~ respectively.

Table of Contents


	September 30,			December 31,
	2020			2019

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,300,000		$	1,300,000
Unamortized debt issuance costs		(4,857)			(5,930)
	$	1,295,143		$	1,294,070
Weighted average interest rate		2.93	%		4.46	%
Assets pledged to secure notes payable (1):
Servicing advances	$	232,519		$	207,460
Mortgage servicing rights	$	2,213,344		$	2,861,442
Deposits	$	192,597		$	—

September 30,

December 31,



2019

2018

(dollars in thousands)

Carrying value:

Unpaid principal balance

$
1,300,000

$
1,300,000

Unamortized debt issuance costs

(6,375)

(7,709)

$
1,293,625

$
1,292,291

Weighted average interest rate

4.90
%

5.07
%
Unused amount

$
150,000

$
150,000

Assets pledged to secure notes payable:

Cash

$
101,773

$
108,174

Servicing advances (1)

$
181,747

$
162,895

Mortgage servicing rights (1)

$
2,489,481

$
2,807,333

(1)

~~(1)~~

Beneficial interests in the Ginnie Mae MSRs, ~~and~~ servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, ~~2018-GT1~~GMSR Servicing Advance Notes and ~~2018-GT2~~the 2018 Term Notes. The VFN financing isand the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and ~~2018-GT1 Notes and 2018-GT2~~the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheet.

~~Obligations Under Capital Lease~~Unsecured Senior Notes

On September 29, 2020, the Company issued $500 million aggregate principal amount of 5.375% senior notes (the “Unsecured Notes”). Interest on the Unsecured Notes accrues beginning on September 29, 2020 at a rate of 5.375% per year. Interest on the Unsecured Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2021. The Unsecured Notes mature on October 15, 2025.

Before October 15, 2022, the Company may, at its option and on any one or more occasions redeem:

●

some or all of the Unsecured Notes at a price equal to 100% of the principal amount of the Unsecured Notes redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a make-whole premium; and

●

up to 40% of the aggregate principal amount of the Unsecured Notes with an amount equal to or less than the net proceeds from certain equity offerings at a redemption price of 105.375% plus accrued and unpaid interest to, but excluding, the redemption date.

On or after October 15, 2022, the Company may, at its option and on any one or more occasions, redeem some or all of the Unsecured Notes at the applicable redemption prices set forth in the indenture under which the Unsecured Notes were issued, plus accrued and unpaid interest to, but excluding, the redemption date.

If a “change of control” (as defined in the indenture under which the Unsecured Notes were issued) occurs, the holders of the Unsecured Notes may require the Company to purchase for cash all or a portion of their Unsecured Notes at a purchase price equal to 101% of the principal amount of the Unsecured Notes, plus accrued and unpaid interest to, but excluding, the repurchase date.

The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the value of collateral securing such indebtedness.

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The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any future secured indebtedness of the guarantors to the extent of the value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.

Corporate Revolving Line of Credit

The Company, ~~has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.~~

~~Obligations under capital lease are summarized below:~~

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(dollars in thousands)

Average balance

$
25,812

$
11,615

$
13,380

$
15,187

Weighted average interest rate

4.47
%

4.09
%

4.48
%

3.87
%

Total interest expense

$
274

$
122

$
476

$
444

Maximum daily amount outstanding

$
28,295

$
13,032

$
28,295

$
20,971

September 30,

December 31,

2019

2018

(dollars in thousands)

Unpaid principal balance

$
23,881

$
6,605

Weighted average interest rate

4.45
%

4.46
%
Assets pledged to secure obligations under capital lease:

Furniture, fixtures and equipment

$
22,172

$
16,281

Capitalized software

$
14,090

$
1,017

~~Excess Servicing Spread Financing at Fair Value~~

~~In conjunction with~~through its ~~purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has~~subsidiary PennyMac, entered into ~~sale~~an amended and ~~assignment agreements~~restated credit agreement on November 18, 2016, as amended (the “Credit Agreement”) under which PennyMac established a revolving line of credit in an amount not to exceed $150 million. Certain cash accounts with ~~PMT. Under these agreements,~~balances totaling $52.6 million at December 31, 2019, were pledged to secure this revolving line of credit. PennyMac did not borrow under the ~~Company sold to PMT~~revolving line of credit during the ~~right to receive ESS cash flows relating to certain MSRs. The Company retained a fixed base servicing fee~~periods presented and ~~all ancillary income associated~~terminated the Credit Agreement on September 29, 2020 concurrent with ~~servicing~~ the ~~loans. The Company continues to be~~issuance the ~~servicer of~~Unsecured Notes. Debt issuance costs and non-utilization fees totaled $561,000 and $481,000 for the ~~mortgage loans~~quarters ended September 30, 2020 and ~~retains all servicing obligations, including responsibility to make servicing advances.~~2019, respectively, and $1.5 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.

~~Table of Contents~~

~~Following is a summary of ESS:~~

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Balance at beginning of period

$
194,156

$
229,470

$
216,110

$
236,534
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement

377

499

1,327

1,983
Accrual of interest

2,291

3,740

8,124

11,584
Repayment

(9,819)

(11,543)

(30,901)

(35,852)
Change in fair value

(3,864)

1,109

(11,519)

9,026
Balance at end of period

$
183,141

$
223,275

$
183,141

$
223,275

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

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Balance at beginning of period	$	18,709	$	20,587	$	21,155	$	20,053	$	25,909	$	18,709	$	21,446	$	21,155
Provision for losses on loans sold:
Resulting from sales of loans		2,508		1,842		5,222		4,550		5,219		2,508		13,120		5,222
Reduction in liability due to change in estimate		(1,175)		(1,155)		(6,305)		(3,627)		(2,473)		(1,175)		(5,419)		(6,305)
(Recoveries) incurred losses, net		(74)		(252)		(104)		46
Losses incurred, net										(151)		(74)		(643)		(104)
Balance at end of period	$	19,968	$	21,022	$	19,968	$	21,022	$	28,504	$	19,968	$	28,504	$	19,968
Unpaid principal balance of loans subject to representations and warranties at end of period	$	166,541,153	$	139,315,779					$	199,194,983	$	166,541,153

Note ~~13—~~14—Income Taxes

The Company’s effective income tax rates were ~~26.9%~~26.5% and ~~9.0%~~26.9% for the quarters ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively and ~~26.3%~~26.4% and ~~8.6%~~26.3% for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Beginning November 1, 2018, the Company’s income subject to~~

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable. The Company does not anticipate any material changes in its effective income tax ~~includes~~rates resulting from the portion of its income formerly attributed to the noncontrolling interest, which was not subject to income tax at the parent Company level before the Reorganization. As a result, the Company reported a higher effective tax rate for the quarter and nine months ended September 30, 2019 than for the quarter and nine months ended September 30, 2018.CARES Act.

Note ~~14—~~15—Commitments and Contingencies

Litigation

From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.

5051

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On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into a corporate reorganization (the “Reorganization”), without ensuring that the Reorganization was entirely fair to the Company or public shareholders. In connection with the Reorganization, the Company was formed as a Delaware corporation on July 2, 2018, and became the top-level parent holding company for the consolidated PennyMac business on November 1, 2018, The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While the Company and its co-defendants believe the Garfield Action is without merit and expressly disclaim any wrongdoing, they have collectively agreed to settle the Garfield Action for an amount equal to $6.85 million in order to avoid the ongoing costs of litigation and further distractions to their respective businesses. A settlement agreement was filed with the Delaware Court on October 9, 2020, and is currently pending approval. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company. While no assurance can be provided to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending. Any potential range of loss cannot be reasonably estimated at this time primarily because the matter involves complex factual and legal issues; there is substantial uncertainty regarding any alleged damages, and the matter is at a preliminary stage of litigation.

Regulatory Matters

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

Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund loans totaled ~~$8.3~~$18.9 billion as of September 30, ~~2019.~~2020.

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Note ~~15—~~16—Stockholders’ Equity

In June ~~2017,~~2020, the Company’s board of directors ~~authorized a~~approved an increase to the Company’s common stock repurchase program ~~under which the Company may repurchase up to~~from $50 million to $500 million. The Company entered into a privately negotiated transaction with The BlackRock Foundation under the revised stock repurchase program to repurchase 6,975,323 shares of ~~its outstanding~~the Company’s common ~~stock.~~ stock at a price of $34 per share.

Following is a summary of activity under the stock repurchase program:


	Quarter ended September 30,				Nine months ended September 30,				Cumulative
	2020		2019		2020		2019		total (1)

	(in thousands)
Shares of common stock repurchased		118		—		7,331		51		8,147
Cost of shares of common stock repurchased	$	6,927	$	—	$	248,210	$	1,056	$	263,158

Quarter ended September 30,

Nine months ended September 30,

Cumulative


2019

2018

2019

2018

total (1)

(in thousands)
Shares of common stock repurchased

—

—

51

236

816
Cost of shares of common stock repurchased

$
—

$
—

$
1,056

$
4,826

$
14,948

(1)

~~(1)~~

Amounts represent the total shares of common stock repurchased under the stock repurchase program through September 30, ~~2019.~~

2020.

~~Note 16—Noncontrolling Interest~~

As a result of the Reorganization, noncontrolling interest unitholders contributed their Class A units of PNMAC in exchange for shares of the Company’s common stock without any cash consideration on a one-for-one basis. Consequently, the noncontrolling interest was reclassified to the Company’s paid-in capital accounts, net of deferred income taxes attributable to the noncontrolling interests.

~~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

Nine months ended

September 30, 2018

September 30, 2018

(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders

$
14,489

$
48,945
Increase in the Company's paid-in capital accounts for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

$
4,377

$
32,501
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 by noncontrolling interest unitholders and issued as equity compensation

131

1,616

~~Table of Contents~~

Note 17—Net Gains on Loans Held for Sale

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


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
From non-affiliates:
Cash gain (loss):
Loans	$	605,559	$	(22,838)	$	1,219,732	$	(77,659)
Hedging activities		(72,268)		(148,128)		(421,947)		(230,200)
		533,291		(170,966)		797,785		(307,859)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		245,946		227,256		747,219		518,706
Provision for losses relating to representations and warranties:
Pursuant to loan sales		(5,219)		(2,508)		(13,120)		(5,222)
Reduction in liability due to change in estimate		2,473		1,175		5,419		6,305
Change in fair value of loans and derivatives held at period end:
Interest rate lock commitments		173,381		33,347		404,795		95,785
Loans		(79,776)		(5,822)		(140,878)		(35,508)
Hedging derivatives		(5,052)		92,588		17,955		72,838
		865,044		175,070		1,819,175		345,045
From PennyMac Mortgage Investment Trust (1)		(9,775)		60,662		62,549		122,996
	$	855,269	$	235,732	$	1,881,724	$	468,041

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
From non-affiliates:

Cash loss:

Loans

$
(22,838)

$
(107,414)

$
(77,659)

$
(399,457)
Hedging activities

(148,128)

(2,507)

(230,200)

89,322

(170,966)

(109,921)

(307,859)

(310,135)
Non-cash gain:

Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales

227,256

147,259

518,706

443,056
Provision for losses relating to representations and warranties:

Pursuant to loan sales

(2,508)

(1,842)

(5,222)

(4,550)
Reduction in liability due to change in estimate

1,175

1,155

6,305

3,627
Change in fair value of loans and derivatives held at period end:

Interest rate lock commitments

33,347

(18,526)

95,785

(21,109)
Loans

(5,822)

6,897

(35,508)

21,407
Hedging derivatives

92,588

13,327

72,838

11,100

175,070

38,349

345,045

143,396
From PennyMac Mortgage Investment Trust

60,662

18,565

122,996

45,878

$
235,732

$
56,914

$
468,041

$
189,274

(1)	Gain on sale of loans to PMT are detailed in Note 4–Related Party Transactions.

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Table of Contents

Note 18—Net Interest Income

Net interest income is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Interest income:
From non-affiliates:
Cash and short-term investments	$	1,259	$	2,894	$	4,863	$	7,533
Loans held for sale at fair value		41,854		35,800		120,866		101,509
Placement fees relating to custodial funds		9,163		43,231		44,419		98,628
		52,276		81,925		170,148		207,670
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell		676		1,527		2,686		5,015
		52,952		83,452		172,834		212,685

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase (1)		27,322		19,429		70,493		47,709
Mortgage loan participation purchase and sale agreements		999		2,304		3,870		7,034
Obligations under capital lease		83		274		354		476
Notes payable		10,738		17,525		37,668		53,559
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		20,711		12,453		54,536		24,978
Interest on mortgage loan impound deposits		1,256		2,104		4,561		4,967
		61,109		54,089		171,482		138,723
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		2,070		2,291		6,416		8,124
		63,179		56,380		177,898		146,847
	$	(10,227)	$	27,072	$	(5,064)	$	65,838

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Interest income:

From non-affiliates:

Cash and short-term investments

$
2,894

$
814

$
7,533

$
2,001
Loans held for sale at fair value

35,800

34,941

101,509

95,982
Placement fees relating to custodial funds

43,231

23,397

98,628

55,014

81,925

59,152

207,670

152,997
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

1,527

1,812

5,015

5,686

83,452

60,964

212,685

158,683

Interest expense:

To non-affiliates:

Assets sold under agreements to repurchase (1)

19,429

4,676

47,709

15,943
Mortgage loan participation purchase and sale agreements

2,304

2,533

7,034

6,450
Notes payable

17,525

21,369

53,559

55,939
Obligations under capital lease

274

122

476

444
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

12,453

4,883

24,978

14,259
Interest on mortgage loan impound deposits

2,104

1,452

4,967

3,517

54,089

35,035

138,723

96,552
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value

2,291

3,740

8,124

11,584

56,380

38,775

146,847

108,136

$
27,072

$
22,189

$
65,838

$
50,547

(1)

~~(1)~~

In 2017, the Company entered into a master repurchase agreement that ~~provides~~provided the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $1.6 million and ~~$12.8~~$14.7 million of such incentives as reductions of Interest expense during the quarter ~~ended September 30, 2019~~ and ~~2018, respectively, and $14.7 million and $35.5 million during the~~ nine months ended September 30, 2019, ~~and 2018,~~ respectively. The master repurchase agreement expired on August 21, 2019.

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Table of Contents

Note 19—Stock-based Compensation

As of September 30, ~~2019,~~2020, the Company had ~~one~~1 stock-based compensation plan. Following is a summary of the stock-based compensation activity:


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Grants:
Units:
Performance-based RSUs		—		—		665		524		—		—		422		665
Stock options		—		—		344		674		—		—		273		344
Time-based RSUs		4		5		334		321		—		4		310		334
Grant date fair value:
Performance-based RSUs	$	—	$	—	$	15,253	$	12,791	$	—	$	—	$	14,788	$	15,253
Stock options		—		—		2,965		6,147		—		—		2,770		2,965
Time-based RSUs		102		100		7,647		7,803		—		102		10,823		7,647
Total	$	102	$	100	$	25,865	$	26,741	$	—	$	102	$	28,381	$	25,865
Vestings and exercises:
Performance-based RSUs vested		—		—		648		774		—		—		603		648
Stock options exercised		127		55		245		285		152		127		476		245
Time-based RSUs vested		3		1		294		245		7		3		355		294
Compensation expense	$	8,941	$	8,532	$	19,124	$	20,766	$	7,095	$	8,941	$	26,220	$	19,124

Note 20—Earnings Per Share of Common Stock

Basic earnings per share of common stock is determined ~~using~~by dividing net income ~~attributable to the Company’s common stockholders divided~~ by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is determined by dividing net income ~~attributable to the Company’s common stockholders~~ by the weighted average number of shares of common stock outstanding, assuming all dilutive shares of common stock were issued.

Potentially dilutive shares of common stock include non-vested stock-based compensation ~~awards and, before the Reorganization, PennyMac Class A units.~~awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock outstanding based on the outstanding stock-based compensation awards. ~~As a result of the Reorganization, all PNMAC Class A units converted into shares of the Company’s common stock on a one-for-one basis.~~

~~Table of Contents~~

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


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands, except per share amounts)
Net income	$	535,160	$	121,473	$	1,194,080	$	240,304

Weighted average basic shares of common stock outstanding		72,439		78,361		76,292		78,119
Effect of dilutive shares:
Common shares issuable under stock-based compensation plan		3,699		2,021		3,326		1,702
Weighted average shares of common stock applicable to diluted earnings per share		76,138		80,382		79,618		79,821
Basic earnings per share of common stock	$	7.39	$	1.55	$	15.65	$	3.08
Diluted earnings per share of common stock	$	7.03	$	1.51	$	15.00	$	3.01

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

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





Net income attributable to common stockholders

$
121,473

$
14,489

$
240,304

$
48,945
Weighted average shares of common stock outstanding

78,361

25,125

78,119

24,644
Basic earnings per share of common stock

$
1.55

$
0.58

$
3.08

$
1.99

Diluted earnings per share of common stock:

Net income attributable to common stockholders

$
121,473

$
14,489

$
240,304

$
48,945
Net income attributable to dilutive stock-based compensation units

—

552

—

2,435
Net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes

—

29,580

—

101,921
Net income attributable to common stockholders for diluted earnings per share

$
121,473

$
44,621

$
240,304

$
153,301
Weighted average shares of common stock outstanding applicable to basic earnings per share

78,361

25,125

78,119

24,644
Effect of dilutive shares:

Common shares issuable under stock-based compensation plan

2,021

1,476

1,702

1,818
PennyMac Class A units exchangeable to Class A common stock

—

52,312

—

52,492
Weighted average shares of common stock applicable to diluted earnings per share

80,382

78,913

79,821

78,954
Diluted earnings per share of common stock

$
1.51

$
0.57

$
3.01

$
1.94

Table of Contents

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



	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)		—		1,157		335		985
Stock options (2)		—		566		217		888
Total anti-dilutive shares and units		—		1,723		552		1,873
Weighted average exercise price of anti-dilutive stock options (2)	$	—	$	23.50	$	35.03	$	23.98

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)

1,157

1,172

985

1,060
Time-based RSUs

—

86

—

68
Stock options (2)

566

1,208

888

705
Total anti-dilutive shares and units

1,723

2,466

1,873

1,833
Weighted average exercise price of anti-dilutive stock options (2)

$
23.50

$
17.79

$
23.98

$
17.79

(1)

~~(1)~~

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

(2)

~~(2)~~

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

~~Table of Contents~~

Note 21—Supplemental Cash Flow Information


					Nine months ended September 30,
					2020		2019

	Nine months ended September 30,
	2019		2018
	(in thousands)
					(in thousands)
Cash paid for interest	$	125,987	$	123,622	$	184,087	$	125,987
Cash paid (refunds received) for income taxes , net	$	5,761	$	(1,541)
Cash paid for income taxes, net					$	260,723	$	5,761
Non-cash investing activity:
Mortgage servicing rights resulting from loan sales	$	545,839	$	448,604	$	753,795	$	545,839
Mortgage servicing liabilities resulting from loan sales	$	27,133	$	5,548	$	6,576	$	27,133
Unsettled portion of MSR acquisitions	$	—	$	13,501
Operating right-of-use assets recognized	$	60,642	$	—	$	8,219	$	60,642
Non-cash financing activity:
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	1,327	$	1,983	$	1,393	$	1,327
Issuance of common stock and Class A common stock in settlement of director fees	$	184	$	245
Issuance of common stock in settlement of directors' fees					$	144	$	184

Note 22—Regulatory Capital and Liquidity Requirements

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

The Company is subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements ~~include~~ include:

●

tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others;

●

before June 30, 2020, a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 600 basis points; and

●

effective June 30, 2020, a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered forbearance.

Table of Contents

On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the ~~Company’s total~~UPB of all other 1-4 unit ~~servicing portfolio, excluding mortgage~~ loans ~~subserviced for others~~serviced, and aincrease the liquidity requirement ~~equal~~ to ~~3.5~~4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the ~~Agencies~~UPB serviced for Ginnie Mae plus ~~200~~300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of ~~600~~400 basis points. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.

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

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


	September 30, 2020						December 31, 2019
Agency–company subject to requirement	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)

	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS	$	3,841,356		$	616,001		$	2,247,751		$	585,674
Ginnie Mae – PLS	$	3,139,830		$	980,469		$	1,907,398		$	910,456
HUD – PLS	$	3,139,830		$	2,500		$	1,907,398		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	607,064		$	82,828		$	257,794		$	79,991
Ginnie Mae – PLS	$	607,064		$	217,648		$	257,794		$	216,119
Adjusted net worth / Total assets ratio
Ginnie Mae – PLS		10	%		6	%		19	%		6	%
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		12	%		6	%		22	%		6	%

September 30, 2019

December 31, 2018

Agency–company subject to requirement

Actual (1)

Requirement (1)

Actual (1)

Requirement (1)

(dollars in thousands)

Capital

Fannie Mae & Freddie Mac – PLS

$
2,062,630

$
572,167

$
1,788,430

$
514,089

Ginnie Mae – PLS

$
1,718,072

$
852,256

$
1,535,826

$
733,342

Ginnie Mae – PennyMac

$
2,006,339

$
937,482

$
1,786,430

$
806,676

HUD – PLS

$
1,718,072

$
2,500

$
1,535,826

$
2,500

Liquidity

Fannie Mae & Freddie Mac – PLS

$
282,056

$
78,240

$
271,802

$
70,775

Ginnie Mae – PLS

$
282,056

$
211,021

$
271,802

$
189,592

Tangible net worth / Total assets ratio

Fannie Mae & Freddie Mac – PLS

19
%

6
%

21
%

6
%

(1)

~~(1)~~

Calculated in compliance with the respective Agency’s requirements.

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

~~Table of Contents~~

Note 23—Segments

The Company operates in ~~three~~3 segments: production, servicing and investment management.

~~Two~~NaN of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, 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 and managing the acquired assets and correspondent production activities for PMT.

Table of Contents

Financial performance and results by segment are as follows:


	Quarter ended September 30, 2020
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	700,830	$	154,439	$	855,269	$	—	$	855,269
Loan origination fees		75,572		—		75,572		—		75,572
Fulfillment fees from PennyMac Mortgage Investment Trust		54,839		—		54,839		—		54,839
Net loan servicing fees		—		132,807		132,807		—		132,807
Net interest income (expense):
Interest income		26,050		26,902		52,952		—		52,952
Interest expense		18,325		44,850		63,175		4		63,179
		7,725		(17,948)		(10,223)		(4)		(10,227)
Management fees		—		—		—		8,508		8,508
Other		132		1,802		1,934		1,290		3,224
Total net revenue		839,098		271,100		1,110,198		9,794		1,119,992
Expenses		225,817		159,407		385,224		6,477		391,701
Income before provision for income taxes	$	613,281	$	111,693	$	724,974	$	3,317	$	728,291
Segment assets at quarter end	$	7,319,838	$	23,843,110	$	31,162,948	$	17,917	$	31,180,865

Quarter ended September 30, 2019

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total

(in thousands)

Revenue: (1)



Net gains on loans held for sale at fair value

$
216,132

$
19,600

$
235,732

$
—

$
235,732

Loan origination fees

49,434

—

49,434

—

49,434

Fulfillment fees from PennyMac Mortgage Investment Trust

45,149

—

45,149

—

45,149

Net loan servicing fees

—

66,229

66,229

—

66,229

Net interest income (expense):

Interest income

22,445

61,007

83,452

—

83,452

Interest expense

18,423

37,936

56,359

21

56,380

4,022

23,071

27,093

(21)

27,072

Management fees

—

—

—

10,098

10,098

Other

324

567

891

1,742

2,633

Total net revenue

315,061

109,467

424,528

11,819

436,347

Expenses

135,777

127,581

263,358

6,792

270,150

Income before provision for income taxes

$
179,284

$
(18,114)

$
161,170

$
5,027

$
166,197

Segment assets at quarter end

$
4,850,741

$
4,433,177

$
9,283,918

$
19,281

$
9,303,199

(1)

~~(1)~~

All revenues are from external customers.


	Quarter ended September 30, 2019
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	216,132	$	19,600	$	235,732	$	—	$	235,732
Loan origination fees		49,434		—		49,434		—		49,434
Fulfillment fees from PennyMac Mortgage Investment Trust		45,149		—		45,149		—		45,149
Net loan servicing fees		—		66,229		66,229		—		66,229
Net interest income (expense):
Interest income		22,445		61,007		83,452		—		83,452
Interest expense		18,423		37,936		56,359		21		56,380
		4,022		23,071		27,093		(21)		27,072
Management fees		—		—		—		10,098		10,098
Other		324		567		891		1,742		2,633
Total net revenue		315,061		109,467		424,528		11,819		436,347
Expenses		135,777		127,581		263,358		6,792		270,150
Income before provision for income taxes	$	179,284	$	(18,114)	$	161,170	$	5,027	$	166,197
Segment assets at quarter end	$	4,850,741	$	4,433,177	$	9,283,918	$	19,281	$	9,303,199

~~Table of Contents~~

Quarter ended September 30, 2018

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total

(in thousands)

Revenue: (1)

Net gains on loans held for sale at fair value

$
34,947

$
21,967

$
56,914

$
—

$
56,914

Loan origination fees

26,485

—

26,485

—

26,485

Fulfillment fees from PennyMac Mortgage Investment Trust

26,256

—

26,256

—

26,256

Net loan servicing fees

—

109,703

109,703

—

109,703

Net interest income (expense):

Interest income

17,013

43,935

60,948

16

60,964

Interest expense

1,274

37,491

38,765

10

38,775

15,739

6,444

22,183

6

22,189

Management fees

—

—

—

6,471

6,471

Carried Interest from Investment Funds

—

—

—

(17)

(17)

Other

645

805

1,450

1,478

2,928

Total net revenue

104,072

138,919

242,991

7,938

250,929

Expenses

78,405

105,346

183,751

5,481

189,232

Income before provision for income taxes

$
25,667

$
33,573

$
59,240

$
2,457

$
61,697

Segment assets at quarter end (2)

$
2,168,126

$
4,812,898

$
6,981,024

$
11,996

$
6,993,020

(1)

~~(1)~~

All revenues are from external customers.

Table of Contents


	Nine months ended September 30, 2020
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	1,637,193	$	244,531	$	1,881,724	$	—	$	1,881,724
Loan origination fees		192,091		—		192,091		—		192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		149,594		—		149,594		—		149,594
Net loan servicing fees		—		412,952		412,952		—		412,952
Net interest income (expense):
Interest income		71,840		100,994		172,834		—		172,834
Interest expense		51,124		126,756		177,880		18		177,898
		20,716		(25,762)		(5,046)		(18)		(5,064)
Management fees		—		—		—		25,851		25,851
Other		483		1,473		1,956		4,347		6,303
Total net revenue		2,000,077		633,194		2,633,271		30,180		2,663,451
Expenses		608,602		413,071		1,021,673		18,395		1,040,068
Income before provision for income taxes	$	1,391,475	$	220,123	$	1,611,598	$	11,785	$	1,623,383
Segment assets at period end	$	7,319,838	$	23,843,110	$	31,162,948	$	17,917	$	31,180,865

(1)

~~(2)~~

~~Excludes parent Company assets, which consist of $1.8 million of cash and includes receivable from parent Company of $2.3 million.~~

Nine months ended September 30, 2019

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total

(in thousands)

Revenue: (1)



Net gains on loans held for sale at fair value

$
407,713

$
60,328

$
468,041

$
—

$
468,041

Loan origination fees

110,288

—

110,288

—

110,288

Fulfillment fees from PennyMac Mortgage Investment Trust

102,313

—

102,313

—

102,313

Net loan servicing fees

—

205,934

205,934

—

205,934

Net interest income (expense):

Interest income

55,714

156,971

212,685

—

212,685

Interest expense

36,236

110,572

146,808

39

146,847

19,478

46,399

65,877

(39)

65,838

Management fees

—

—

—

26,178

26,178

Other

929

2,664

3,593

4,844

8,437

Total net revenue

640,721

315,325

956,046

30,983

987,029

Expenses

316,187

324,949

641,136

19,815

660,951

Income before provision for income taxes

$
324,534

$
(9,624)

$
314,910

$
11,168

$
326,078

Segment assets at period end

$
4,850,741

$
4,433,177

$
9,283,918

$
19,281

$
9,303,199

~~(1)~~

All revenues are from external customers.


	Nine months ended September 30, 2019
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	407,713	$	60,328	$	468,041	$	—	$	468,041
Loan origination fees		110,288		—		110,288		—		110,288
Fulfillment fees from PennyMac Mortgage Investment Trust		102,313		—		102,313		—		102,313
Net loan servicing fees		—		205,934		205,934		—		205,934
Net interest income (expense):
Interest income		55,714		156,971		212,685		—		212,685
Interest expense		36,236		110,572		146,808		39		146,847
		19,478		46,399		65,877		(39)		65,838
Management fees		—		—		—		26,178		26,178
Other		929		2,664		3,593		4,844		8,437
Total net revenue		640,721		315,325		956,046		30,983		987,029
Expenses		316,187		324,949		641,136		19,815		660,951
Income before provision for income taxes	$	324,534	$	(9,624)	$	314,910	$	11,168	$	326,078
Segment assets at period end	$	4,850,741	$	4,433,177	$	9,283,918	$	19,281	$	9,303,199

(1) All revenues are from external customers.

Table of Contents

Nine months ended September 30, 2018

Mortgage Banking

Investment


Production

Servicing

Total

Management

Total


(in thousands)

Revenue: (1)

Net gains on loans held for sale at fair value

$
105,111

$
84,163

$
189,274

$
—

$
189,274

Loan origination fees

75,476

—

75,476

—

75,476

Fulfillment fees from PennyMac Mortgage Investment Trust

52,759

—

52,759

—

52,759

Net loan servicing fees

—

340,181

340,181

—

340,181

Net interest income (expense):

Interest income

48,135

110,532

158,667

16

158,683

Interest expense

4,401

103,694

108,095

41

108,136

43,734

6,838

50,572

(25)

50,547

Management fees

—

—

—

17,910

17,910

Carried Interest from Investment Funds

—

—

—

(365)

(365)

Other

1,497

1,928

3,425

4,221

7,646

Total net revenue

278,577

433,110

711,687

21,741

733,428

Expenses

216,722

290,094

506,816

17,221

524,037

Income before provision for income taxes

$
61,855

$
143,016

$
204,871

$
4,520

$
209,391

Segment assets at period end (2)

$
2,168,126

$
4,812,898

$
6,981,024

$
11,996

$
6,993,020

~~(1)~~

~~All revenues are from external customers.~~

~~(2)~~

~~Excludes parent Company assets, which consist of $1.8 million of cash and includes receivable from parent Company of $2.3 million.~~

Note 24—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, on October 31, 2019, the Company announced that it has initiated a quarterly dividend for common shareholders and that the board of directors declared a cash dividend of $0.12 per common share. The dividend will be paid on November 29, 2019 to common shareholders of record as of November 15, 2019.period:

●

On October 19, 2020, The Company issued an additional $150 million in principal amount of unsecured senior notes under a supplemental indenture governing the Unsecured Notes described in Note 12 – Borrowings. The additional unsecured senior notes have the same terms, other than the issuance date and issuance price, as the Unsecured Notes.

●

On November 5, 2020, the Company announced that its board of directors declared a cash dividend of $0.15 per common share. The dividend will be paid on November 25, 2020 to common shareholders of record as of November 16, 2020.

●

All agreements to repurchase assets that matured before the date of this Report were extended or renewed.

5960

Table of Contents

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

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including 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 ~~and home equity~~ 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 and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). 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 were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant.

One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. For tax purposes, the Reorganization ~~is to be~~was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code. PNMAC Holdings’ financial statements remain our historical financial statements.

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

●

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

●

The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT.

●

The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.

Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage and home equity loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a ~~government‑sponsored~~government-sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the ~~Securities and Exchange Commission (“SEC”)~~SEC as an investment adviser under the Investment Advisers Act of 1940, ~~(the “Advisers Act”),~~ as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT. PCM previously managed PNMAC Mortgage Opportunity Fund, LLC, PNMAC Mortgage Opportunity Fund, LP, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our Investment Funds. The Investment Funds were dissolved during 2018.

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Results of Operations

Our results of operations are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

	(dollars in thousands, except per share amounts)
Revenues:
Net gains on loans held for sale at fair value	$	855,269		$	235,732		$	1,881,724		$	468,041
Loan origination fees		75,572			49,434			192,091			110,288
Fulfillment fees from PennyMac Mortgage Investment Trust		54,839			45,149			149,594			102,313
Net loan servicing fees		132,807			66,229			412,952			205,934
Net interest (expense) income		(10,227)			27,072			(5,064)			65,838
Management fees		8,508			10,098			25,851			26,178
Other		3,224			2,633			6,303			8,437
Total net revenue		1,119,992			436,347			2,663,451			987,029
Expenses		391,701			270,150			1,040,068			660,951
Income before provision for income taxes		728,291			166,197			1,623,383			326,078
Provision for income taxes		193,131			44,724			429,303			85,774
Net income	$	535,160		$	121,473		$	1,194,080		$	240,304
Earnings per share
Basic	$	7.39		$	1.55		$	15.65		$	3.08
Diluted	$	7.03		$	1.51		$	15.00		$	3.01
Annualized return on average common stockholders' equity		77.6	%		26.2	%		63.8	%		18.2	%
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	613,281		$	179,284		$	1,391,475		$	324,534
Servicing		111,693			(18,114)			220,123			(9,624)
Total mortgage banking		724,974			161,170			1,611,598			314,910
Investment management		3,317			5,027			11,785			11,168
	$	728,291		$	166,197		$	1,623,383		$	326,078
Adjusted Earning Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1)	$	769,805		$	221,293		$	1,688,677		$	478,021
During the period:
Interest rate lock commitments issued	$	36,564,786		$	22,423,177		$	87,334,326		$	49,291,237
At end of period:
Interest rate lock commitments outstanding	$	18,873,579		$	8,311,786
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights	$	234,850,997		$	221,215,993
Mortgage servicing liabilities		1,799,562			2,327,687
Loans held for sale		8,749,673			4,323,252
		245,400,232			227,866,932
Subserviced for PMT		156,496,568			120,608,076
	$	401,896,800		$	348,475,008

Net assets of PennyMac Mortgage Investment Trust	$	2,281,266		$	2,219,611
Book value per share	$	41.67		$	24.37

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(dollars in thousands, except per share amounts)

Revenues:

Net gains on loans held for sale at fair value

$
235,732

$
56,914

$
468,041

$
189,274

Loan origination fees

49,434

26,485

110,288

75,476

Fulfillment fees from PennyMac Mortgage Investment Trust

45,149

26,256

102,313

52,759

Net loan servicing fees

66,229

109,703

205,934

340,181

Net interest income

27,072

22,189

65,838

50,547

Management fees

10,098

6,471

26,178

17,910

Other

2,633

2,911

8,437

7,281

Total net revenue

436,347

250,929

987,029

733,428

Expenses

270,150

189,232

660,951

524,037

Income before provision for income taxes

166,197

61,697

326,078

209,391

Provision for income taxes

44,724

5,545

85,774

17,908

Net income

$
121,473

$
56,152

$
240,304

$
191,483

Earnings per share

Basic

$
1.55

$
0.58

$
3.08

$
1.99

Diluted

$
1.51

$
0.57

$
3.01

$
1.94

Annualized return on average common stockholders' equity

26.2
%

10.8
%

18.2
%

12.7
%
Income before provision for income taxes by segment:

Mortgage banking:

Production

$
179,284

$
25,667

$
324,534

$
61,855

Servicing

(18,114)

33,573

(9,624)

143,016

Total mortgage banking

161,170

59,240

314,910

204,871

Investment management

5,027

2,457

11,168

4,520

$
166,197

$
61,697

$
326,078

$
209,391

During the period:

Interest rate lock commitments issued

$
22,423,177

$
11,130,611

$
49,291,237

$
33,843,166

Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees

$
16,647,172

$
7,517,883

$
35,523,802

$
17,139,884

At end of period:

Unpaid principal balance of loan servicing portfolio:

Owned:

Mortgage servicing rights

$
221,215,993

$
193,659,378

Mortgage servicing liabilities

2,327,687

1,265,461

Loans held for sale

4,323,252

2,352,771

227,866,932

197,277,610

Subserviced for PMT

120,608,076

87,226,461

$
348,475,008

$
284,504,071

Net assets of PennyMac Mortgage Investment Trust

$
2,219,611

$
1,558,563

Book value per share

$
24.37

$
21.47

(1)

To provide investors with information in addition to our results as determined by accounting principles generally accepted in the United States (“GAAP”), we disclose Adjusted EBITDA as a non-GAAP measure which is a measure that is frequently used in our industry to measure performance and we believe that this measure provides supplemental information that is useful to investors. Adjusted EBITDA is not a financial measure calculated in accordance with GAAP and should not be considered as a substitute for net income, or any other performance measure calculated in accordance with GAAP.

We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation model, increase (decrease) in fair value of ESS payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital leases to the extent such items existed in the periods presented.

We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the

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performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.

Adjusted EBITDA measures have limitations as analytical tools, and should not be considered them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

(a) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

(b) they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;

Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Net income	$	535,160	$	121,473	$	1,194,080	$	240,304
Provision for income taxes		193,131		44,724		429,303		85,774
Income befoe provisions for income taxes		728,291		166,197		1,623,383		326,078
Depreciation and amortization		6,401		3,900		17,126		10,650
Decrease in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation model		37,030		295,510		1,065,678		719,654
Decrease in fair value of ESS payable to PennyMac Mortgage Investment Trust		(3,135)		(3,864)		(18,293)		(11,519)
Hedging gains associated with MSRs		(6,521)		(250,146)		(1,027,327)		(587,883)
Stock‑based compensation		7,095		8,941		26,220		19,124
Interest expense on corporate debt or corporate revolving credit facilities and capital lease		644		755		1,890		1,917
Adjusted EBITDA	$	769,805	$	221,293	$	1,688,677	$	478,021

During the nine months ended September 30, 2020, the United States was significantly impacted by the ongoing effects of the COVID-19 Pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the Pandemic. These developments have resulted in an economic recession in the United States and increased unemployment that have created financial hardships for many existing borrowers.

As part of its response to the Pandemic, the federal government included requirements in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that we provide borrowers with loans we service for the Agencies with substantial payment forbearance. As a result of this requirement, we have seen a large increase in delinquencies in our servicing portfolio which has increased our cost to service those loans and may require us to finance substantial amounts of advances of principal and interest payments to the investors holding these loans, as well as property taxes, insurance and other costs to protect investors’ interest in the properties collateralizing the loans. As of September 30, 2020, 9.2% of loans in our predominately government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make in order to fund borrower delinquencies.

This development may have a negative effect on the earnings of our servicing segment before taking into account the effect of future developments on the valuation of our MSRs by, among other things, reducing servicing fee income, reducing the amount of placement fees we earn on custodial deposits related to these loans, increasing our cost to service due to higher delinquency and default rates, as well as increased financing costs due to the need to advance funds on behalf of delinquent borrowers. We expect these losses to be offset by growth in our loan servicing portfolio and gains on early buyout loans as those borrowers reperform.

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Before the onset of the Pandemic, the mortgage origination market was experiencing healthy demand owing to historically low interest rates in the United States. The government’s response to the onset of the Pandemic, including fiscal stimulus and infusions of additional liquidity by the Federal Reserve into financial markets acted to further lower market mortgage interest rates. These developments have acted to sustain heightened demand for new mortgage loans despite the slowdown in overall economic activity. The mortgage origination market for 2019 was estimated at $2.3 trillion; current forecasts estimate the origination market to approximate $3.6 trillion for 2020 and range from $2.5 trillion to $2.7 trillion for 2021. This increase in demand for mortgage loans, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, has allowed us to realize higher gain-on sale margins in our production segment. Fannie Mae and Freddie Mac are expected to add a 50 basis point adverse market refinance fee applicable to most mortgage refinances on December 1, 2020 that could have a negative impact on future refinances.

The current environment caused by the Pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects on our future prospects are difficult to anticipate, for further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II, Item 1A.

For the quarter and nine months ended September 30, ~~2019,~~2020, income before provision for income taxes increased ~~$104.5~~$562.1 million and ~~$116.7 million,~~$1.3 billion, respectively, compared to the same periods ~~in 2018.~~ended September 30, 2019. The increases were primarily due ~~to:~~

~~increases in production income (Net gains on loans held for sale at fair value~~, ~~Loan origination fees~~ ~~and~~ ~~Fulfillment fees from PennyMac Mortgage Investment Trust), partially offset by;~~

~~decreases in~~ ~~Net loan servicing fees~~;

~~and increases in total expenses.~~

~~The increases~~to an increase in production income ~~reflect~~(Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust) which reflects higher production volume and improved ~~profit margins. The decreases~~margins and an increase in Net loan servicing fees ~~were mainly~~primarily due to ~~the effect~~growth in our loan servicing portfolio and increase in income from buying loans out of ~~lower interest rates on the fair value of our MSRs that resulted~~Ginnie Mae securities for potential resecuritization, partially offset by an increase in ~~fair value losses net of hedging results, compared to the same periods in 2018.~~total expenses. The ~~increases~~increase in total expenses were mainly due to increases in compensation, servicing and loan origination ~~and compensation~~ expenses reflecting the continuing growth of our mortgage banking ~~activities.~~

~~These increases in pretax income were offset by increases in~~activities and the ~~provision for income taxes resulting from an increase in~~impact of the ~~effective income tax rate resulting from the Reorganization.~~

~~Net Loan Servicing Fees~~

~~Following is a summary of~~Pandemic on our ~~net loan servicing fees:~~

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Net loan servicing fees:

Loan servicing fees:

From non-affiliates

$
185,967

$
147,182

$
533,510

$
421,536
From PennyMac Mortgage Investment Trust

12,964

10,071

35,102

30,521
From Investment Funds

—

—

—

3
Other fees

26,018

17,009

74,043

44,817

224,949

174,262

642,655

496,877
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results

(158,720)

(64,559)

(436,721)

(156,696)
Net loan servicing fees

$
66,229

$
109,703

$
205,934

$
340,181
Average loan servicing portfolio

$
341,369,904

$
274,420,615

$
325,658,620

$
261,586,617

~~Table of Contents~~

~~Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:~~

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Realization of cash flows

$
(117,220)

$
(71,362)

$
(316,469)

$
(197,765)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities

(295,510)

60,883

(719,654)

230,948
Change in fair value of excess servicing spread

3,864

(1,109)

11,519

(9,026)
Hedging results

250,146

(52,971)

587,883

(180,853)
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

$
(158,720)

$
(64,559)

$
(436,721)

$
(156,696)
Average balances:

Mortgage servicing rights

$
2,601,069

$
2,634,026

$
2,757,948

$
2,302,713
Mortgage servicing liabilities

$
23,997

$
9,961

$
14,649

$
10,920
Excess servicing spread financing

$
187,088

$
225,926

$
199,911

$
232,694
At period end:

Mortgage servicing rights

$
2,556,253

$
2,785,964

Mortgage servicing liabilities

$
34,294

$
9,769

Excess servicing spread financing

$
183,141

$
223,275

~~Following is a summary of our loan servicing portfolio:~~

September 30,

December 31,

2019

2018

(in thousands)

Loans serviced

Prime servicing:

Owned:

Mortgage servicing rights

Originated

$
157,437,101

$
144,296,544

Acquired

63,778,892

56,757,600

221,215,993

201,054,144

Mortgage servicing liabilities

2,327,687

1,160,938

Loans held for sale

4,323,252

2,420,636

227,866,932

204,635,718

Subserviced for PMT

120,460,120

94,276,938

Total prime servicing

348,327,052

298,912,656

Special servicing – Subserviced for PMT

147,956

381,216

Total loans serviced

$
348,475,008

$
299,293,872

Net loan servicing fees decreased $43.5 million and $134.2 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decreases were primarily due to an increase of $94.2 million and $280.0 million in losses in fair value of MSRs and mortgage servicing liabilities (“MSLs”), net of hedging results, during the quarter and nine months ended September 30, 2019, respectively, resulting from the effect of decreasing interest rates on mortgage servicing asset and liability fair values. The increased losses were partially offset by increases of $50.7 million and $145.8 million in loan servicing fees for the quarter and nine months ended September 30, 2019, respectively, resulting from an increase in our average servicing portfolio ~~of 24% for the quarter~~ and ~~nine months ended September 30, 2019 compared to the same periods in 2018.~~operations.

~~Table of Contents~~

Net Gains on Loans Held for Sale at Fair Value

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

During the quarter and nine months ended September 30, ~~2019,~~2020, we recognized Net gains on loans held for sale at fair value totaling ~~$235.7~~$855.3 million and ~~$468.0 million,~~$1.9 billion, respectively, an increase of ~~$178.8~~$619.5 million and ~~$278.8 million, respectively,~~$1.4 billion, compared to the same periods in ~~2018.~~2019. The increases were primarily due to ~~an increase in loan production volume~~the combined effects of decreasing interest rates on demand for loans and ~~an improvement in~~of temporary disruption of industry capacity at the onset of the Pandemic, both of which increased profit margins ~~in our mortgage production business, reflecting increased demand for mortgage loans~~ during ~~2019~~2020 as compared to ~~2018.~~2019.

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


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
From non-affiliates:
Cash loss:
Cash gain (loss):
Loans	$	(22,838)	$	(107,414)	$	(77,659)	$	(399,457)	$	605,559	$	(22,838)	$	1,219,732	$	(77,659)
Hedging activities		(148,128)		(2,507)		(230,200)		89,322		(72,268)		(148,128)		(421,947)		(230,200)
		(170,966)		(109,921)		(307,859)		(310,135)
Total cash gain (loss)										533,291		(170,966)		797,785		(307,859)
Non-cash gain:
Change in fair value of loans and derivative financial instruments outstanding at period end:
Change in fair value of loans and derivative financial instruments outstanding at end of period:
Interest rate lock commitments		33,347		(18,526)		95,785		(21,109)		173,381		33,347		404,795		95,785
Loans		(5,822)		6,897		(35,508)		21,407		(79,776)		(5,822)		(140,878)		(35,508)
Hedging derivatives		92,588		13,327		72,838		11,100		(5,052)		92,588		17,955		72,838
		120,113		1,698		133,115		11,398
										88,553		120,113		281,872		133,115
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		227,256		147,259		518,706		443,056		245,946		227,256		747,219		518,706
Provision for losses relating to representations and warranties:
Pursuant to loan sales		(2,508)		(1,842)		(5,222)		(4,550)		(5,219)		(2,508)		(13,120)		(5,222)
Reduction in liability due to change in estimate		1,175		1,155		6,305		3,627		2,473		1,175		5,419		6,305
		225,923		146,572		519,789		442,133
		346,036		148,270		652,904		453,531
Total non-cash gain										331,753		346,036		1,021,390		652,904
Total gains on sale from non-affiliates										865,044		175,070		1,819,175		345,045
From PennyMac Mortgage Investment Trust		60,662		18,565		122,996		45,878		(9,775)		60,662		62,549		122,996
	$	235,732	$	56,914	$	468,041	$	189,274
									$	855,269	$	235,732	$	1,881,724	$	468,041
During the period:
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans	$	19,383,044	$	9,869,209	$	42,574,349	$	30,382,616	$	26,629,871	$	19,383,044	$	63,728,308	$	42,574,349
Conventional mortgage loans		3,031,076		1,236,912		6,686,393		3,399,365		9,934,915		3,031,076		23,596,038		6,686,393
Jumbo mortgage loans		6,087		24,490		23,452		61,185		—		6,087		8,304		23,452
Home equity lines of credit		2,970		—		7,043		—		—		2,970		1,676		7,043
	$	22,423,177	$	11,130,611	$	49,291,237	$	33,843,166
									$	36,564,786	$	22,423,177	$	87,334,326	$	49,291,237
At end of period:
Loans held for sale at fair value	$	4,522,971	$	2,416,955					$	9,126,172	$	4,522,971
Commitments to fund and purchase mortgage loans	$	8,311,786	$	3,388,437
Commitments to fund and purchase loans									$	18,873,579	$	8,311,786

~~Table of Contents~~

Our gain on sale of loans held for sale includes both cash and non-cash elements. We recognize a significant portion of our gain on sale of loans when we make a commitment to purchase or fund a mortgage loan. We recognize this gain in the form of an interest rate lock commitment. We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which ~~represents~~represent the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representation and warranties we provide in our loan sale transactions.

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Non-cash elements of gain on sale of loans held for sale

The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately ~~96%~~39% and ~~111%~~54% of our gain on sale of loans held for sale at fair value for the quarter and nine months ended September 30, ~~2019,~~2020, respectively, as compared to ~~258%~~147% and ~~234%~~140% for the quarter and nine months ended September 30, ~~2018.~~2019, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. How we measure and update our measurements of IRLCs, MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

Our agreements with the purchasers and insurers include representations and warranties related to the 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 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 loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

~~The method used to estimate our losses on~~Our representations and warranties ~~is a function~~are generally not subject to stated limits of ~~our estimate of future defaults, loan repurchase rates,~~exposure. However, we believe that the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent 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 relating to~~ current ~~loan sales as a component of~~ ~~Net gains on loans held for sale at fair value~~ totaling $2.5 million and $5.2 million for the quarter and nine months ended September 30, 2019, respectively, compared to $1.8 million and $4.6 million during the quarter and nine months ended September 30, 2018, respectively. We also recorded reductions in the liability of $1.2 million and $6.3 million during the quarter and nine months ended September 30, 2019, respectively, compared to $1.2 million and $3.6 million during the quarter and nine months ended September 30, 2018, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.

~~Table of Contents~~

~~Following is a summary of loan repurchase activity and the~~ UPB of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and ~~warranties:~~warranties.

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
During the period:








Indemnification activity:

Loans indemnified by PFSI at beginning of period

$
12,928

$
10,334

$
8,899

$
7,579
New indemnifications

5,582

932

9,848

4,110
Less indemnified loans sold, repaid or refinanced

1,587

1,519

1,824

1,942
Loans indemnified by PFSI at end of period

$
16,923

$
9,747

$
16,923

$
9,747
Repurchase activity:

Total loans repurchased by PFSI

$
4,115

$
11,910

$
15,427

$
24,895
Less:

Loans repurchased by correspondent lenders

2,677

5,332

9,961

16,237
Loans repaid by borrowers or resold with defects resolved

1,663

590

4,258

1,156
Net loans repurchased with losses chargeable to liability for representations and warranties

$
(225)

$
5,988

$
1,208

$
7,502
Net losses charged (recoveries credited) to liability for representations and warranties

$
74

$
252

$
104

$
(46)

At end of period:

Unpaid principal balance of loans subject to representations and warranties

$
166,541,153

$
139,315,779

Liability for representations and warranties

$
19,968

$
21,002

During the quarter and nine months ended September 30, 2019, we repurchased loans totaling $4.1 million and $15.4 million in UPB, respectively. We recorded losses of $104,000 net of recoveries, during the nine months ended September 30, 2019. If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change or investor and insurer loss mitigation strategies are adjusted, the level of repurchase activity may increase.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.

~~Our~~The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are ~~generally not subject to stated limits of exposure. However, we believe that the current UPB of mortgage loans~~ sold ~~by us~~ and ~~subject to representation and warranty~~review our liability ~~to date represents the maximum exposure to repurchases related to~~estimate on a periodic basis.

We recorded provisions for losses under representations and ~~warranties.~~

~~Loan origination fees~~

~~Loan origination fees increased $22.9~~warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $5.2 million and ~~$34.8~~$13.1 million for the quarter and nine months ended September 30, 2020, respectively, compared to $2.5 million and $5.2 million for the quarter and nine months ended September 30, 2019, respectively. The increase in the provision relating to current loan sales is primarily attributable to increased sales of loans supplemented by increased loss assumptions relating to our securitizations of early buyout loans. We also recorded reductions in the liability of $2.5 million and $5.4 million during the quarter and nine months ended September 30, 2020, respectively, compared to $1.2 million and $6.3 million during the quarter and nine months ended September 30, 2019, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.

Table of Contents

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


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
During the period:
Indemnification activity:
Loans indemnified by PFSI at beginning of period	$	16,396	$	12,928	$	15,366	$	8,899
New indemnifications		1,285		5,582		3,731		9,848
Less indemnified loans sold, repaid or refinanced		2,053		1,587		3,469		1,824
Loans indemnified by PFSI at end of period	$	15,628	$	16,923	$	15,628	$	16,923
Repurchase activity:
Total loans repurchased by PFSI	$	9,146	$	4,115	$	43,699	$	15,427
Less:
Loans repurchased by correspondent lenders		7,207		2,677		23,713		9,961
Loans repaid by borrowers or resold with defects resolved		5,282		1,663		12,649		4,258
Net loans (resolved) repurchased with losses chargeable to liability for representations and warranties	$	(3,343)	$	(225)	$	7,337	$	1,208
Net losses charged to liability for representations and warranties	$	151	$	74	$	643	$	104

At end of period:
Unpaid principal balance of loans subject to representations and warranties	$	199,194,983	$	166,541,153
Liability for representations and warranties	$	28,504	$	19,968

During the quarter and nine months ended September 30, 2020, we repurchased loans totaling $9.1 million and $43.7 million in UPB, respectively. We recorded losses of $151,000 and $643,000 net of recoveries during the quarter and nine months ended September 30, 2020, respectively. If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change, correspondent lenders become unwilling or unable to repurchase defective loans, or investor and insurer loss mitigation strategies are adjusted, the level of repurchase and loss activity may increase.

Loan origination fees

Loan origination fees increased $26.1 million and $81.8 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in ~~2018.~~2019. The ~~increase was~~increases were primarily due to an increase in volume of loans we produced.

~~Table of Contents~~

Fulfillment fees from PennyMac Mortgage Investment Trust

Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees ~~are~~were calculated as a percentage of the UPB of the loans we fulfilled for PMT through June 30, 2020. Effective July 1, 2020, fulfillment fees are calculated based on the number of loans we fulfill for PMT.

~~Following is a summary of our fulfillment fees:~~

Quarter ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)
Fulfillment fee revenue

$
45,149

$
26,256

$
102,313

$
52,759
Unpaid principal balance of loans fulfilled subject to fulfillment fees

$
16,647,172

$
7,517,883

$
35,523,802

$
17,139,884
Average fulfillment fee rate (in basis points)

27

35

29

31

Fulfillment fees increased ~~$18.9~~$9.7 million and ~~$49.6~~$47.3 million during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in ~~2018.~~2019. The increases were primarily due to an increase in PMT’s loan production volume, partially offset by ~~an increase in discretionary reductions in~~the effect of the amendment to the fulfillment fee ~~rate~~structure during the quarter and nine month period ended September 30, 2020, compared to the same periods in 2019.

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Net Loan Servicing Fees

Following is a summary of our net loan servicing fees:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Net loan servicing fees:
Loan servicing fees:
From non-affiliates	$	203,696	$	185,967	$	601,527	$	533,510
From PennyMac Mortgage Investment Trust		18,752		12,964		48,806		35,102
Other		27,920		26,018		85,218		74,043
		250,368		224,949		735,551		642,655
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results		(117,561)		(158,720)		(322,599)		(436,721)
Net loan servicing fees	$	132,807	$	66,229	$	412,952	$	205,934
Average loan servicing portfolio	$	394,392,315	$	341,369,904	$	386,004,037	$	325,658,620

Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Realization of cash flows	$	(90,187)	$	(117,220)	$	(302,541)	$	(316,469)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities		(37,030)		(295,510)		(1,065,678)		(719,654)
Change in fair value of excess servicing spread		3,135		3,864		18,293		11,519
Hedging results		6,521		250,146		1,027,327		587,883
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results	$	(117,561)	$	(158,720)	$	(322,599)	$	(436,721)
Average balances:
Mortgage servicing rights	$	2,252,504	$	2,601,069	$	2,364,573	$	2,757,948
Mortgage servicing liabilities	$	31,070	$	23,997	$	29,635	$	14,649
Excess servicing spread financing	$	149,035	$	187,088	$	158,636	$	199,911
At period end:
Mortgage servicing rights	$	2,333,821	$	2,556,253
Mortgage servicing liabilities	$	31,698	$	34,294
Excess servicing spread financing	$	142,990	$	183,141

Table of Contents

Following is a summary of our loan servicing portfolio:



	September 30,		December 31,
	2020		2019

	(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	187,134,080	$	166,188,825
Acquired		47,716,917		59,598,279
		234,850,997		225,787,104
Mortgage servicing liabilities		1,799,562		2,758,454
Loans held for sale		8,749,673		4,724,006
		245,400,232		233,269,564
Subserviced for PMT		156,425,439		135,288,944
Total prime servicing		401,825,671		368,558,508
Special servicing for PMT		71,129		125,724
Total loans serviced	$	401,896,800	$	368,684,232

Net loan servicing fees increased $66.6 million and $207.0 million, respectively, during the quarter and nine months ended September 30, ~~2019,~~2020 compared to the same periods ~~in 2018.~~

~~Net Interest Income~~

~~Net interest income increased $4.9~~ended September 30, 2019. The increases were due to $41.1 million and ~~$15.3~~$114.1 million, respectively, less in fair value losses relating to MSRs, mortgage servicing liabilities (“MSLs”), and ESS, net of hedging results and an increase of $25.4 million and $92.9 million, respectively, in loan servicing fees resulting from an increase in our average servicing portfolio during the quarter and nine months ended September 30, ~~2019, respectively,~~2020, compared to the same periods in ~~2018.~~2019.

During the nine months ended September 30, 2020, the prepayment expectations resulting from the decreasing interest rate environment, along with expectations of higher costs to service loans in the coming months and increased returns demanded by market participants in response to the uncertainties created by the Pandemic, resulted in a 36% reduction in fair value (as measured by the December 31, 2019 fair value) of our investment in MSRs. This reduction in fair value was offset by our hedging results and change in fair value of ESS.

There can be no assurance that our hedging activities will continue to perform in a like manner in the future. As discussed above, we expect the ongoing effects of the Pandemic and the requirements of the CARES Act to reduce our servicing income and to increase our servicing expenses due to the increased number of delinquent loans, and significant levels of forbearance that we have and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the Pandemic.

Net Interest (Expense) Income

Net interest income decreased $37.3 million during the quarter ended September 30, 2020 compared to the same period in 2019. The ~~increases were~~decrease was primarily due to:

●

~~increases~~a decrease in placement fees we receive relating to custodial funds that we manage ~~reflecting~~due to decreased earning rates which reflect the ~~growth of our servicing portfolio~~lower interest rate environment; and ~~higher earnings rates in 2019 compared to 2018, partially offset by;~~

●

~~increases~~an increase in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of increased borrower refinancing activity due to the lower interest rates in ~~2019~~2020 as compared to ~~2018; and~~

2019; partially offset by

●

an increase in interest income on loans held for sale due to larger average loan inventory balances during the quarter ended September 30, 2020 as compared to 2019.

Table of Contents

Net interest income decreased $70.9 million during the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was primarily due to:

~~increases~~●

a decrease in placement fees we receive relating to custodial funds that we manage due to low earning rates;

●

an increase in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of increased borrower refinancing activity due to the lower interest rates in 2020 as compared to 2019;

●

an increase in interest expense on repurchase agreements, reflecting the ~~substantial curtailment~~expiration of ~~financing~~a master repurchase agreement in August 2019 that provided us with incentives ~~we received from one~~to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $14.7 million of ~~our lenders and an increase~~such incentives as reductions in ~~average borrowing balances~~ Interest expense during the ~~quarter and~~ nine months ended September 30, ~~2019~~2019; partially offset by

●

an increase in interest income on loans held for sale due to ~~fund a higher volume of~~larger average loan inventory balances during the nine months ended September 30, 2020 as compared to ~~the same periods in 2018.~~

2019.

We entered into a master repurchase agreement in 2017 that provided us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recordedManagement fees

Management fees are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Management fees:
PennyMac Mortgage Investment Trust:
Base management	$	8,508	$	7,914	$	25,851	$	20,862
Performance incentive		—		2,184		—		5,316
	$	8,508	$	10,098	$	25,851	$	26,178
Net assets of PMT at end of period	$	2,281,266	$	2,219,611

Management fees decreased $1.6 million and ~~$12.8 million of such incentives as reductions in~~ ~~Interest expense~~ ~~during the quarters ended September 30, 2019 and 2018,~~$327,000, respectively, and $14.7 million and $35.5 million during the nine month periods ended September 30, 2019 and 2018, respectively. The loan volumes targeted by the master repurchase agreement were achieved during the second quarter of 2019, and the master repurchase agreement expired on August 21, 2019.

~~Table of Contents~~

~~Management fees and Carried Interest~~

~~Management fees and Carried Interest are summarized below:~~

Quarter ended September 30,

Nine months ended September 30,

2019

2018

2019

2018

(in thousands)
Management fees:

PennyMac Mortgage Investment Trust:

Base management

$
7,914

$
5,799

$
20,862

$
17,223
Performance incentive

2,184

683

5,316

683

10,098

6,482

26,178

17,906
Investment Funds

—

(11)

—

4
Total management fees

10,098

6,471

26,178

17,910
Carried Interest

—

(17)

—

(365)
Total management fees and Carried Interest

$
10,098

$
6,454

$
26,178

$
17,545

Net assets of PennyMac Mortgage Investment Trust at end of period

$
2,219,611

$
1,558,563

~~Management fees increased $3.6 million and $8.3 million~~ during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in ~~2018,~~2019. The decrease was due to a decrease of $2.2 million and $5.3 million, respectively, in incentive fees during the quarter and nine months ended September 30, 2020 compared to the same period in 2019 reflecting the ~~combined effect~~losses PMT incurred during the nine months ended September 30, 2020, partially offset by an increase of $594,000 and $5.0 million, respectively, in base management fees reflecting the ~~performance incentive fees arising from PMT’s increased profitability and the increase~~increases in PMT’s average shareholders’ equity, upon which its base management fees are based. The increase in PMT’s average shareholders’ equity ~~was primarily due~~during 2020 as compared to 2019 is the ~~issuance~~result of ~~new common shares by~~PMT’s equity offerings throughout 2019. We do not expect to recognize performance incentive fees for the foreseeable future because of the losses PMT incurred during the ~~quarter and nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Table of Contents

Expenses

~~Expenses~~

Compensation

~~Our compensation expense is~~Compensation expenses are summarized below:


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Salaries and wages	$	77,748	$	64,367	$	212,135	$	190,856	$	117,230	$	77,748	$	308,629	$	212,135
Incentive compensation		39,824		17,831		86,587		54,345		57,257		39,824		154,597		86,587
Taxes and benefits		14,619		12,634		44,603		37,950		20,858		14,619		61,316		44,603
Stock and unit-based compensation		8,941		8,532		19,124		20,766		7,095		8,941		26,220		19,124
	$	141,132	$	103,364	$	362,449	$	303,917
									$	202,440	$	141,132	$	550,762	$	362,449
Head count:
Average		3,751		3,361		3,591		3,301		5,672		3,751		4,978		3,591
Quarter end		3,907		3,383						6,019		3,907

Compensation expense increased ~~$37.8~~$61.3 million and ~~$58.5~~$188.3 million during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in ~~2018.~~2019. The increases were primarily due to growth in head count made to accommodate the growth in our loan production and servicing activities as well as to increases in incentive compensation resulting from performance-based incentives ~~in our mortgage banking business~~ and higher than expected attainment of profitability ~~targets along with increases in salaries and wages due to increased average headcounts resulting from the growth in our mortgage banking activities.~~targets.

~~Table of Contents~~

Servicing

Servicing expenses increased ~~$7.1~~$23.2 million and ~~$11.6~~$62.6 million during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in ~~2018. The increases were~~2019. This increase in servicing expense was primarily the result of the increase in delinquencies we experienced due to ~~increased purchases~~the effects on borrower delinquencies of ~~EBO loans from Ginnie Mae guaranteed pools for~~ the quarter and nine months ended September 30, 2019 compared to the same periods in 2018. During the nine months ended September 30, 2019, we purchased $2.6 billion in UPB of EBO loans, compared to $1.6 billion during the same period in 2018.Pandemic.

The EBO program reduces the ongoing cost of servicing defaulted loans that have been sold into Ginnie Mae MBS when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such loan pools, it results in loss recognition when the loans are purchased. We recognize the loss because purchasing the mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net of interest receivable from the loans’ insurer or guarantor at the debenture rate of interest we receive from the insurer or guarantor while the loan is in default.

Loan origination

Loan origination expense increased ~~$27.6~~$18.9 million and ~~$58.0~~$78.3 million during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in ~~2018.~~2019. The increases were primarily ~~due to increases in wholesale brokerage fees and loan file compilation expenses,~~ resulting from increased consumer and broker direct lending activities, ~~as well as an increase in~~partially offset by cost reduction initiatives related to lender paid fees ~~due to the mix of production volume shifting toward a higher proportion of VA-guaranteed loans~~ during the quarter and nine months ended September 30, ~~2019 as~~2020 compared to the same periods during ~~2018.~~2019.

Provision for Income Taxes

Our effective income tax rates were ~~26.9%~~26.5% and ~~26.3%~~26.4% during the quarter and nine months ended September 30, ~~2019,~~2020, respectively, compared to ~~9.0%~~26.9% and ~~8.6%~~26.3% during the quarter and nine months ended September 30, 2018, respectively. Beginning November 1, 2018, PFSI’s income subject to income tax includes the portion of its income formerly attributed to the noncontrolling interest, which was not subject to income tax at the PFSI level before the Reorganization. As a result, we reported higher effective tax rates for the quarter and nine months ended September 30, 2019, respectively, as compared to the same periods in ~~2018.~~

2019.

7072

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Balance Sheet Analysis

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


					September 30,		December 31,
					2020		2019

	September 30,		December 31,
	2019		2018
	(in thousands)
					(in thousands)
ASSETS
Cash and short-term investments	$	291,931	$	273,113	$	631,302	$	262,902
Loans held for sale at fair value		4,522,971		2,521,647		9,126,172		4,912,953
Servicing advances, net		271,501		313,197		393,654		331,169
Investments in and advances to affiliates		149,089		165,886		210,427		157,343
Mortgage servicing rights		2,556,253		2,820,612		2,333,821		2,926,790
Loans eligible for repurchase		892,631		1,102,840		17,183,873		1,046,527
Other		618,823		281,278		1,301,616		566,333
Total assets	$	9,303,199	$	7,478,573	$	31,180,865	$	10,204,017


LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt	$	4,053,514	$	2,332,143	$	7,794,251	$	4,639,001
Long-term debt		1,500,647		1,648,973		1,944,448		1,493,466
Liability for loans eligible for repurchase		892,631		1,102,840		17,183,873		1,046,527
Income taxes payable						673,149		504,569
Other		944,794		740,826		568,067		458,947
Total liabilities		7,391,586		5,824,782		28,163,788		8,142,510
Stockholders' equity		1,911,613		1,653,791		3,017,077		2,061,507
Total liabilities and stockholders' equity	$	9,303,199	$	7,478,573	$	31,180,865	$	10,204,017

Total assets increased ~~$1.8~~$21.0 billion from ~~$7.5~~$10.2 billion at December 31, ~~2018~~2019 to ~~$9.3~~$31.2 billion at September 30, ~~2019.~~2020. The increase was primarily due to ~~increases~~an increase of $16.1 billion in loans eligible for repurchase, $4.2 billion in loans held for sale at fair value, ~~resulting from~~$368.4 million in cash and short-term investments, $418.6 million in derivative assets and $317.7 million in other assets, partially offset by a decrease of $593.0 million in MSRs. The increase in loans eligible for repurchase reflects an increase in delinquent loans as a result of the Pandemic and the CARES Act forbearance requirements. The decrease in MSRs reflects the $1.0 billion in fair value losses discussed above, partially offset by additions resulting from our loan production ~~volume.~~activities. We increased our holding of cash and short-term investments during the nine months ended September 30, 2020 as a means of enhancing our liquidity during the Pandemic.

Total liabilities increased ~~$1.6~~$20.1 billion from ~~$5.8~~$8.1 billion at December 31, ~~2018~~2019 to ~~$7.4~~$28.2 billion at September 30, ~~2019.~~2020. The increase was primarily attributable to anthe increase in ~~borrowings required to finance a larger inventory of~~liability for loans ~~held~~eligible for sale combined with a $72.1 million increase in other liabilities due to recognition of operating lease liabilities effective January 1, 2019, as the result of our adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, ~~Leases (Topic 842), which requires us to recognize our contractual lease rights and obligations on our consolidated balance sheet.~~repurchase.

Cash Flows

Our cash flows for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 are summarized below:


	Nine months ended September 30,
	2020		2019		Change

	(in thousands)
Operating	$	(3,923,531)	$	(1,690,141)	$	(2,233,390)
Investing		924,599		169,416		755,183
Financing		3,339,596		1,566,513		1,773,083
Net increase in cash and restricted cash	$	340,664	$	45,788	$	294,876

Nine months ended September 30,

2019

2018

Change

(in thousands)

Operating

$
(1,690,141)

$
732,584

$
(2,422,725)

Investing

169,416

(349,783)

519,199

Financing

1,566,513

(317,722)

1,884,235

Net increase in cash and restricted cash

$
45,788

$
65,079

$
(19,291)

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Our cash flows resulted in a net increase in cash and restricted cash of ~~$45.8~~$340.7 million during the nine months ended September 30, ~~2019~~2020 as discussed below.

~~Table of Contents~~

Operating activities

Net cash used in operating activities totaled $3.9 billion during the nine months ended September 30, 2020 compared with net cash used in operating activities totaled $1.7 billion during ~~nine months ended September 30, 2019 and net cash provided by operating activities totaled $732.6 million during~~ the same period in ~~2018.~~2019. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:


					Nine months ended September 30,
					2020		2019

	Nine months ended September 30,
	2019		2018
	(in thousands)
					(in thousands)
Cash flows from:
Loans held for sale	$	(2,010,338)	$	543,106	$	(3,383,080)	$	(2,010,338)
Other operating sources		320,197		189,478
	$	(1,690,141)	$	732,584
Other operating (uses) sources						(540,451)		320,197
					$	(3,923,531)	$	(1,690,141)

The decrease in cash flows from other operating activities during the nine months ended September 30, 2020 compared to the same period in 2019 primarily reflects an increase in deposits securing certain of our borrowings and increases in servicing advances caused by COVID-19 induced borrower delinquencies.

Investing activities

Net cash provided by investing activities during the nine months ended September 30, 2020 totaled $924.6 million primarily due to $1.0 billion in net settlement of derivative financial instruments used to hedge our investment in MSRs. Net cash provided by investing activities during the nine months ended September 30, 2019 totaled $169.4 million, primarily due to $542.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by the purchase of MSRs totaling $227.4 million and increase in margin deposit of $168.1 million.

Financing activities

Net cash ~~used in investing~~provided by financing activities totaled $3.3 billion during the nine months ended September 30, ~~2018 totaled $349.8 million was~~2020, primarily due to ~~funds used~~net repurchase of assets sold under agreement to repurchase, reflecting an increase in our financing of mortgage loans held for ~~net settlement~~sale and issuance of ~~derivative financial instruments used~~unsecured notes to ~~hedge~~finance the growth in our ~~investment in MSRs and purchase of MSRs totaling $180.1 million.~~

~~Financing activities~~

loans held for sale. Net cash provided by financing activities totaled $1.6 billion during the nine months ended September 30, 2019, primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSRs. ~~Net cash used in financing activities totaled $317.7 million during the nine months ended September 30, 2018 primarily due to net repurchases~~

Table of ~~assets sold under agreements to repurchase, reflecting a reduction in our financing of loans held for sale.~~Contents

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

The effect of the Pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II, Item 1A.

The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the Pandemic and may require the servicer to advance principal and interest, property taxes, insurance premiums and other expenses to the investor for up to four months on Fannie Mae and Freddie Mac loans and longer on Ginnie Mae and other government agency backed loans. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing allowing the Company to borrow $600 million against Ginnie Mae MSRs and servicing advances. The Ginnie Mae servicing advances eligible for financing include advances made to support regularly scheduled monthly principal and interest to mortgage-backed securities holders, taxes, homeowners insurance and escrowed items and other expenses related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to procure additional advance financing.

The Pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae program provides us with the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities. We refer to such loans as “early buyout” or EBO loans.

During the quarter ended September 30, 2020, we repurchased $2.7 billion in UPB of EBO loans from our Ginnie Mae MSR portfolio. Our objective is to work with the borrowers to cure the loan delinquency through either borrower reperformance or modification of the loans’ terms. When curing the delinquency is not feasible, we work to settle the loan and collect our claims from the applicable insurer or guarantor. When we are able to cure the delinquency, we are able to re-deliver the cured loan into another Ginnie Mae guaranteed security. Depending on the method used to cure a borrower delinquency, the Ginnie Mae program may require at least a six month period of timely borrower payments before we are able to re-deliver the loan. Therefore, regardless of whether we cure or settle the repurchased loan, our investment in the EBO loans may require a substantial holding period.

Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, ESS financing, notes payable, ~~(including a revolving credit agreement) and~~ a capital ~~lease. Most~~lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for terms of approximately one year. Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing. On September 29, 2020, we issued $500 million of long term Unsecured Notes that mature on October 15, 2025. We used the proceeds from the Unsecured Notes to repay some of our existing short-term borrowings.

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, maximum daily and ending balances:


									Quarter ended September 30,				Nine months ended September 30,
									2020		2019		2020		2019

	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
									(in thousands)
Average balance	$	2,098,208	$	1,563,053	$	1,861,086	$	1,618,008	$	3,363,140	$	2,098,208	$	2,669,336	$	1,861,086
Maximum daily balance	$	3,539,459	$	2,201,880	$	3,539,459	$	2,380,121	$	7,267,046	$	3,539,459	$	7,267,046	$	3,539,459
Balance at period end	$	3,539,459	$	1,738,839					$	7,267,046	$	3,539,459

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

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

●

positive net income during ~~each~~one of the two most recent calendar ~~quarter;~~

quarters;

●

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

●

a minimum tangible net worth of ~~$500 million;~~

$1.25 billion;

●

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

●

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

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

In addition to the covenants noted above, ~~PennyMac’s revolving credit agreement~~the indenture governing our Unsecured Notes contains covenants that limit our and ~~capital lease contain additional financial~~our restricted subsidiaries’ ability to engage in specified types of transactions. These covenants ~~including, but not limited~~limit our and our restricted subsidiaries’ ability to,

among other things:

●

~~a minimum of cash equal to the amount borrowed under the revolving credit agreement;~~

pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments;

●

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

incur, assume or guarantee additional debt or issue preferred stock;

●

~~a minimum of tangible net worth of $500 million;~~

incur liens on assets;

●

~~a minimum asset coverage ratio (the ratio~~merge or consolidate with another person or sell all or substantially all of ~~the total asset amount~~our assets to ~~the total commitment) of 2.5; and~~

another person;

●

~~a maximum ratio~~transfer, sell or otherwise dispose of ~~total indebtedness to tangible net worth ratio~~certain assets including capital stock of ~~5:1.~~

subsidiaries;

●

enter into transactions with affiliates; and

●

allow to exist certain restrictions on the ability of our non-guarantor restricted subsidiaries to pay dividends or make other payments to us.

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

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

We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established

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minimum liquidity ~~requirements~~ and ~~revised their~~ net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:

●

Effective June 30, 2020, 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 (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) 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

~~Table of Contents~~

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 0.25% (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.

On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 4% of total Agency servicing UPB. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.

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 is based on the current fair value of such ESS and amounts received on the underlying mortgage loans.

InOn June ~~2017,~~10, 2020, our ~~board~~Board of ~~directors approved a~~Directors increased our common stock repurchase program ~~that allows us to repurchase up to~~from $50 million ~~of our common stock using~~to $500 million. Share repurchases may be effected through open market ~~stock~~ purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. ~~We intend to finance the stock repurchase program through cash on hand.~~ From inception through September 30, ~~2019,~~2020, we have repurchased ~~$14.9~~$263.2 million of shares under our stock repurchase program.

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.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of September 30, ~~2019,~~2020, we have not entered into any off-balance sheet arrangements.

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Contractual Obligations

As of September 30, ~~2019~~2020, we had contractual obligations aggregating ~~$14.3~~$29.1 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office ~~facilities and license certain software to support our loan servicing operations.~~facilities.

~~Table of Contents~~

Payment obligations under these agreements are summarized below:


	Payments due by year
			Less than		1-3		3-5		More than

											Payments due by year
													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 loans	$	8,311,786	$	8,311,786	$	—	$	—	$	—	$	18,873,579	$	18,873,579	$	—	$	—	$	—
Short-term debt		4,054,084		4,054,084		—		—		—		7,802,424		7,802,424		—		—		—
Long-term debt		1,507,022		9,226		14,655		1,300,000		183,141		1,956,947		7,677		656,280		650,000		642,990
Interest on long-term debt		282,034		72,343		141,501		50,674		17,516		284,901		72,850		126,843		67,445		17,763
Office leases												106,777		18,586		33,197		27,770		27,224
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		46,537		—		—		—		46,537		35,784		5,940		—		—		29,844
Office leases		84,001		17,334		27,959		20,954		17,754
Total	$	14,285,464	$	12,464,773	$	184,115	$	1,371,628	$	264,948	$	29,060,412	$	26,781,056	$	816,320	$	745,215	$	717,821

Debt Obligations

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable (including a revolving credit agreement), ESS and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the ~~revolving credit agreement and the~~ capital lease ~~in each case~~ where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of September 30, ~~2019,~~2020, we believe we were in compliance in all material respects with these covenants.

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

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

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Our debt obligations have the following size and maturities:

~~The borrowings have maturities as follows:~~


	Outstanding		Total		Committed
Lender	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)

	(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC (3)	$	3,557,746	$	3,400,000	$	100,000	April 23, 2021
Credit Suisse First Boston Mortgage Capital LLC (3)	$	50,000	$	600,000	$	600,000	April 23, 2021
JPMorgan Chase Bank, N.A.	$	—	$	2,000,000	$	—	September 30, 2022
JPMorgan Chase Bank, N.A.	$	741,341	$	750,000	$	50,000	January 7, 2021
Citibank, N.A.	$	632,928	$	1,000,000	$	650,000	August 3, 2021
Bank of America, N.A.	$	767,391	$	800,000	$	500,000	March 11, 2021
Morgan Stanley Bank, N.A.	$	784,434	$	800,000	$	100,000	November 2, 2022
Royal Bank of Canada	$	363,193	$	500,000	$	180,000	January 29, 2021
BNP Paribas	$	370,013	$	375,000	$	200,000	July 30, 2021
Wells Fargo Bank, N.A.	$	—	$	175,000	$	175,000	October 6, 2022
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	535,378	$	550,000	$	—	March 11, 2021
Notes payable
GMSR 2018-GT1 Term Note	$	650,000	$	650,000			February 25, 2023
GMSR 2018-GT2 Term Note	$	650,000	$	650,000			August 25, 2023
Unsecured senior notes	$	500,000	$	650,000			October 15, 2025
Credit Suisse AG (3)	$	—	$	—	$	—	April 23, 2021
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	13,957	$	25,000	$	—	June 13, 2022

Outstanding

Total

Committed

Lender

indebtedness (1)

facility size (2)

facility (2)

Maturity date (2)

(dollar amounts in thousands)


Assets sold under agreements to repurchase

Credit Suisse First Boston Mortgage Capital LLC (3)

$
899,713

$
1,100,000

$
300,000

April 24, 2020
Credit Suisse First Boston Mortgage Capital LLC (3)

$
100,000

$
400,000

$
400,000

April 26, 2020
JPMorgan Chase Bank, N.A.

$
711,619

$
1,000,000

$
50,000

October 11, 2019
Morgan Stanley Bank, N.A.

$
551,027

$
800,000

$
100,000

August 21, 2020
Bank of America, N.A.

$
497,335

$
500,000

$
500,000

October 28, 2019
Citibank, N.A.

$
461,496

$
700,000

$
300,000

August 4, 2020
BNP Paribas

$
192,534

$
200,000

$
100,000

July 31, 2020
Royal Bank of Canada

$
125,735

$
135,000

$
20,000

December 31, 2019
Mortgage loan participation purchase and sale agreements

Bank of America, N.A.

$
514,625

$
550,000

$
—

October 28, 2019
Notes payable

GMSR 2018-GT1 Term Note

$
650,000

$
650,000

February 25, 2023
GMSR 2018-GT2 Term Note

$
650,000

$
650,000

August 25, 2023
Credit Suisse AG

$
—

$
150,000

$
—

October 31, 2019
Credit Suisse AG (3)

$
—

$
—

$
—

February 1, 2020
Obligations under capital lease

Banc of America Leasing and Capital LLC

$
23,881

$
25,000

$
—

June 13, 2022

(1)

~~(1)~~

Outstanding indebtedness as of September 30, ~~2019.~~

2020.

(2)

~~(2)~~

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

(3)

~~(3)~~

The borrowing of ~~$100~~$50 million with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase up to a maximum of ~~$400~~$600 million, less any amount utilized under the Credit Suisse AG note payable, ~~and~~ an agreement to repurchase relating to the financing of Fannie Mae ~~MSRs.~~

MSRs and an agreement to repurchase relating to the financing of GNMA servicing advances.

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 September 30, ~~2019:~~2020:


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC (1)	$	1,092,694	April 23, 2021	April 23, 2021
Credit Suisse First Boston Mortgage Capital LLC (2)	$	460,264	October 19, 2020	April 23, 2021
Bank of America, N.A.	$	410,222	November 2, 2020	March 11, 2021
JP Morgan Chase Bank, N.A.	$	192,579	December 2, 2020	January 7, 2021
Morgan Stanley Bank, N.A.	$	62,630	November 3, 2020	November 3, 2020
Citibank, N.A.	$	48,231	December 15, 2020	August 3, 2021
Royal Bank of Canada	$	33,343	October 30, 2020	October 30, 2020
BNP Paribas	$	27,646	December 16, 2020	July 30, 2021

Weighted average

maturity of

advances under

Counterparty

Amount at risk

repurchase agreement

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC (1)

$
1,313,083

April 26, 2020

April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC (2)

$
231,656

December 2, 2019

April 24, 2020
Bank of America, N.A.

$
82,942

October 28, 2019

October 28, 2019
JP Morgan Chase Bank, N.A.

$
79,142

October 9, 2019

October 11, 2019
Citibank, N.A.

$
41,279

December 17, 2019

August 4, 2020
Morgan Stanley Bank, N.A.

$
40,511

December 16, 2019

August 21, 2020
BNP Paribas

$
12,363

December 17, 2019

July 31, 2020
Royal Bank of Canada

$
9,804

December 31, 2019

December 31, 2019

(1)

~~(1)~~

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

(2)

~~(2)~~

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

All debt financing arrangements that matured between September 30, ~~2019~~2020 and the date of this Report have been renewed or extended and are described in Note 1112—Borrowings to the accompanying consolidated financial ~~statements.~~

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statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Fair Value Risk

Our IRLCs, mortgage loans held for sale, MSRs, MSLs and ESS financing are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk ~~inflation~~we face is primarily attributable to interest rate risk and prepayment risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value ~~risk.~~of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.

In general, rising interest rates negatively affect the fair value of our IRLCs, inventory of mortgage loans held for sale and ESS financing and positively affect the fair value of our MSRs. Changes in interest rate significantly influence the prepayment speeds of the loans underlying our investments in MSRs and ESS, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and ESS and the discount rate used in their valuation.

Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.

Prepayment Risk

To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our MSLs and ESS.

Risk Management Activities

We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs and repurchase agreement derivatives (both of which arise from our operations) for purposes other than in support of our risk management activities.

Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.

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Fair Value Sensitivities

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~~inputs 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 as of September 30, ~~2019,~~2020, 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	$	2,711,416		$	2,631,356		$	2,593,213		$	2,520,423		$	2,485,674		$	2,419,237		$	2,520,756		$	2,423,512		$	2,377,775		$	2,291,555		$	2,250,885		$	2,174,008
Change in fair value:
$	$	155,164		$	75,104		$	36,960		$	(35,830)		$	(70,578)		$	(137,016)		$	186,935		$	89,691		$	43,954		$	(42,266)		$	(82,935)		$	(159,813)
%		6.1	%		2.9	%		1.4	%		(1.4)	%		(2.8)	%		(5.4)	%		8.0	%		3.8	%		1.9	%		(1.8)	%		(3.6)	%		(6.8)	%



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	$	2,849,511		$	2,694,915		$	2,623,737		$	2,492,206		$	2,431,360		$	2,318,431		$	2,641,609		$	2,480,030		$	2,405,127		$	2,265,888		$	2,201,123		$	2,080,347
Change in fair value:
$	$	293,259		$	138,663		$	67,484		$	(64,047)		$	(124,892)		$	(237,822)		$	307,788		$	146,209		$	71,306		$	(67,933)		$	(132,698)		$	(253,474)
%		11.5	%		5.4	%		2.6	%		(2.5)	%		(4.9)	%		(9.3)	%		13.2	%		6.3	%		3.1	%		(2.9)	%		(5.7)	%		(10.9)	%



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	$	2,643,178		$	2,599,715		$	2,577,984		$	2,534,521		$	2,512,790		$	2,469,328		$	2,434,372		$	2,384,096		$	2,358,959		$	2,308,683		$	2,283,546		$	2,233,270
Change in fair value:
$	$	86,925		$	43,462		$	21,731		$	(21,731)		$	(43,462)		$	(86,925)		$	100,551		$	50,275		$	25,138		$	(25,138)		$	(50,275)		$	(100,551)
%		3.4	%		1.7	%		0.9	%		(0.9)	%		(1.7)	%		(3.4)	%		4.3	%		2.2	%		1.1	%		(1.1)	%		(2.2)	%		(4.3)	%

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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 September 30, ~~2019,~~2020, 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	$	149,307		$	146,083		$	144,520		$	141,490		$	140,021		$	137,170
Change in fair value:
$	$	6,317		$	3,093		$	1,531		$	(1,500)		$	(2,969)		$	(5,820)
%		4.4	%		2.2	%		1.1	%		(1.0)	%		(2.1)	%		(4.1)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%

	(dollar amounts in thousands)

Fair value	$	158,408		$	150,372		$	146,604		$	139,522		$	136,193		$	129,919
Change in fair value:
$	$	15,418		$	7,382		$	3,614		$	(3,468)		$	(6,797)		$	(13,071)
%		10.8	%		5.2	%		2.5	%		(2.4)	%		(4.8)	%		(9.1)	%

Pricing spread shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
188,259

$
185,666

$
184,396

$
181,904

$
180,682

$
178,285

Change in fair value:

$

$
5,117

$
2,525

$
1,254

$
(1,238)

$
(2,460)

$
(4,856)

%

2.8
%

1.4
%

0.7
%

(0.7)
%

(1.3)
%

(2.7)
%

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Prepayment speed shift in %

-20%

-10%

-5%

+5%

+10%

+20%


(dollar amounts in thousands)

Fair value

$
203,530

$
192,865

$
187,893

$
178,597

$
174,248

$
166,091

Change in fair value:

$

$
20,389

$
9,724

$
4,752

$
(4,544)

$
(8,893)

$
(17,051)

%

11.1
%

5.3
%

2.6
%

(2.5)
%

(4.9)
%

(9.3)
%

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls, and appropriately mitigate the risk of material misstatement in the financial statements.

~~Management~~There has ~~evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes~~been no change in our internal control over financial reporting during the quarter ended September 30, 2020 that ~~occurred during our last fiscal quarter have~~has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we describe changes in our internal control over financial reporting since June 30, 2019 that management believes have materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.

7882

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During the quarter ended September 30, 2019, we substantially completed the implementation of an internally-developed loan servicing system. In connection with this implementation and related business process changes, we updated the design of multiple internal controls over financial reporting that were previously considered effective to reflect the design of the loan servicing system and associated data sources, and implemented controls to replace controls previously addressed by certain service organization SOC 1 Reports (System and Organization Controls Reports). We adopted this system and the related processes and controls during the quarter ended September 30, 2019. Therefore, the use of this system was included in the preparation of our financial statements for the quarter ended September 30, 2019. We continue to monitor and test these controls for adequate design and operating effectiveness.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are material updates to legal proceedings of the Company.

~~As previously disclosed, on~~On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On ~~March 1,~~December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While the Company and its ~~directors and officers named in~~co-defendants believe the Garfield Action is without merit and expressly disclaim any wrongdoing, they have collectively agreed to settle the Garfield Action for an amount equal to $6.85 million in order to avoid the ongoing costs of litigation and further distractions to their respective businesses. A settlement agreement was filed with the Delaware Court on October 9, 2020, and is currently pending approval. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to ~~dismiss the complaint. The motion to dismiss has been fully briefed, orally argued, and is pending a ruling~~compel arbitration filed by the ~~court.~~Company. While no assurance can be provided to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending. Any potential range of loss cannot be reasonably estimated at this time primarily because the matter involves complex factual and legal issues; there is substantial uncertainty regarding any alleged damages, and the matter is at a preliminary stage of litigation.

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on ~~March 5, 2019~~February 28, 2020, except for the following:

Our business, financial condition and results of operations have been, and will likely continue to be, adversely affected by the emergence of the COVID-19 pandemic.

The COVID-19 pandemic has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to negatively affect our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to COVID-19.

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The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from COVID-19. As a result of the CARES Act forbearance requirements, we expect to record additional increases in delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans.. We also expect the effects of the CARES Act forbearance requirements to reduce our servicing income and increase our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of COVID-19. Future servicing advances will be driven by the number of borrower delinquencies, including those resulting from payment forbearance; the amount of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the Pandemic.

Financial markets have experienced substantial volatility and reduced liquidity, resulting in unprecedented federal government intervention to lower the federal funds rate to near zero and support market liquidity by purchasing assets in many financial markets, including the mortgage-backed securities market. The CARES Act forbearance requirements and the decline in financial markets have negatively impacted the fair value of our servicing assets. In addition, the CARES Act forbearance requirements and the decline in financial markets have caused PMT to report material losses and negatively affected PMT's shareholders' equity and, as a result, our net assets under management. Consequently, we have experienced a reduction in our base management fees from PMT, and we do not expect to earn performance incentive fees from PMT for the foreseeable future. Further market volatility may result in additional declines in the value of our servicing assets, lower base management fees and make it increasingly difficult to optimize our hedging activities. Also, our liquidity and/or regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets. In addition, if we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our ~~Quarterly Reports~~lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.

We may also have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who are also adversely impacted by the volatility and dislocations in the financial markets and may not be willing to continue to extend us credit on the same terms, or on favorable terms, or at all.

In addition, our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure.

Governmental authorities have taken additional measures to stabilize the financial markets and support the economy. The success of these measures are unknown and they may not be sufficient to address the current market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19. The scope and duration of COVID-19 and the efficacy of the extraordinary measures put in place to address it are currently unknown. Even after COVID-19 subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

Our Unsecured Notes have increased our overall indebtedness and contain restrictive covenants limiting our flexibility in operating our business.

On September 29, 2020 and October 19, 2020, we issued $650 million aggregate principal amount of 5.375% unsecured senior notes due on October 15, 2025 (the “Unsecured Notes”). As our unsecured obligations, the repayment of the Unsecured Notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The Unsecured Notes’ indenture contain restrictive covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:

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•

pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments;

•

incur, assume or guarantee additional debt or issue preferred stock;

•

incur liens on assets;

•

merge or consolidate with another person or sell all or substantially all of our assets to another person;

•

transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries;

•

enter into transactions with affiliates; and

•

allow to exist certain restrictions on the ability of our non-guarantor restricted subsidiaries to pay dividends or make other payments to us.

We may be unable to take advantage of future business opportunities because of the limitations imposed on us by the Unsecured Notes’ restrictive covenants. If we fail to comply with the Unsecured Notes’ restrictive covenants and are unable to obtain a waiver or amendment, an event of default would result under the terms of the Unsecured Notes’ indenture. In addition, the Unsecured Notes’ restrictive covenants and our overall level of indebtedness including our indebtedness under the Unsecured Notes could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes.

To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in our Annual Report on Form ~~10-Q filed thereafter.~~10-K for the year ended December 31, 2019 under the heading “Risk Factors.”

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

There were no sales of unregistered equity securities during the quarter ended September 30, ~~2019.~~2020.

~~There were no common~~The following table summarizes information about our stock ~~repurchases~~repurchase during the quarter ended September 30, ~~2019.~~2020:


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or program (1)		Approximate dollar value of shares that may yet be purchased under the plans or program (1)
July 1, 2020 – July 31, 2020		—	$	��		—	$	243,769,499
August 1, 2020 – August 31, 2020		—	$	—		—	$	243,769,499
September 1, 2020 – September 30, 2020		118,141	$	58.64		118,141	$	236,842,078
Total		118,141	$	58.64		118,141	$	236,842,078

(1)

In June 2020, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $50 million to $500 million. In addition, the Company entered into a privately negotiated transaction with The BlackRock Foundation under the revised stock repurchase program to repurchase 6,975,323 shares of the Company’s common stock at a price of $34 per share. The stock repurchase program does not require the Company 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 privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727)

Exhibit No.	Exhibit Description	~~Incorporated by Reference~~ ~~from the Below-Listed~~ Form ~~(Each Filed under SEC~~ ~~File Number 15‑68669 or~~ ~~001‑38727)~~	Filing Date
~~Exhibit No.~~2.1	~~Exhibit Description~~Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, LLC, and the Contributors.	~~Form~~8-K12B	~~Filing Date~~November 1, 2018

3.1	Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.	~~8‑K12B~~8-K12B	November 1, 2018

3.1.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.	~~8‑K12B~~8-K12B	November 1, 2018

3.2	Amended and Restated Bylaws of New PennyMac Financial Services, Inc.	~~8‑K12B~~8-K12B	November 1, 2018

3.2.1	Amendment to Amended and Restated Bylaws ~~Amendment~~ of PennyMac Financial Services, Inc.~~, formerly~~ (formerly known as New PennyMac Financial Services, Inc.).	10-Q	November 4, 2019

4.1	Indenture, dated as of September 29, 2020, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank, National Association, as trustee, relating to the 5.375% Senior Notes due 2025.	8-K	September 29, 2020

4.2	Form of Global Note for 5.375% Senior Notes due 2025 (Included in Exhibit 4.1).	8-K	September 29, 2020

4.3	First Supplemental Indenture, dated as of October 19, 2020, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank, National Association, as trustee, relating to the 5.375% Senior Notes due 2025.	*

~~10.1†~~10.1	~~PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Net Share Withholding) (2020).~~	*

~~10.2†~~	~~PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Sale to Cover) (2020).~~	*

~~10.3†~~	~~PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Net Share Withholding) (2020).~~	*

~~10.4†~~	~~PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Sale to Cover) (2020).~~	*

~~10.5†~~	~~Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (Net Share Withholding) (2017-2019).~~	*

~~10.6†~~	~~Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (Sale to Cover) (2017-2019).~~	*

~~10.7~~	~~Sixth~~Eighth Amendment to Master Repurchase Agreement, dated as of ~~July 23, 2019, by~~August 24, 2020, between PennyMac Loan Services, LLC and ~~between~~ JPMorgan Chase Bank, N.A. ~~and PennyMac Loan Services, LLC.~~	~~8‑K~~*	~~July 25, 2019~~

~~10.8~~10.2	Ninth Amendment ~~Number Nine~~ to ~~the Amended and Restated~~ Master Repurchase Agreement, dated as of ~~August 6, 2019, by and~~October 9, 2020, between ~~Citibank, N.A. and~~ PennyMac Loan Services, ~~LLC.~~LLC and JPMorgan Chase Bank, N.A.	*

~~10.9~~10.3	Tenth Amendment ~~Number Fourteen~~ to ~~the~~ Master Repurchase Agreement, dated as of ~~August 23, 2019, by and~~October 21, 2020, between PennyMac Loan Services, LLC ~~Morgan Stanley~~and JPMorgan Chase Bank, N.A. ~~and Morgan Stanley Mortgage Capital Holdings LLC.~~	*

~~10.10~~10.4^˄	Joint Amendment No. 72 to the ~~Third~~Series 2020-SPIADVF1 Repurchase Agreement and Amendment No. 2 to the Pricing Side Letter, dated as of August 25, 2020, among Credit Suisse First	*

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements 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: November ~~4, 2019~~6, 2020	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		President and Chief Executive Officer

Dated: November ~~4, 2019~~6, 2020	By:	/s/ ANDREW S. CHANG
		Andrew S. Chang
		Senior Managing Director and Chief Financial Officer


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	1,389	$	1,543	$	4,514	$	4,055
Compensation		165		120		405		360
Expenses incurred on PMT's behalf, net		2,852		1,942		5,561		3,001
	$	4,406	$	3,605	$	10,480	$	7,416
Payments and settlements during the quarter (1)	$	58,479	$	68,191	$	228,514	$	111,411


	Quarter ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Cash flows:
Sales proceeds	$	26,683,234	$	17,897,693	$	67,209,239	$	39,084,441
Servicing fees received (1)	$	166,316	$	149,210	$	491,743	$	426,774
Net servicing advances (recoveries)	$	71,890	$	8,605	$	68,992	$	(23,583)


	Quarter ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
Cash flows:
Sales proceeds	$	17,897,693	$	11,375,408	$	39,084,441	$	34,208,217
Servicing fees received (1)	$	149,210	$	123,626	$	426,774	$	354,535
Net servicing advances (recoveries)	$	8,605	$	4,147	$	(23,583)	$	(20,572)


					September 30,		December 31,
					2020		2019

	September 30,		December 31,
	2019		2018
	(in thousands)
					(in thousands)
Unpaid principal balance of loans outstanding	$	159,638,921	$	145,224,596	$	188,854,796	$	168,842,011
Delinquencies:
30-89 days	$	7,828,087	$	6,222,864	$	7,237,198	$	7,947,560
90 days or more:
Not in foreclosure	$	2,480,348	$	2,208,083	$	19,423,346	$	3,237,563
In foreclosure	$	1,199,933	$	720,894	$	621,649	$	888,136
Foreclosed	$	11,369	$	24,243	$	13,730	$	15,387
Bankruptcy	$	1,339,983	$	970,329	$	1,288,443	$	1,343,816


	September 30, 2020
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	188,854,796	$	—	$	188,854,796
Purchased		47,795,763		—		47,795,763
		236,650,559		—		236,650,559
PennyMac Mortgage Investment Trust				156,496,568		156,496,568
Loans held for sale		8,749,673		—		8,749,673
	$	245,400,232	$	156,496,568	$	401,896,800
Delinquent loans (1):
30 days	$	5,924,488	$	1,435,686	$	7,360,174
60 days		3,178,614		621,723		3,800,337
90 days or more:
Not in foreclosure		24,324,945		5,622,954		29,947,899
In foreclosure		831,239		37,293		868,532
Foreclosed		16,409		45,925		62,334
	$	34,275,695	$	7,763,581	$	42,039,276
Bankruptcy	$	1,815,833	$	158,182	$	1,974,015
Delinquent loans in COVID-19 related forbearance:
30 days	$	2,344,986	$	474,168	$	2,819,154
60 days		2,289,880		476,220		2,766,100
90 days or more not in foreclosure		17,827,122		4,716,956		22,544,078
	$	22,461,988	$	5,667,344	$	28,129,332
Custodial funds managed by the Company (2)	$	10,364,855	$	6,347,559	$	16,712,414


			Page
	~~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	9 8
	Notes to Consolidated Financial Statements	10 9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	60 61
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77
~~Item 4.~~	~~Controls and Procedures~~	78
		80
Item 4.	Controls and Procedures	82

PART II. OTHER INFORMATION		80 83

Item 1.	Legal Proceedings	80 83
Item 1A.	Risk Factors	80 83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80 85
Item 3.	Defaults Upon Senior Securities	80 85
Item 4.	Mine Safety Disclosures	80 86
Item 5.	Other Information	80 86
Item 6.	Exhibits	81 87


	Quarter ended September 30, 2019
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity
	(in thousands)
Balance, June 30, 2019	78,305	$	8	$	1,317,023	$	461,966	$	1,778,997
Net income	—		—		—		121,473		121,473
Stock-based compensation	128		—		11,095		—		11,095
Issuance of common stock in settlement of directors' fees	2		—		48		—		48
Balance, September 30, 2019	78,435	$	8	$	1,328,166	$	583,439	$	1,911,613


	Quarter ended September 30, 2018
	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, June 30, 2018	25,009	$	3	$	229,941	$	299,951	$	1,332,049	$	1,861,944
Net income	—		—		—		14,489		41,663		56,152
Stock and unit-based compensation	55		—		2,944		—		6,472		9,416
Class A common stock dividends ($0.40 per share)	—		—		—		(10,054)		—		(10,054)
Issuance of Class A common stock in settlement of directors' fees	—		—		28		—		57		85
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	131		—		4,377		—		(4,377)		—
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.	—		—		(833)		—		—		(833)
Balance, September 30, 2018	25,195	$	3	$	236,457	$	304,386	$	1,375,864	$	1,916,710


	Nine months ended September 30, 2019
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity
	(in thousands)
Balance, December 31, 2018	77,494	$	8	$	1,310,648	$	343,135	$	1,653,791
Net income	—		—		—		240,304		240,304
Stock-based compensation	984		—		18,390		—		18,390
Issuance of common stock in settlement of directors' fees	8		—		184		—		184
Repurchase of common stock	(51)		—		(1,056)		—		(1,056)
Balance, September 30, 2019	78,435	$	8	$	1,328,166	$	583,439	$	1,911,613


	Nine months ended September 30, 2018
	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, December 31, 2017	23,530	$	2	$	204,103	$	265,306	$	1,250,263	$	1,719,674
Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value	—		—		—		189		587		776
Balance, January 1, 2018	23,530		2		204,103		265,495		1,250,850		1,720,450
Net income	—		—		—		48,945		142,538		191,483
Stock and unit-based compensation	285		—		7,400		—		18,084		25,484
Class A common stock dividends ($0.40 per share)	—		—		—		(10,054)		—		(10,054)
Issuance of Class A common stock in settlement of directors' fees	—		—		79		—		166		245
Repurchase of Class A common stock	(236)		—		(1,554)		—		(3,272)		(4,826)
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	1,616		1		32,501		—		(32,502)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—		(6,072)		—		—		(6,072)
Balance, September 30, 2018	25,195	$	3	$	236,457	$	304,386	$	1,375,864	$	1,916,710


	September 30, 2019
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	159,638,921	$	—	$	159,638,921
Purchased		63,904,759		—		63,904,759
		223,543,680		—		223,543,680
PennyMac Mortgage Investment Trust		—		120,608,076		120,608,076
Loans held for sale		4,323,252		—		4,323,252
	$	227,866,932	$	120,608,076	$	348,475,008
Delinquent loans:
30 days	$	8,114,297	$	879,366	$	8,993,663
60 days		2,432,250		147,325		2,579,575
90 days or more:
Not in foreclosure		3,043,663		181,330		3,224,993
In foreclosure		1,518,946		87,284		1,606,230
Foreclosed		13,372		110,821		124,193
	$	15,122,528	$	1,406,126	$	16,528,654
Bankruptcy	$	1,872,679	$	124,619	$	1,997,298
Custodial funds managed by the Company (1)	$	6,976,614	$	3,018,131	$	9,994,745


	September 30, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	90,663	$	—	$	—	$	90,663
Loans held for sale at fair value		—		4,437,954		85,017		4,522,971
Derivative assets:
Interest rate lock commitments		—		—		147,400		147,400
Repurchase agreement derivatives		—		—		8,187		8,187
Forward purchase contracts		—		17,943		—		17,943
Forward sales contracts		—		6,141		—		6,141
MBS put options		—		10,040		—		10,040
Put options on interest rate futures purchase contracts		6,266		—		—		6,266
Call options on interest rate futures purchase contracts		2,414		—		—		2,414
Total derivative assets before netting		8,680		34,124		155,587		198,391
Netting		—		—		—		34,557
Total derivative assets		8,680		34,124		155,587		232,948
Mortgage servicing rights at fair value		—		—		2,556,253		2,556,253
Investment in PennyMac Mortgage Investment Trust		1,667		—		—		1,667
	$	101,010	$	4,472,078	$	2,796,857	$	7,404,502
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	183,141	$	183,141
Derivative liabilities:
Interest rate lock commitments		—		—		2,276		2,276
Forward purchase contracts		—		51,585		—		51,585
Forward sales contracts		—		34,498		—		34,498
Total derivative liabilities before netting		—		86,083		2,276		88,359
Netting		—		—		—		(74,324)
Total derivative liabilities		—		86,083		2,276		14,035
Mortgage servicing liabilities at fair value		—		—		34,294		34,294
	$	—	$	86,083	$	219,711	$	231,470


	Quarter ended September 30, 2019
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total
	(in thousands)
Balance, June 30, 2019	$	217,998	$	111,776	$	16,015	$	2,720,335	$	3,066,124
Purchases and issuances, net		1,861,769		199,274		1,502		46		2,062,591
Sales and repayments		(1,582,564)		—		(9,422)		—		(1,591,986)
Mortgage servicing rights resulting from loan sales		—		—		—		246,757		246,757
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		4,252		—		—		—		4,252
Other factors		—		92,138		92		(410,885)		(318,655)
		4,252		92,138		92		(410,885)		(314,403)
Transfers from Level 3 to Level 2		(416,062)		—		—		—		(416,062)
Transfers to real estate acquired in settlement of loans		(376)		—		—		—		(376)
Transfers of interest rate lock commitments to loans held for sale		—		(258,064)		—		—		(258,064)
Balance, September 30, 2019	$	85,017	$	145,124	$	8,187	$	2,556,253	$	2,794,581
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019	$	(2,328)	$	145,124	$	41	$	(410,885)	$	(268,048)


Term Notes	September 30, 2019		December 31, 2018
	(in thousands)
Fair value	$	1,306,828	$	1,285,894
Carrying value	$	1,293,625	$	1,292,291



	September 30, 2020		December 31, 2019
Fair value (in thousands)	$	2,774,997	$	383,878
Key inputs (1):
Discount rate:
Range		3.2% – 9.2%		3.0% – 9.2%
Weighted average		3.2%		3.0%
Twelve-month projected housing price index change:
Range		2.1% – 2.6%		2.6% – 3.2%
Weighted average		2.2%		2.8%
Voluntary prepayment/resale speed (2):
Range		0.5% – 24.9%		0.4% – 21.4%
Weighted average		19.6%		18.2%
Total prepayment speed (3):
Range		0.6% – 38.7%		0.5% – 39.2%
Weighted average		29.9%		36.2%



	September 30, 2019		December 31, 2018
Carrying value (in thousands)	$	85,017	$	260,008
Key inputs (1):
Discount rate:
Range		3.2% – 9.2%		2.8% – 9.2%
Weighted average		3.4%		2.9%
Twelve-month projected housing price index change:
Range		2.6% – 3.2%		2.2% – 5.0%
Weighted average		2.9%		3.5%
Voluntary prepayment/resale speed (2):
Range		0.3% – 19.2%		0.1% – 21.8%
Weighted average		15.8%		20.1%
Total prepayment speed (3):
Range		0.6% – 34.8%		0.1% – 40.5%
Weighted average		29.6%		37.7%



	September 30, 2020		December 31, 2019
Fair value (in thousands) (1)	$	541,445	$	136,650
Key inputs (2):
Pull-through rate:
Range		11.8% – 100%		12.2% – 100%
Weighted average		80.6%		86.5%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range		1.0 – 5.1		1.4 – 5.7
Weighted average		3.5		4.2
Percentage of loan commitment amount
Range		0.2% – 2.5%		0.3% – 2.8%
Weighted average		1.1%		1.6%



	September 30, 2019		December 31, 2018
Carrying value (in thousands) (1)	$	145,124	$	49,338
Key inputs (2):
Pull-through rate:
Range		12.2% – 100%		16.6% – 100%
Weighted average		85.6%		84.1%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range		1.4 – 5.7		1.5 – 5.5
Weighted average		4.0		3.8
Percentage of unpaid principal balance:
Range		0.3% – 2.9%		0.4% – 3.2%
Weighted average		1.6%		1.5%


	September 30, 2020	December 31, 2019

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 2,333,821	$ 2,926,790
Pool characteristics:
Unpaid principal balance of underlying loans	$ 234,850,997	$ 225,787,103
Weighted average note interest rate	3.8%	3.9%
Weighted average servicing fee rate (in basis points)	35	35
Key inputs (1):
Pricing spread (2):
Range	8.0% – 17.6%	6.8% – 15.8%
Weighted average	10.1%	8.5%
Effect on fair value of:
5% adverse change	($42,266)	($44,561)
10% adverse change	($82,935)	($87,734)
20% adverse change	($159,813)	($170,155)
Annual total prepayment speed (3):
Range	10.4% – 32.3%	9.3% – 40.9%
Weighted average	15.3%	12.7%
Equivalent average life (in years)
Range	1.7 – 6.8	1.4 – 7.4
Weighted average	5.4	6.1
Effect on fair value of:
5% adverse change	($67,933)	($63,569)
10% adverse change	($132,698)	($124,411)
20% adverse change	($253,474)	($238,549)
Annual per-loan cost of servicing:
Range	$78 – $110	$77 – $100
Weighted average	$104	$97
Effect on fair value of:
5% adverse change	($25,138)	($24,516)
10% adverse change	($50,275)	($49,032)
20% adverse change	($100,551)	($98,065)


	September 30, 2019	December 31, 2018
	(Carrying value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$ 2,556,253	$ 2,820,612
Unpaid principal balance of underlying loans	$ 221,215,993	$ 201,054,144
Weighted average note interest rate	4.0%	4.0%
Weighted average servicing fee rate (in basis points)	34	33
Key inputs (1):
Pricing spread (2):
Range	5.9% – 15.8%	5.8% – 16.1%
Weighted average	8.5%	8.7%
Effect on fair value of:
5% adverse change	($35,830)	($45,268)
10% adverse change	($70,578)	($89,073)
20% adverse change	($137,016)	($172,556)
Prepayment speed (3):
Range	9.8% – 33.0%	8.4% – 32.6%
Weighted average	15.6%	9.9%
Average life (in years):
Range	1.4 – 7.2	1.5 – 7.9
Weighted average	5.2	7.2
Effect on fair value of:
5% adverse change	($64,047)	($47,687)
10% adverse change	($124,892)	($93,626)
20% adverse change	($237,822)	($180,623)
Annual per-loan cost of servicing:
Range	$77 – $100	$78 – $99
Weighted average	$96	$93
Effect on fair value of:
5% adverse change	($21,731)	($22,944)
10% adverse change	($43,462)	($45,888)
20% adverse change	($86,925)	($91,775)


		Quarter ended September 30,				Nine months ended September 30,
Derivative activity	Income statement line	2019		2018		2019		2018
		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value	$	33,347	$	(18,526)	$	95,785	$	(21,109)
Repurchase agreement derivatives	Interest expense	$	92	$	(227)	$	(1,608)	$	(1,345)
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	(55,540)	$	10,820	$	(157,362)	$	100,422
Mortgage servicing rights	Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	250,146	$	(52,971)	$	587,883	$	(180,853)



	Quarter ended		Nine months ended
	September 30, 2019		September 30, 2019
	(dollars in thousands)
Lease expense:
Operating leases	$	3,356	$	9,817
Short-term leases		213		644
Sublease income		(35)		(94)
Net lease expense included in Occupancy and equipment	$	3,534	$	10,367

Other information:
Cash payments for operating leases	$	4,063	$	11,793
Operating lease right-of-use assets recognized
Upon adoption of ASU 2016-02	$	—	$	58,713
New leases		1,929		1,929
	$	1,929	$	60,642
Period end:
Weighted averages:
Remaining lease term (in years)				5.8
Discount rate				4.6%


Twelve months ended September 30,	Operating leases
	(in thousands)
2020	$	17,246
2021		14,754
2022		12,170
2023		11,580
2024		9,123
Thereafter		17,628
Total lease payments		82,501
Less imputed interest		(10,341)
Total	$	72,160


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	1,313,083	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC	$	231,656	December 2, 2019	April 24, 2020
Bank of America, N.A.	$	82,942	October 28, 2019	October 28, 2019
JP Morgan Chase Bank, N.A.	$	79,142	October 9, 2019	October 11, 2019
Citibank, N.A.	$	41,279	December 17, 2019	August 4, 2020
Morgan Stanley Bank, N.A.	$	40,511	December 16, 2019	August 21, 2020
BNP Paribas	$	12,363	December 17, 2019	July 31, 2020
Royal Bank of Canada	$	9,804	December 31, 2019	December 31, 2019


	Quarter ended September 30,				Nine months ended September 30,				Cumulative
	2019		2018		2019		2018		total (1)
	(in thousands)
Shares of common stock repurchased		—		—		51		236		816
Cost of shares of common stock repurchased	$	—	$	—	$	1,056	$	4,826	$	14,948


	Quarter ended		Nine months ended
	September 30, 2018		September 30, 2018
	(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	14,489	$	48,945
Increase in the Company's paid-in capital accounts for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	$	4,377	$	32,501
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 by noncontrolling interest unitholders and issued as equity compensation		131		1,616



	September 30, 2019						December 31, 2018
Agency–company subject to requirement	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)
	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS	$	2,062,630		$	572,167		$	1,788,430		$	514,089
Ginnie Mae – PLS	$	1,718,072		$	852,256		$	1,535,826		$	733,342
Ginnie Mae – PennyMac	$	2,006,339		$	937,482		$	1,786,430		$	806,676
HUD – PLS	$	1,718,072		$	2,500		$	1,535,826		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	282,056		$	78,240		$	271,802		$	70,775
Ginnie Mae – PLS	$	282,056		$	211,021		$	271,802		$	189,592
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		19	%		6	%		21	%		6	%


	Quarter ended September 30, 2019
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	216,132	$	19,600	$	235,732	$	—	$	235,732
Loan origination fees		49,434		—		49,434		—		49,434
Fulfillment fees from PennyMac Mortgage Investment Trust		45,149		—		45,149		—		45,149
Net loan servicing fees		—		66,229		66,229		—		66,229
Net interest income (expense):
Interest income		22,445		61,007		83,452		—		83,452
Interest expense		18,423		37,936		56,359		21		56,380
		4,022		23,071		27,093		(21)		27,072
Management fees		—		—		—		10,098		10,098
Other		324		567		891		1,742		2,633
Total net revenue		315,061		109,467		424,528		11,819		436,347
Expenses		135,777		127,581		263,358		6,792		270,150
Income before provision for income taxes	$	179,284	$	(18,114)	$	161,170	$	5,027	$	166,197
Segment assets at quarter end	$	4,850,741	$	4,433,177	$	9,283,918	$	19,281	$	9,303,199


	Outstanding		Total		Committed
Lender	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)
	(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC (3)	$	899,713	$	1,100,000	$	300,000	April 24, 2020
Credit Suisse First Boston Mortgage Capital LLC (3)	$	100,000	$	400,000	$	400,000	April 26, 2020
JPMorgan Chase Bank, N.A.	$	711,619	$	1,000,000	$	50,000	October 11, 2019
Morgan Stanley Bank, N.A.	$	551,027	$	800,000	$	100,000	August 21, 2020
Bank of America, N.A.	$	497,335	$	500,000	$	500,000	October 28, 2019
Citibank, N.A.	$	461,496	$	700,000	$	300,000	August 4, 2020
BNP Paribas	$	192,534	$	200,000	$	100,000	July 31, 2020
Royal Bank of Canada	$	125,735	$	135,000	$	20,000	December 31, 2019
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	514,625	$	550,000	$	—	October 28, 2019
Notes payable
GMSR 2018-GT1 Term Note	$	650,000	$	650,000			February 25, 2023
GMSR 2018-GT2 Term Note	$	650,000	$	650,000			August 25, 2023
Credit Suisse AG	$	—	$	150,000	$	—	October 31, 2019
Credit Suisse AG (3)	$	—	$	—	$	—	February 1, 2020
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	23,881	$	25,000	$	—	June 13, 2022


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC (1)	$	1,313,083	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC (2)	$	231,656	December 2, 2019	April 24, 2020
Bank of America, N.A.	$	82,942	October 28, 2019	October 28, 2019
JP Morgan Chase Bank, N.A.	$	79,142	October 9, 2019	October 11, 2019
Citibank, N.A.	$	41,279	December 17, 2019	August 4, 2020
Morgan Stanley Bank, N.A.	$	40,511	December 16, 2019	August 21, 2020
BNP Paribas	$	12,363	December 17, 2019	July 31, 2020
Royal Bank of Canada	$	9,804	December 31, 2019	December 31, 2019

	Boston Mortgage Capital, LLC, Credit Suisse AG, Cayman Islands Branch and PennyMac Loan Services, LLC.

10.5	Amendment No. 1 to the Amended and Restated Series 2020-SPIADVF1 Indenture Supplement, dated as of August 25, 2020, among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.	*

10.6^˄	Joint Amendment No. 4 to the Series 2016-MSRVF1 Repurchase Agreement and Amendment No. 3 to the Pricing Side Letter, dated as of August 25, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, LLC.	*

10.7^˄	Amendment No. 3 to the Amended and Restated Series 2016-MSRVF1 Indenture Supplement, dated as of August 25, 2020, among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.	*

10.8	Fourth Amended and Restated Master Repurchase Agreement, dated as of September ~~11, 2019, by and~~9, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization ~~LTD,~~Ltd, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC.	*


~~10.11~~
10.9^˄	~~Master Repurchase~~Joint Amendment No. 4 to Loan and Security Agreement and Amendment No. 3 to Pricing Side Letter, dated as of ~~September 11, 2019, by and~~October 21, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Private National Mortgage Acceptance Company, LLC, and PennyMac Loan Services, LLC.	*

10.10^˄	Joint Amendment No. 2 to the MSR PC Repo Agreement and Amendment No. 3 to the Pricing Side Letter, dated as of October 21, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse, AG, Cayman Islands Branch, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC.	*

~~10.12~~	~~Seventh Amendment to Master Repurchase Agreement, dated as of October 11, 2019, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.~~	*

~~10.13~~	~~First Amendment to Guaranty, dated as of October 11, 2019, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank, N.A.~~	*

~~10.14~~	~~Amendment No. 2 to Master Repurchase Agreement, dated as of October 28, 2019, by and among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Bank of America, N.A.~~	*

~~10.15~~	Amendment No. 10 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 28, 2019, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	*

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

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

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

32.2	Certification of Andrew S. Chang pursuant to Rule ~~13a‑14(b)~~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:~~The following financial statements from the Company’s Quarterly Report on Form 10-Q were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (ii) the Consolidated Statements of Income for the quarters ended September 30, ~~2019~~2020 and September 30, ~~2018,~~2019, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended September 30, ~~2019~~2020 and September 30, ~~2018,~~2019, (iv) the Consolidated Statements of Cash Flows for the quarters ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019 and (v) the Notes to the Consolidated Financial Statements.	*

104	Cover Page Interactive Data File (embedded within the Inline XBRL document).


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