PFSI 10-K 2019 - Equibles

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

| \(Mark One\) |  |

| --- | --- | | ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | For the fiscal year ended December 31, 2019 | | | Or | | | ☐ | 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<br>\(State or other jurisdiction of<br>incorporation or organization\) | 83‑1098934<br>\(IRS Employer<br>Identification No.\) |

| --- | --- | | 3043 Townsgate Road, Westlake Village, California (Address of principal executive offices) | 91361 (Zip Code) | (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 | Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 ☒ | | --- | --- | | 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 ☒

As of June 30, 2019 the aggregate market value of the registrant’s Common Stock, $0.0001 par value (“common stock”), held by non‑affiliates was $553,217,131 based on the closing price as reported on the New York Stock Exchange on that date.

As of February 26, 2020, the number of outstanding shares of common stock of the registrant was 78,558,156.

Documents Incorporated by Reference

Document	Parts Into Which Incorporated
Definitive Proxy Statement for<br>2020 Annual Meeting of Stockholders	Part III

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10‑K

December 31, 2019

TABLE OF CONTENTS

|  |  | Page |

| --- | --- | --- | | | Special Note Regarding Forward‑Looking Statements | 3 | | PART I | | | | Item 1 | Business | 6 | | Item 1A | Risk Factors | 13 | | Item 1B | Unresolved Staff Comments | 39 | | Item 2 | Properties | 39 | | Item 3 | Legal Proceedings | 40 | | Item 4 | Mine Safety Disclosures | 41 | | PART II | | | | Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 41 | | Item 6 | Selected Financial Data | 41 | | Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 43 | | Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 65 | | Item 8 | Financial Statements and Supplementary Data | 67 | | Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 67 | | Item 9A | Controls and Procedures | 68 | | Item 9B | Other Information | 70 | | PART III | | | | Item 10 | Directors, Executive Officers and Corporate Governance | 71 | | Item 11 | Executive Compensation | 71 | | Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 71 | | Item 13 | Certain Relationships and Related Transactions, and Director Independence | 72 | | Item 14 | Principal Accounting Fees and Services | 72 | | PART IV | | | | Item 15 | Exhibits and Financial Statement Schedules | 73 | | Item 16 | Form 10-K Summary | 82 | | | Signatures | 93 | | 4 | | |

Table of Contents

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

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

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

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

| --- | --- |

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

| --- | --- |

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

| --- | --- |

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

| --- | --- |

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

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and as set forth in Item IA. of Part I hereof and any subsequent Quarterly Reports on Form 10‑Q.

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

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

| --- | --- |

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

| --- | --- |

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

| --- | --- |

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

| --- | --- |

| · | changes to government mortgage modification programs; |

| --- | --- |

| · | 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; |

| --- | --- |

Table of Contents

·	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; |

| --- | --- |

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

| --- | --- |

| · | changes in prevailing interest rates; |

| --- | --- |

| · | increases in loan delinquencies and defaults; |

| --- | --- |

| · | our 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 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; |

| --- | --- |

Table of Contents

·	our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effects of climate change, or other events; 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.

Table of Contents

PART I

Item 1. Business

The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward‑looking statements that involve risks and uncertainties. Actual results could differ significantly from the projections and results discussed in the forward‑looking statements due to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to “we,” “our,” “us,” and the “Company” refer to PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.)(“PFSI”).

Our Company

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

We operate and control all of the business and affairs 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 (“BlackRock” or “BlackRock, Inc.”) and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates (“Highfields”).

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 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.

Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government‑sponsored entity (“GSE”). 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”) 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,

Table of Contents

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.

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. | | --- | --- |

Following is a summary of our segment’s results:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | (in thousands) | | | | | | | | | | | Net revenues: | | | | | | | | | | | | Production | $ | 993,884 | $ | 385,995 | $ | 513,641 | $ | 694,405 | $ | 481,636 | | Servicing | | 440,784 | | 567,921 | | 386,203 | | 212,886 | | 202,322 | | Investment management | | 42,736 | | 29,587 | | 22,679 | | 23,996 | | 30,847 | | | $ | 1,477,404 | $ | 983,503 | $ | 922,523 | $ | 931,287 | $ | 714,805 | | Income (loss) before income taxes: | | | | | | | | | | | | Production | $ | 527,834 | $ | 87,266 | $ | 238,508 | $ | 416,096 | $ | 271,869 | | Servicing | | (14,751) | | 172,302 | | 58,672 | | (36,099) | | 1,297 | | Investment management | | 16,361 | | 7,003 | | 5,789 | | 2,486 | | 7,722 | | Non-segment activities (1) | | — | | 1,126 | | 32,940 | | 600 | | (1,695) | | | $ | 529,444 | $ | 267,697 | $ | 335,909 | $ | 383,083 | $ | 279,193 | | Total assets at year end: | | | | | | | | | | | | Production | $ | 4,836,472 | $ | 2,434,897 | $ | 2,459,014 | $ | 2,195,330 | $ | 1,122,242 | | Servicing | | 5,347,549 | | 5,031,920 | | 4,886,594 | | 2,841,551 | | 2,270,940 | | Investment management | | 19,996 | | 11,681 | | 19,880 | | 91,517 | | 92,893 | | | $ | 10,204,017 | $ | 7,478,498 | $ | 7,365,488 | $ | 5,128,398 | $ | 3,486,075 |

| \(1\) | Primarily represents Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement we entered into as part of our initial public offering during 2013, of which, for 2017, $32.0 million was the result of the change in the federal income tax rate under the Tax Cuts and Jobs Act of 2017 \(the “Tax Act”\). |

| --- | --- |

Mortgage Banking

Loan Production

In our loan production activities, we earn interest income, gains or losses during the holding period and upon the sale of these loans, and retain the associated mortgage servicing rights (“MSRs”). Our loan production segment sources new prime credit quality first-lien residential conventional and government-insured or guaranteed mortgage loans and home equity loans through three channels: correspondent production, consumer direct and broker direct lending.

Table of Contents

In correspondent production we manage, on behalf of PMT and for our own account, the purchase from non-affiliates of mortgage loans that have been underwritten to investor guidelines. For conventional mortgage loans, we perform fulfillment activities for PMT and earn a fulfillment fee for each mortgage loan purchased by PMT. In the case of government insured mortgage loans, we fulfill them for our own account and purchase them from PMT at PMT’s cost plus a sourcing fee.

Through our consumer direct lending channel, we originate mortgage and home equity loans on a national basis. Our consumer direct model relies on the Internet and call center-based staff to acquire and interact with customers across the country. We do not have a “brick and mortar” branch network.

In broker direct lending, we obtain loan application packages from third-party mortgage loan brokers for mortgage loans, underwrite and fund mortgage loans for sale to PMT or investors.

We conduct our own fulfillment for loans originated through the consumer direct and broker direct lending channels. Our loan production activity is summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Unpaid principal balance ("UPB") of loans purchased and originated for sale: | | | | | | | | Loans sourced through our correspondent lending channel: | | | | | | | | From PennyMac Mortgage Investment Trust | $ | 47,937,306 | $ | 36,415,933 | $ | 40,561,241 | | From non-affiliates | | 1,686,472 | | — | | — | | | | 49,623,778 | | 36,415,933 | | 40,561,241 | | Loans sourced through our consumer direct channel | | 9,752,500 | | 4,650,316 | | 5,466,669 | | Loans sourced through our broker direct channel | | 2,154,817 | | 378,544 | | — | | | | 61,531,095 | | 41,444,793 | | 46,027,910 | | UPB of conventional loans fulfilled for PennyMac Mortgage Investment Trust | | 56,033,704 | | 26,194,303 | | 22,971,119 | | Total loan production | $ | 117,564,799 | $ | 67,639,096 | $ | 68,999,029 |

Loan Servicing

Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent borrowers; and supervising foreclosures and property dispositions. We service loans both as the owner of MSRs and on behalf of other MSR or loan owners. We provide servicing for conventional and government-insured or guaranteed mortgage loans and home equity loans (“prime servicing”), as well as servicing of distressed loans for PMT (“special servicing”).

Table of Contents

The UPB of our loan servicing portfolio is summarized below:

|  | December 31, 2019 |  |  |  |  |  | December 31, 2018 |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | Contract | | Total | | | | Contract | | Total | | | | Servicing | | servicing and | | mortgage | | Servicing | | servicing and | | mortgage | | | | rights owned | | subservicing | | loans serviced | | rights owned | | subservicing | | loans serviced | | | | (in thousands) | | | | | | | | | | | | | Investor: | | | | | | | | | | | | | | Non-affiliated entities: | | | | | | | | | | | | | | Originated | $ | 168,842,011 | $ | — | $ | 168,842,011 | $ | 145,224,596 | $ | — | $ | 145,224,596 | | Purchased | | 59,703,547 | | — | | 59,703,547 | | 56,990,486 | | — | | 56,990,486 | | | | 228,545,558 | | — | | 228,545,558 | | 202,215,082 | | — | | 202,215,082 | | PennyMac Mortgage Investment Trust | | — | | 135,414,668 | | 135,414,668 | | — | | 94,658,154 | | 94,658,154 | | Loans held for sale | | 4,724,006 | | — | | 4,724,006 | | 2,420,636 | | — | | 2,420,636 | | Total | $ | 233,269,564 | $ | 135,414,668 | $ | 368,684,232 | $ | 204,635,718 | $ | 94,658,154 | $ | 299,293,872 |

Investment Management

We are an investment manager through our subsidiary, PCM. PCM currently manages PMT and, before 2019, managed the Investment Funds. For these activities, we earn management fees as a percentage of net assets and may earn incentive compensation based on investment performance. During 2018, we completed the liquidation of the Investment Funds.

The net assets of PMT are summarized below:

	December 31,
	2019		2018
	(in thousands)
PennyMac Mortgage Investment Trust	$	2,450,916	$	1,556,132

U.S. Mortgage Market

The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately $11.0 trillion of outstanding debt as of December 31, 2019. According to Inside Mortgage Finance, first lien mortgage loan origination volume was approximately $2.4 trillion in 2019. Many of the largest financial institutions, primarily banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced their participation in the mortgage market creating opportunities for non-bank participants.

The residential mortgage industry is characterized by high barriers to entry, including the necessity for approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-federally chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful operations, and financial capital requirements.

Table of Contents

Our Growth Strategies

Our growth strategies include:

Growing Consumer Direct Lending through Portfolio Recapture and Non‑Portfolio Originations

We expect to grow our consumer direct lending business by leveraging our growing servicing portfolio through recapture of existing customers for refinance and purchase-money loans as well as increasing our non‑portfolio originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will lead to greater origination activity through our consumer direct business. As of December 31, 2019, we serviced 1.8 million loans. At the same time, we are making significant investments in technology, personnel and marketing to increase our non‑portfolio originations. We believe that our national call center model and our technology will enable us to drive origination process efficiencies and best‑in‑class customer service.

Growing Broker Direct Lending

During 2018, we introduced our broker direct lending channel. The broker lending channel involves the underwriting and funding of mortgage loans sourced by mortgage loan brokers and other financial intermediaries. According to Inside Mortgage Finance, the broker lending channel represented approximately 14% of U.S. residential mortgage originations in 2019. Through this mortgage loan origination channel, third-party mortgage loan brokers submit loan application packages to us and we underwrite and fund the mortgage loans. In 2019 and 2018, we funded $2.2 billion and $378.5 million of mortgage loans, respectively, through our broker direct channel. We plan on growing our mortgage loan volume by adding broker relationships and offering our mortgage loan brokers access to our technology through a dedicated portal.

Growing Correspondent Production through Expanding Seller Relationships and Adding Products and Services

We expect to grow our correspondent production business by expanding the number and types of sellers from which we purchase loans and increasing the volume of loans that we purchase from our sellers as we continue to add to the loan products and services we offer. Over the past several years, a number of large banks have exited or reduced the size of their correspondent production businesses, creating an opportunity for non‑bank entities to gain market share. We believe that we are well positioned to continue taking advantage of this opportunity based on our management expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting systems and processes.

Growing our Mortgage Loan Servicing Portfolio

We expect to focus the growth of our servicing portfolio on loan production activities, as our correspondent government‑insured production and consumer and broker direct lending add new prime servicing for owned MSRs, and correspondent conventional production adds new subservicing. In 2019, our correspondent, consumer direct and broker direct loan production totaled $117.6 billion in UPB. We supplement our organic growth with MSR acquisitions, some of which may be concentrated in delinquent or defaulted loans for which we have expertise in servicing. We have acquired MSRs both from large mortgage servicers and independent mortgage bankers, which are selling MSRs due to continuing operational and regulatory and capital pressures. In 2019, we purchased approximately $16.3 billion in UPB of MSRs.

Expansion into New Markets and Products

We regularly evaluate opportunities to grow our business, including expansion into new markets, such as the broker lending channel. We also continue to develop new products to satisfy demand from customers in each of our production channels and respond to changing circumstances in the market for mortgage-related financing.

Table of Contents

Compliance and Regulatory

Our business is subject to extensive federal, state and local regulation. The CFPB was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB is responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers.

Our loan production and loan servicing operations are regulated at the state level by state licensing authorities and administrative agencies. We, along with certain PennyMac employees who engage in regulated activities, must apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements typically require an application process, the payment of fees, background checks and administrative review. Our servicing operations are licensed (or exempt or otherwise not required to be licensed) to service mortgage loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands. Our consumer direct lending business is licensed to originate loans in 49 states and the District of Columbia. From time to time, we receive requests from states and Agencies and various investors for records, documents and information regarding our policies, procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing and examination requirements.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that require all individuals acting in the United States as mortgage loan originators to be individually licensed or registered if they intend to offer mortgage loan products. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses and the completion of pre‑licensing education, annual education and the successful completion of both national and state exams.

We must comply with a number of federal consumer protection laws, including, among others:

| · | the Real Estate Settlement Procedures Act \(“RESPA”\), and Regulation X thereunder, which require certain disclosures to mortgagors regarding the costs of mortgage loans, the administration of tax and insurance escrows, the transferring of servicing of mortgage loans, the response to consumer complaints, and payments between lenders and vendors of certain settlement services; |

| --- | --- |

| · | the Truth in Lending Act \(“TILA”\), and Regulation Z thereunder, which require certain disclosures to mortgagors regarding the terms of their mortgage loans, notices of sale, assignments or transfers of ownership of mortgage loans, new servicing rules involving payment processing, and adjustable rate mortgage change notices and periodic statements; |

| --- | --- |

| · | the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on the basis of age, race and certain other characteristics, in the extension of credit; |

| --- | --- |

| · | the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; |

| --- | --- |

| · | the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public loan data; |

| --- | --- |

| · | the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are reached, sets disclosure and notification requirements, and requires the return of unearned premiums; |

| --- | --- |

Table of Contents

·	the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service members on active duty;

| · | the Gramm‑Leach‑Bliley Act and Regulation P thereunder, which require us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters; |

| --- | --- |

| · | the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications; |

| --- | --- |

| · | the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the credit history of consumers; and |

| --- | --- |

| · | the National Flood Insurance Reform Act of 1994, which provides for lenders to require from borrowers or to purchase flood insurance on behalf of borrower/owners of properties in special flood hazard areas. |

| --- | --- |

Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB.

Our senior management team has established a comprehensive compliance management system ("CMS") that is designed to ensure compliance with applicable mortgage origination and servicing laws and regulations. The components of our CMS include: (a) oversight by senior management and our Board of Directors to ensure that our compliance culture, guidance, and resources are appropriate; (b) a compliance program to ensure that our policies, training and monitoring activities are complete and comprehensive; (c) a complaint management program to ensure that consumer complaints are appropriately addressed and that any required actions are implemented on a timely basis; and (d) independent oversight to ensure that our CMS is functioning as designed.

An important component of the CMS is management’s Mortgage Regulatory Compliance Committee (“MRCC”). This committee oversees the CMS and supports our cultural initiatives that reinforce the importance of regulatory compliance. The MRCC also monitors changes in the internal and external environment, approves mortgage compliance policies, monitors compliance with those policies and ensures any required remediation is implemented on a timely basis. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance. MRCC membership includes senior management from all areas of the Company impacted by mortgage compliance laws and regulations. The MRCC meets on a regular basis throughout the year.

Intellectual Property

We hold various registered trademarks, including trademarks with respect to the name PennyMac®, the swirl design and rooftop design appearing in certain PennyMac drawings and logos and various additional designs and word marks relating to the PennyMac name. Depending upon the jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained. We generally intend to renew our trademarks as they come up for renewal. We do not otherwise rely on any copyright, patent or other form of registration to protect our rights in our intellectual property. Our other intellectual property includes proprietary know‑how and technological innovations, such as our proprietary workflow-driven cloud-based servicing system, as well as proprietary pricing engines, loan‑level analytics systems and other trade secrets that we have developed to maintain our competitive position.

Competition

Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for the totality of our business. We compete with a number of nationally‑focused companies in each of our businesses.

Table of Contents

In our mortgage banking segments, we compete with large financial institutions and with other independent residential mortgage loan producers and servicers, such as Wells Fargo, JP Morgan Chase, Quicken Loans and Mr. Cooper. In our loan production segment, we compete on the basis of product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. In our servicing segment, we compete on the basis of experience in the residential loan servicing business, quality and efficiency of execution and servicing performance.

In our investment management segment, we compete for capital with both traditional and alternative investment managers. We compete on the basis of historical track record of risk‑adjusted returns, experience of investment management team, the return profile of prospective investment opportunities and on the level of fees and expenses.

Employees

As of December 31, 2019, we, through a subsidiary, had 4,215 employees.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through the investor relations section of our website at www.pennymacfinancial.com as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, liquidity and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of operations in future periods.

Risks Related to Our Mortgage Banking Segment

Regulatory Risks

We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations.

We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits and examinations by federal and state regulators. Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Further, PLS may be required to pay substantial penalties imposed by its regulators due to compliance errors, or PLS may lose its license to originate and/or service loans.

Table of Contents

The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers or other third party originators or servicers with whom we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders and third party originators and servicers, if any of them are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be materially and adversely affected. Our service providers and vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and vendors to mitigate risks of noncompliance with applicable laws may also have these negative results.

The outcome of the 2020 U.S. Presidential and Congressional elections could result in significant policy changes or regulatory uncertainty in our industry. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the new government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition and results of operations.

New rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB or state regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions.

Under the Dodd-Frank Act, the CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. Although there has been a decline in enforcement actions by the CFPB under the current government administration, examinations by state regulators and enforcement actions by state attorneys general have increased and may continue to increase in the residential mortgage and servicing sectors.

Rules and regulations promulgated under the Dodd-Frank Act or by the CFPB, uncertainty regarding recent changes in leadership (including interim leadership) or authority levels within the CFPB, and actions taken or not taken by the CFPB could result in heightened federal and state regulation and oversight of our business activities, materially and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated with our business activities. Our failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on our business, liquidity, financial condition and results of operations.

We are highly dependent on U.S. government‑sponsored entities and government agencies, and any changes in these entities, their current roles or the leadership at such entities or their regulators could materially and adversely affect our business, financial condition, liquidity and results of operations.

Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of mortgage‑backed securities (“MBS”), in the secondary market. Presently, almost all of the newly originated loans that we originate directly with borrowers or assist PMT in acquiring from mortgage lenders through our correspondent production activities qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We or PMT also derive other material financial benefits from our Agency relationships, including the assumption of credit risk by certain of these Agencies on loans included in such MBS in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures. A number of legislative proposals have been introduced in recent years that would wind down or

Table of Contents

phase out the GSEs, including a proposal by the current White House administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the U.S. government, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial condition, liquidity and results of operations.

Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them, could also materially and adversely affect our ability to sell and securitize loans through our loan production segment, and the performance, liquidity and market value of our investments. Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its correspondent production business would be similarly affected. Moreover, any changes to the nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity and results of operations.

Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its correspondent production business is also highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. Similarly, to the extent the Agencies increase the number of purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected.

Our business prospects, financial condition, liquidity and results of operations could be adversely impacted if, and to the extent that, there is no longer a special exemption and qualified mortgage (“QM”) loan designation for certain GSE eligible loans and there are no offsetting changes to the ability to repay (“ATR”) rules.

The Dodd-Frank Act provides that a lender must make “a reasonable, good faith determination” of each borrower’s ability to repay a loan, but may presume that a borrower will be able to repay a loan if such loan has certain characteristics that meet the QM definition. The CFPB adopted regulations that created a special exemption, generally referred to as the “QM patch,” which allows any GSE-eligible loan to be deemed a QM. The QM patch effectively provides QM designation for GSE eligible loans that have a debt-to-income ratio in excess of 43%, which represents a meaningful portion of the loans currently purchased by the GSEs. Without the QM patch or an alternative, loans with debt-to-income ratios above 43% would not be designated as QM unless they were insured by a federal agency such as the FHA or VA, which have each adopted their own QM definition that does not currently have a debt-to-income ratio limitation. The QM patch expires on the earlier of the end of the GSEs’ conservatorship or January 10, 2021.

Table of Contents

On July 25, 2019, the CFPB released an Advanced Notice of Proposed Rulemaking (“ANPR”) regarding the expiration of the QM patch, specifically stating that the CFPB intends to allow the QM patch to expire in January 2021. In a letter to lawmakers on January 17, 2020, the CFPB signaled it plans to extend the QM patch for a short period until the effective date of a proposed alternative that would replace the 43% DTI requirement or until the end of the GSEs’ conservatorship, whichever comes first. The expiration of the QM Patch or any action to modify the QM rule could have significant implications for the U.S. housing and mortgage market. The GSEs would no longer be able to purchase or guarantee loans with DTIs above 43% and a portion of the type of loans currently originated under the QM patch could move away from the GSEs to other federal agencies or to the private market. We may be unable to comply with Appendix Q of the ATR rule or to find comfort in the non-QM market, and our borrowers may be unable to meet the 43% DTI requirement. Also, a loan from another federal agency may not be attractive to all borrowers who otherwise would have found financing under the QM patch. The GSEs could also see a significant drop in their origination volumes if changes to the QM rule do not offset the impact of the expiration of the QM patch. Further, we may also face operational changes and significant declines in origination volume if the QM patch expires without offsetting changes to the QM rule. All of these events could materially and adversely affect our business, financial condition, liquidity and results of operations.

We are required to hold various Agency approvals in order to conduct our business and there is no assurance that we will be able to obtain or maintain those Agency approvals or that changes in Agency guidelines will not materially and adversely affect our business, financial condition, liquidity and results of operations.

We are required to hold certain Agency approvals in order to sell mortgage loans to the Agencies and service such mortgage loans on their behalf. Our failure to satisfy the various requirements necessary to obtain and maintain such Agency approvals over time would restrict our direct business activities and could materially and adversely impact our business, financial condition, liquidity and results of operations.

We are also required to follow specific guidelines that impact the way that we originate and service Agency loans. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which would also adversely affect our business, financial condition, liquidity and results of operations.

In addition, the FHFA has directed the GSEs to align their guidelines for servicing delinquent mortgages and assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. Our failure to operate efficiently and effectively within the prevailing regulatory framework and in accordance with the applicable origination and servicing guidelines and/or the loss of our seller/servicer license approval or approved issuer status with the Agencies could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments, all of which could materially and adversely affect our business, financial condition, liquidity and results of operations.

Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition, liquidity and results of operation.

We are subject to minimum financial eligibility requirements established by the Agencies. These minimum financial requirements, which are described in Liquidity and Capital Resources, include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency mortgage loans and MBS and cover the associated financial obligations and risks.

Table of Contents

In order to meet these minimum financial requirements, we are required to maintain cash and cash equivalents in amounts that may adversely affect our business, financial condition, liquidity and results of operations, which could significantly impede us from growing our business and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate our Agency approvals or agreements, which could cause us to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition liquidity and results of operations.

We may be subject to certain banking regulations that may limit our business activities.

As of December 31, 2019, PNC Financial Services Group Inc. (“PNC”) owned approximately 22% of the outstanding voting common shares of BlackRock, Inc. Based on PNC’s interests in and relationships with BlackRock, Inc., BlackRock, Inc. is deemed to be a non-bank subsidiary of PNC. BlackRock, Inc. is one of our largest equity holders. Due to this relationship, we are deemed to be a non-bank subsidiary of PNC, which is regulated as a financial holding company under the Bank Holding Company Act of 1956, as amended. As a non-bank subsidiary of PNC, we may be subject to certain banking regulations, including the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Such banking regulations could limit the activities and the types of businesses that we may conduct, and the Federal Reserve may also impose substantial fines and other penalties for violations that we may commit. To the extent that we, as a non-bank mortgage lender, are subject to banking regulations, we could be at a competitive disadvantage because many of our non-bank competitors are not subject to these same regulations.

In addition, provisions of the Dodd-Frank Act referred to as the “Volcker Rule” prohibit or restrict a bank holding company and its affiliates from conducting certain transactions with certain investment funds, including hedge funds and private equity funds (collectively “covered funds”), when it has an ownership interest in, sponsors or advises a covered fund. The Volcker Rule prohibits proprietary trading as defined by such rule, unless the trading is permitted by an exemption, such as for risk-mitigating hedging purposes. The Volcker Rule applies to us by virtue of our affiliation with PNC through BlackRock. The Volcker Rule limits our ability to acquire or retain an ownership interest in, sponsor, advise or manage covered funds, and limits investments in certain covered funds by our employees, among other restrictions. If a fund, whether newly created or existing, becomes a covered fund, then certain transactions between us and the covered fund could be prohibited or restricted, or the fund may need to be restructured. These prohibitions, restrictions and limitations could disadvantage us against those competitors that are not subject to the Volcker Rule in the ability to manage covered funds and to retain employees. Our failure to comply with the requirements of the Volcker Rule may adversely affect our business, financial condition, liquidity and results of operations.

Unlike competitors that are federally chartered banks, we are subject to the licensing and operational requirements of states and other jurisdictions that result in substantial compliance costs, and our business would be adversely affected if we lose our licenses.

Because we are not a federally chartered depository institution, we do not benefit from exemptions to state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and regulatory changes may increase our costs through stricter licensing laws, disclosure laws or increased fees or may impose conditions to licensing that we or our personnel are unable to meet.

In most states in which we operate, a regulatory agency or agencies regulate and enforce laws relating to mortgage servicers and mortgage originators. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary income we are entitled to collect from borrowers or otherwise. This could make our business cost‑prohibitive in the affected state or states and could materially affect our business.

Table of Contents

The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act of 1940 could have a material and adverse effect on our business.

We intend to operate so that we and each of our subsidiaries are not required to register as investment companies under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that our subsidiary, PennyMac Loan Services, LLC (“PLS”), qualifies for one or more exemptions provided in the Investment Company Act because of the historical and current composition of its assets and income; however, there can be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more exemptions will continue to be applicable.

If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator was responsible for, or aware of, the release of such hazardous substances. The presence of hazardous substances may also adversely affect an owner’s ability to sell real estate, borrow using real estate as collateral or make debt payments to us. In addition, if we take title to a property, the presence of hazardous substances may adversely affect our ability to sell the property, and we may become liable to a governmental entity or to third parties for various fines, damages or remediation costs. Any of these liabilities or events may materially and adversely affect the fair value of the relevant asset and/or our business, financial condition, liquidity and results of operations.

Market Risks

Our mortgage banking revenues are highly dependent on macroeconomic and United States real estate market, mortgage market and financial market conditions.

The success of our business strategies and our results of operations are materially affected by current or future conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political issues, government shutdowns, climate change and the availability and cost of credit may contribute to increased volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets in particular going forward. A destabilization of the real estate market, mortgage market and financial markets or deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.

Table of Contents

The industry in which we operate is highly competitive, and is likely to become more competitive, and decreased margins resulting from increased competition or our inability to compete successfully could adversely affect our business, financial condition, liquidity and results of operations.

We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. With respect to mortgage loan production, we face competition in such areas as mortgage loan offerings, rates, fees and customer service. With respect to servicing, we face competition in areas such as fees, cost to service and service levels, including our performance in reducing delinquencies and entering into successful modifications.

Large commercial banks and savings institutions and other non-bank mortgage originators and servicers are becoming increasingly competitive in the origination or acquisition of newly originated mortgage loans and the servicing of mortgage loans. Many of these institutions have significantly greater resources and access to capital and financing arrangements than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our loan production and servicing models. As more non‑bank entities enter these markets and as more commercial banks aggressively compete, our mortgage banking businesses may generate lower volumes and/or margins. If we are unable to grow our loan production volumes or if our margins become compressed, then our business, financial condition, liquidity and results of operations could be materially and adversely affected.

In addition, technological advances and heightened e‑commerce activities have increased consumers’ access to products and services. This has intensified competition among banks and non‑banks in offering and servicing mortgage loans. We may be unable to compete successfully in our mortgage banking businesses and this could materially and adversely affect our business, financial condition, liquidity and results of operations.

We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations.

Our loan production segment consists of our consumer direct lending activities, in which we originate mortgage loans directly with borrowers through telephone call centers or the Internet, our correspondent production activities, in which we facilitate the acquisition by PMT from correspondent sellers of newly originated mortgage loans that have been underwritten to our standards and, in the case of government loans, acquire such loans from PMT, and our broker direct lending activities, in which we provide brokers with a broad range of mortgage loan products and programs. To date, we have grown our loan production volumes on the basis of our product offerings, technical knowledge, manufacturing quality, speed of execution, interest rates and fees, as well as the relationships we have established through our network of mortgage lenders. In our correspondent production activities and broker direct lending activities, the lenders and brokers with whom we do business are not contractually obligated to do business with us or PMT, and our competitors also have relationships with these lenders and brokers and actively compete against us. Our non-servicing portfolio consumer direct lending platform is also largely driven on referrals and establishing relationships.

In addition, our consumer direct lending business relies heavily on our ability to convert leads regarding prospective borrowers into funded loans, the success of which depends on the pricing we offer relative to the pricing of our competitors and our operational ability to process, underwrite and close loans. Institutions that compete with us in this regard may have significantly greater access to capital or other resources than we do, which may give them the benefit of a lower cost of operations.

We may experience significant growth in our loan production volumes. If we do not effectively manage our growth and are unable to consistently maintain quality of execution, our reputation and existing relationships with mortgage lenders and brokers could be damaged, we may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders and brokers, our new mortgage products may not gain widespread acceptance and the quality of our correspondent production, consumer direct lending and broker direct lending operations could suffer, all of which could negatively affect our brand and operating results.

Table of Contents

Our loan production segment is also subject to overall market factors that could adversely impact our ability to grow our loan production volume. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or slow growth in the level of new home purchase activity can impact our ability to continue to grow our loan production volumes, and we may be forced to accept lower margins in our respective businesses in order to continue to compete and keep our volume of activity consistent with past or projected levels.

We may be unable to maintain sufficient capital and liquidity to meet the financing requirements of our business.

We will require new and continued debt financing to facilitate our anticipated growth. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to borrow money. We are generally required to renew our financing arrangements each year, which exposes us to refinancing and interest rate risks. Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors beyond our control including:

| · | limitations imposed on us under our financing agreements that contain restrictive covenants and borrowing conditions, which may limit our ability to raise additional debt; |

| --- | --- |

| · | restrictions imposed upon us by regulatory agencies that mandate certain minimum capital and liquidity requirements and additional scrutiny from such regulatory agencies; |

| --- | --- |

| · | liquidity in the credit markets; |

| --- | --- |

| · | prevailing interest rates; |

| --- | --- |

| · | the strength of the lenders from which we borrow, and the regulatory environment in which they operate, including proposed capital strengthening requirements; |

| --- | --- |

| · | limitations on borrowings on credit facilities imposed by the amount of eligible collateral pledged, which may be less than the borrowing capacity of the credit facility; and |

| --- | --- |

| · | accounting changes that may impact calculations of covenants in our debt agreements. |

| --- | --- |

No assurance can be given that any refinancing or additional financing will be possible when needed, that we will be able to negotiate acceptable terms or that market conditions will be favorable at the times that we require such refinancing or additional financing. If we are unable to obtain sufficient capital to meet the financing requirements of our business, financial condition, liquidity and results of operations would be materially and adversely affected.

We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks, profitability and risk thresholds and tolerances, any of which may change materially and negatively impact their business strategies, including their extension of credit to us specifically or mortgage lenders and servicers generally. Certain banking institutions have already exited, and others may in the future decide to exit, the mortgage business. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of operations would be materially and adversely affected.

We leverage our assets under credit and other financing agreements and utilize various other sources of borrowings, which exposes us to significant risk and may materially and adversely affect our business, financial condition, liquidity and results of operations.

We currently leverage and, to the extent available, we intend to continue to leverage the mortgage loans produced through our consumer direct lending business and the government‑insured loans acquired through our correspondent production activities from PMT with borrowings under repurchase agreements. When we enter into

Table of Contents

repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash that we receive from a lender when we initially sell the assets to that lender is less than the fair value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut (assuming that there was no change in the fair value of the assets). In addition, repurchase agreements generally allow the counterparties, to varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, our counterparty may sell the collateral, which may result in significant losses to us.

In addition, we invest in certain assets, including MSRs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs under secured financing arrangements. Our Fannie Mae MSRs are pledged to secure borrowings under a master repurchase agreement and our and Freddie Mac MSRs are pledged to secure borrowings under a loan and security agreement. Our Ginnie Mae MSRs and related excess servicing spread financing (“ESS”) are pledged to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PLS. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.

Each of the secured financing arrangements pursuant to which we finance MSRs and ESS is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency. Accordingly, the exercise by any of Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.

We leverage certain of our other assets under a capital lease and a revolving credit agreement and may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity and results of operations.

Our credit and financing agreements contain financial and restrictive covenants that could adversely affect our business, financial condition, liquidity and results of operations.

The lenders under our credit and financing agreements require us and/or our subsidiaries to comply with various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be insufficient to repurchase the assets that we have sold to the lenders under our repurchase agreements or otherwise service the debt incurred under our other credit and financing agreements. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. If we are unable to maintain these liquidity levels, we could be forced to sell additional assets at a loss and our financial condition could deteriorate rapidly.

Table of Contents

Our existing credit and financing agreements also contain certain events of default and other financial and non‑financial covenants and restrictions that impact our flexibility to determine our operating policies and investment strategies. If we default on our obligations under a credit or financing agreement, fail to comply with certain covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, require us to post additional collateral or repurchase the assets, and/or cease entering into any other credit transactions with us.

Because our credit and financing agreements typically contain cross‑default provisions, a default that occurs under any one agreement could allow the lenders under our other agreements to also declare a default, thereby exposing us to a variety of lender remedies, such as those described above, and potential losses arising therefrom. Any losses that we incur on our credit and financing agreements could materially and adversely affect our business, financial condition, liquidity and results of operations.

Our earnings may decrease because of changes in prevailing interest rates.

Our profitability is directly affected by changes in prevailing interest rates. An increase in prevailing interest rates could:

| · | adversely affect our loan production volume, as refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult; |

| --- | --- |

| · | adversely affect our Ginnie Mae early buyout program because loan modifications would become less economically feasible; and |

| --- | --- |

| · | increase the cost of servicing our outstanding debt, including debt related to servicing assets and loan production; |

| --- | --- |

A decrease in prevailing interest rates could:

| · | cause an increase in the expected volume of loan refinancings, which would require us to record decreases in fair value on our MSRs; and |

| --- | --- |

| · | reduce our earnings from our custodial deposit accounts. |

| --- | --- |

An event of default, a negative ratings agency action, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to refinance existing debt and borrow additional funds. In addition, we may not be able to adjust our operational capacity in a timely manner, or at all, in response to increases or decreases in mortgage production volume resulting from changes in prevailing interest rates.

Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We are subject to risks associated with the expected discontinuation of LIBOR.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the phase out of the use of LIBOR by the end of 2021. To identify a set of alternative interest reference rates to LIBOR, the U.S. Federal Reserve established the Alternative Reference Rates Committee (“ARRC”), a U.S. based working group composed of large U.S. financial institutions. ARRC has identified the Secured Overnight Financing Rate as its preferred replacement for LIBOR, but it is unclear how their preference may impact the risks we maintain to the cessation of LIBOR, or if other benchmarks may emerge as a replacement for LIBOR.

The expected and actual discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. We rely substantially on financing arrangements and liabilities under which our cost of

Table of Contents

borrowing is based on LIBOR. We also hold assets and instruments used to hedge the value of certain assets that depend for their value on LIBOR. We anticipate significant challenges as it relates to the transition away from LIBOR for all of our LIBOR-based assets, financing arrangements, and liabilities, regardless whether their maturity dates fall before or after the anticipated discontinuation date in 2021. These challenges will include, but will not be limited to, amending agreements underlying our existing and/or new LIBOR-based assets, financing arrangements, and liabilities with appropriate fallback language prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the fair value of our LIBOR-linked assets and hedges.

We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We service LIBOR-based adjustable rate mortgages (“ARMs”) for which the underlying mortgage notes incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks. Further, we expect to originate new LIBOR-based ARMs in 2020 and 2021. We also rely on financial models that incorporate LIBOR into their methodologies for financial planning and reporting.

Due to these risks, we expect both the impending and actual discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their value. For the same reason, we also can provide no assurance that changes in the value of our hedge instruments will effectively offset changes in the value of the assets they are expected to hedge. Our inability to manage these risks effectively may materially and adversely affect our business, financial condition, liquidity and results of operations.

Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.

We pursue hedging strategies to reduce our exposure to adverse changes in interest rates. Our hedging activity will vary in scope based on the risks hedged, the level of interest rates, the type of investments held, and other changing market conditions. Hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us because, among other things:

| · | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |

| --- | --- |

| · | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |

| --- | --- |

| · | the duration of the hedge may not match the duration of the related liability or asset; |

| --- | --- |

| · | the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |

| --- | --- |

| · | the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay. |

| --- | --- |

In addition, we may fail to recalculate, re‑adjust and execute hedges in an efficient manner. Any hedging activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in worse overall investment performance than if we had not engaged in any such hedging transactions. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily

Table of Contents

mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing fair values. If our estimates of their value prove to be inaccurate, we may be required to write down the fair values of the MSRs which could adversely affect our business, financial condition, liquidity and results of operations.

Our estimates of the fair value of our MSRs is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds and other market conditions, which affect the number of loans that are repaid or refinanced and thus no longer result in cash flows, and the number of loans that become delinquent.

We use internal financial models that utilize our understanding of inputs and assumptions used by market participants to value our MSRs for purposes of financial reporting and for purposes of determining the price that we pay for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use asset‑specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our inputs and the results of the models.

If loan delinquencies or prepayment speeds are different than anticipated or other factors perform differently than modeled, the recorded value of certain of our MSRs may change. Significant differences in performance could increase the chance that we do not adequately estimate the impact of these factors on our valuations which could result in misstatements of our financial results, restatements of our financial statements, or otherwise materially and adversely affect our business, financial condition, liquidity and results of operations.

The geographic concentration of our servicing portfolio may be affected by weaker economic conditions or adverse events specific to certain regions which could decrease the fair value of our MSRs and adversely affect our business, financial condition, liquidity and results of operations.

A decline in the economy or difficulties in certain real estate markets are likely to cause a decline in the value of residential and commercial properties. To the extent that certain states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, such concentration may disproportionately decrease the fair value of our MSRs and adversely affect our loan production businesses. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost‑prohibitive, we may be required to stop doing business in those states or may be subject to a higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of operations.

Delinquencies can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disasters, pandemic, war or terrorist attacks. A decrease in home prices may result in higher loan‑to‑value ratios (“LTVs”), lower recoveries in foreclosure and an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. Some borrowers do not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume or growth of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments. Further, despite recent increases, interest rates have remained near historical lows for an extended period of time.

Table of Contents

The likelihood of mortgage delinquencies and defaults, and the associated risks to our business, including higher costs to service such loans and a greater risk that we may incur losses due to repurchase or indemnification demands, change as loans season. Newly originated loans typically exhibit low delinquency and default rates as the changes in economic conditions, individual financial circumstances and other factors that drive borrower delinquency often do not appear for months or years. Highly seasoned loan portfolios, in which borrowers have demonstrated years of performance on their mortgage payments, also tend to exhibit low delinquency and default rates. Most of the loans in our prime servicing portfolio were originated in the years 2016 through 2019. As a result, we expect the delinquency rate and defaults in the prime servicing portfolio to increase in future periods as the portfolio seasons.

Increased mortgage delinquencies, defaults and foreclosures may result in lower revenue for loans that we service for the Agencies because we only collect servicing fees from the Agencies for performing loans, and our failure to service delinquent and defaulted loans in accordance with the applicable servicing guidelines could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated. In addition, an increase in delinquencies lowers the interest income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also, increased mortgage defaults may ultimately reduce the number of mortgages that we service.

Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers and to acquire and liquidate the properties securing the loans or otherwise resolve loan defaults if payment collection is unsuccessful, and only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage delinquencies, defaults and foreclosures may also result in an increase in servicing advances we are obligated to make to fulfill our obligations to MBS holders and to protect our investors’ interests in the properties securing the delinquent mortgage loans. An increase in required advances also may cause an increase in our interest expense and affect our liquidity as a result of increased borrowings under our credit facilities to fund any such increase in the advances.

A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations.

Most of the loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. Disruptions in the general MBS market have occurred in the past. Any significant disruption or period of illiquidity in the general MBS market would directly affect our own liquidity and the liquidity of PMT because no existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Related Party Risks

We rely on PMT as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT or its operations, would adversely affect our business, financial condition, liquidity and results of operations.

PMT is the counterparty that currently acquires all of the newly originated mortgage loans in connection with our correspondent production activities. A significant portion of our income is derived from a fulfillment fee earned in connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production activities without having to incur the significant additional debt financing that would be required for us to purchase those loans from the originating lender. In the case of government‑insured loans, we purchase them from PMT at PMT’s cost plus a sourcing fee and fulfill them for our own account and sell the loans, typically by pooling the federally insured or guaranteed loans together into an MBS which Ginnie Mae guarantees. We earn interest income and gains or losses

Table of Contents

during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this relationship with PMT is terminated by PMT or PMT reduces the volume of these loans that it acquires for any reason, we would have to acquire these loans from the correspondent sellers for our own account, something that we may be unable to do, or enter into another similar counterparty arrangement with a third party, which we may not be able to enter into on terms that are as favorable to us, or at all.

The management agreement, the mortgage banking services agreement and certain of the other agreements that we have entered into with PMT contain cross‑termination provisions that allow PMT to terminate one or more of those agreements under certain circumstances where another one of such agreements is terminated. Accordingly, the termination of this relationship with PMT, or a material change in the terms thereof that is adverse to us, would likely have a material adverse effect our business, financial condition, liquidity and results of operations. The terms of these agreements extend until September 12, 2020, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.

We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status, corporate-level income taxes, would apply to all of PMT's taxable income at federal and state tax rates. Either of these scenarios would potentially impair PMT’s financial position and its ability to raise capital, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations.

PMT, as the owner of a substantial number of all of the MSRs or mortgage loans that we subservice, may, under certain circumstances, terminate our subservicing contract with or without cause, in some instances with little notice and little to no compensation. Upon any such termination, it would be difficult to replace such a large volume of subservicing in a short period of time, or perhaps at all. Accordingly, we may not generate as much revenue from subservicing for other third parties. If we were to have our subservicing terminated by PMT, or if there was a change in the terms under which we perform subservicing for PMT that was material and adverse to us, this would have a material adverse effect on our business, financial condition, liquidity and results of operations.

PMT has an exclusive right to acquire the loans that are produced through our correspondent production activities, which may limit the revenues that we could otherwise earn in respect of those loans.

Our mortgage banking services agreement with PMT requires PLS to provide fulfillment services for correspondent production activities exclusively to PMT as long as PMT has the legal and financial capacity to purchase correspondent loans. As a result, the revenue that we earn with respect to these loans will be limited to the fulfillment fees that we earn in connection with the production of these loans, which may be less than the revenues that we might otherwise be able to realize by acquiring these loans ourselves and selling them in the secondary loan market.

Our financings of MSRs using excess servicing spread exposes us to significant risks.

We have previously sold to PMT or its subsidiaries, from time to time, the right to receive certain ESS arising from MSRs that we owned or acquired. The ESS represents the difference between our contractual servicing fee with the applicable Agency and the base servicing fee that we retain as compensation for servicing the related mortgage loans upon our sale of the ESS.

Table of Contents

As a condition of our sale of the ESS, PMT was required to subordinate its interests in the ESS to those of the applicable Agency. With respect to our Ginnie Mae MSRs, we pledged our interest in such MSRs and PMT’s interest in the related ESS to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PLS. Accordingly, our interest in the Ginnie Mae MSRs and PMT’s interest in the related ESS are also subordinated to the rights of an indenture trustee on behalf of the note holders to which the special purpose entity issues its variable funding notes and term notes under an indenture, pursuant to which the indenture trustee has a blanket lien on all of our Ginnie Mae MSRs (including the ESS we sell to PMT and record as a financing).

The indenture trustee, on behalf of the note holders, may liquidate our Ginnie Mae MSRs along with PMT’s interest in the ESS to the extent there exists an event of default under the indenture. In the event PMT’s ESS is liquidated as a result of certain of our actions or inactions, we generally would be required to indemnify PMT under the applicable spread acquisition agreement. A claim by PMT for the loss of its ESS as a result of our actions or inactions would likely be significant in size. Either of these occurrences could have a material adverse effect on our business, financial condition, liquidity and results of operations.

In connection with PLS’ repurchase agreement with the special purpose entity, we also provide pass through financing to PMT under a repurchase agreement to facilitate its financing of the ESS it acquires from us. The repurchase agreement subjects us to the credit risk of PMT. To the extent PMT defaults in its payments of principal and interest under its repurchase agreement with us, we would still be required to make the allocable and corresponding payments under our repurchase agreement with the special purpose entity. To the extent PMT fails to make such payments of principal and interest to us or otherwise defaults under its repurchase agreement and we are unable to make the allocable and corresponding payments under our repurchase agreement with the special purpose entity, this could also create an event of default that could cause a cross default under other financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity and results of operations.

Other Risks

We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances.

Our contracts with purchasers of newly originated loans that we fund through our consumer direct lending business or acquire from PMT through our correspondent production activities contain provisions that require us to indemnify the purchaser of the related loans or repurchase such loans under certain circumstances. Our loan sale agreements with purchasers, including the Agencies, contain provisions that generally require us to indemnify or repurchase these loans if our representations and warranties concerning loan quality and loan characteristics are inaccurate; or the loans fail to comply with the respective Agency’s underwriting or regulatory requirements.

Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They are also typically valued and, therefore, can generally only be sold at a significant discount to the underlying UPBs. In certain cases involving mortgage lenders from whom loans were acquired through our correspondent production activities, we may have contractual rights to either recover some or all of our indemnification losses or otherwise demand repurchase of these loans. Depending on the volume of repurchase and indemnification requests, some of these mortgage lenders may not be able to financially fulfill their obligation to indemnify us or repurchase the affected loans. If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $21.4 million as of December 31, 2019. Because of the increase in our loan production over time, we expect that indemnification and repurchase requests are also likely to increase. Should home values decrease and negatively impact the related loan values, our realized loan losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are

Table of Contents

required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition, liquidity and results of operations.

In deciding whether to approve loans or to enter into other transactions across our businesses with borrowers and counterparties, including brokers, correspondent lenders and non-delegated correspondent lenders, we may rely on information furnished to us by or on behalf of borrowers and such counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and such counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions. Any such misrepresented information could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.

As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicing guidelines could result in our termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable servicing guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of operations could be adversely affected.

We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances, which could adversely affect our business, financial condition, liquidity and results of operations.

During any period in which a borrower is not making payments, we are required under most of our servicing agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a mortgage loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or a liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Table of Contents

We may not realize all of the anticipated benefits of potential future acquisitions of MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.

Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios will depend, in part, on our ability to appropriately service any such assets. The process of acquiring these assets may disrupt our business and may not result in the full benefits expected. The risks associated with these acquisitions include, among others, unanticipated issues in integrating information regarding the new loans to be serviced into our information technology systems, and the diversion of management’s attention from other ongoing business concerns. We have also seen increased scrutiny by the Agencies and regulators with respect to large servicing acquisitions, the effect of which could reduce the willingness of selling institutions to pursue MSR sales and/or impede our ability to complete MSR acquisitions. Moreover, if we inappropriately value the assets that we acquire or the fair value of the assets that we acquire declines after we acquire them, the resulting charges may negatively affect both the carrying value of the assets on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired servicing portfolio may not be able to generate sufficient cash flows to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Risks Related to our Investment Management Segment

Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees.

A significant portion of the fees that we earn under our investment management agreements with clients are based on the fair value of the assets that we manage. The fair values of the securities and other assets held in the portfolios that we manage and, therefore, our assets under management may decline due to any number of factors beyond our control, including, among others, a decline in housing, changes to interest rates, stock or bond market movements, a general economic downturn, political uncertainty or acts of terrorism. The economic outlook cannot be predicted with certainty and we continue to operate in a challenging business environment. If volatile market conditions cause a decline in the fair value of our assets under management, that decline in fair value could materially reduce our management fees and incentive fees under our management contract with PMT and adversely affect our revenues. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced.

We currently manage assets for a single client, the loss of which could significantly reduce our management and incentive fees and have a material adverse effect on our results of operations.

Substantially all of our management and incentive fees result from our management of PMT. The term of the management agreement that we have entered into with PMT, as amended, 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 a termination of one or more related party agreements by PMT in certain circumstances, we may be entitled to a termination fee under our management agreement. However, the termination of such management agreement and the loss of PMT as a client would significantly affect our investment management segment and negatively impact our management fees and incentive fees.

The historical returns on the assets that we select and manage for PMT, and our resulting management and incentive fees, may not be indicative of future results.

The historical returns of the assets that we manage should not be considered indicative of the future returns on those assets or future returns on other assets that we may select for investment by PMT. The investment performance that is achieved for the assets that we manage varies over time, and the nature and mix of assets we manage has changed significantly over the past several years. As a result, the change and variance in investment performance can be significant. Accordingly, the management and incentive fees that we have earned in the past based on those returns should not be considered indicative of the management or incentive fees that we may earn in the future from managing those same assets or from managing other assets for PMT. A decline in the investment performance of our managed assets will also adversely affect our ability to attract and retain clients.

Table of Contents

Changes in regulations applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.

The legislative and regulatory environment in which we operate has undergone significant changes in the recent past. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients, may adversely affect our business. Our ability to succeed in this environment will depend on our ability to proactively monitor any such legislative and regulatory changes. Regulatory changes that will affect other market participants are likely to change the way in which we conduct business with our counterparties. The uncertainty regarding the continued implementation of laws and regulations and their impact on the investment management industry and us cannot be predicted at this time but will continue to be a risk for our business.

We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non‑U.S. governmental regulatory authorities or self‑regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self‑regulatory organizations, as well as by U.S. and non‑U.S. courts. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed on us or the markets in which we trade, or whether any of the proposals will become law. Compliance with any new laws or regulations could add to our compliance burden and costs and adversely affect the manner in which we conduct business, as well as our financial condition, liquidity and results of operations.

Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.

Our investment management segment is subject to extensive regulation in the United States. These regulations are designed primarily to ensure the integrity of the financial markets and to protect investors in any entity that we advise and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities. These requirements relate to, among other things, fiduciary duties to clients, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and advisory clients and general anti‑fraud prohibitions. We are required to maintain an effective compliance program, and are subject to routine periodic examinations by the staff of the SEC.

The failure by us or our service providers to comply with applicable laws or regulations, or the failure of our outside third party compliance advisor to design and successfully implement and administer our compliance program, could result in fines, suspensions of individual employees or other sanctions, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction imposed against us or our employees by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation and cause us to lose existing clients.

We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT.

Pursuant to our management agreement with PMT, we are obligated to provide PMT with the services of our senior management team, and the members of that team are required to devote such time as is necessary and appropriate, commensurate with the level of activity of PMT. The members of our senior management team may have conflicts in allocating their time and services between our operations and the activities of PMT and any other entities or accounts that we may manage in the future.

In addition, we and the other entities or accounts that we may manage may participate in some of PMT’s investments now or in the future, which may not be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests in the investments and those of PMT or such other entities. Any such

Table of Contents

perceived or actual conflicts of interest could damage our reputation and materially and adversely affect our business, financial condition, liquidity and results of operations.

We are subject to significant financial and reputational risks from potential liability arising from lawsuits, and regulatory and government action.

We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains high. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance related issues, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business results and prospects. We may experience a significant volume of litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties may also become increasingly litigious.

We also may be exposed to the risk of litigation by investors in clients that we manage from time to time if our management advice is alleged to constitute gross negligence or willful misconduct. Investors could sue us to recover amounts lost by those entities due to our alleged misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with the performance of any such entities that we manage or from allegations that we improperly exercised control or influence over those entities. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are generally indemnified by the entities that we manage, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from the entities that we manage, our business, financial condition, liquidity and results of operations would be materially and adversely affected.

Risks Related to Our Business in General

We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks.

We have a number of counterparties and vendors, who provide us with financial, technology and other services that are critical to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms or if we had a disruption in service due to a vendor dispute, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. Some of these counterparties and vendors have significant operations outside of the United States. If we or our vendors had to curtail or cease operations in these countries due to political unrest or natural disasters and then transfer some or all of these operations to another geographic area, we could experience disruptions in service and incur significant transition costs as well as higher future overhead costs. With respect to vendors engaged to perform certain servicing activities, we are required to assess their compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it could negatively impact our relationships with our regulators, as well as our business and operations. Further, we may incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our failure to deal appropriately with various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings.

Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with counterparties whose own reputations are under question could harm our business.

Table of Contents

Certain of our officers also serve as officers of PMT. As we expand the scope of our businesses, we increasingly confront potential conflicts of interest relating to investment activities that we manage for PMT. The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we continue to monitor and mitigate or otherwise address any conflicts between our interests and those of PMT through the implementation of procedures and controls. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.

Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. These factors could impair our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees, significantly harm our ability to raise capital, and adversely affect our results of operations.

Initiating new business activities, developing new products or significantly expanding existing business activities may expose us to new risks and will increase our cost of doing business.

Initiating new business activities, developing new products, such as the recently launched home equity line of credit product, or significantly expanding existing business activities, such as our entry into broker direct and consumer direct lending, are ways to grow our businesses and respond to changing circumstances in our industry; however, they may expose us to new risks and regulatory compliance requirements. We cannot be certain that we will be able to manage these risks and compliance requirements effectively. Furthermore, our efforts may not succeed, and any revenues we earn from any new or expanded business initiative may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative.

Our risk management efforts may not be effective.

We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities. We also are subject to various laws, regulations and rules that are not industry specific, including employment laws related to employee hiring and termination practices, health and safety laws, environmental laws and other federal, state and local laws, regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures, and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified, or identify additional risks to which we may become subject in the future. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks, and we may not effectively identify, manage, monitor, and mitigate these risks as our business activities change or increase.

We could be harmed by misconduct or fraud that is difficult to detect.

We are exposed to risks relating to misconduct by our employees, contractors we use, or other third parties with whom we have relationships. For example, our employees could execute unauthorized transactions, use our assets improperly or without authorization, perform improper activities, use confidential information for improper purposes, or misrecord or otherwise try to hide improper activities from us. This type of misconduct could also relate to assets we manage for others through our investment advisory subsidiary, and can be difficult to detect. If not prevented or detected, misconduct by employees, contractors, or others could result in losses, claims or enforcement actions against us, or could seriously harm our reputation. Our controls may not be effective in detecting this type of activity.

Table of Contents

If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could harm our business and the market value of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes‑Oxley Act of 2002 (the “Sarbanes‑Oxley Act”) requires that we evaluate and report on our internal control over financial reporting. We cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we rapidly grow our businesses, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Section 404(b) of the Sarbanes-Oxley Act requires our auditors to formally attest to and report on the effectiveness of our internal control over financial reporting.

If we cannot maintain effective internal control over financial reporting, or our independent registered public accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of our common stock could decline. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in an event of default under one or more of our lending arrangements and/or reduce the market value of shares of our common stock. Additionally, the existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency, and management may not be able to remediate any such material weakness or significant deficiency in a timely manner, or at all. Accordingly, our failure to maintain effective internal control over financial reporting could result in misstatements of our financial results or restatements of our financial statements or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations.

Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.

Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs, investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Changes in accounting interpretations or assumptions could impact our financial statements and our ability to timely prepare our financial statements. Our inability to timely prepare our financial statements in the future would likely adversely affect our share price significantly.

The success and growth of our business depends upon our ability to adapt to and implement technological changes and to successfully develop, implement and protect proprietary technology.

Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological changes, successfully enhance our current information technology solutions through the use of third-party and proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our customers.

Our mortgage loan production businesses are dependent upon our ability to effectively interface with our borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. The direct lending processes are becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower- or counterparty-expected conveniences. In our correspondent production activities, our and PMT’s correspondent sellers also expect and require certain conveniences and service levels that are dependent on technological advancement. In this regard, we are in the process of transitioning from an older loan acquisition platform to a new workflow-driven, cloud-based loan acquisition platform. While we anticipate that this new system will increase scalability and produce other efficiencies, there can be no assurance that the new system will prove to be effective or that such correspondent sellers will easily adapt to a new system. Any failure to effectively or timely transition to our new system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect

Table of Contents

on our business, financial condition and results of operations.

Similarly, our servicing business is dependent on our ability to effectively interface with our customers and investors, as well as service mortgage loans in compliance with applicable laws and regulations and the contractual requirements of such investors. For example, we recently announced the completion of an initiative to develop a proprietary, workflow-driven, cloud-based servicing system that provides for real-time processing and advanced workflow management thereby reducing servicing costs, increasing scalability and creating sustainable efficiencies.

The development, implementation and protection of these technologies and becoming more proficient with them requires significant capital expenditures. As these technological advancements and investor and compliance requirements increase in the future, we will need to further develop these technological capabilities in order to remain competitive, and we will need to implement, execute and maintain them in an operating and regulatory environment that exposes us to significant risk. Moreover, litigation has become necessary to protect our technologies, and, such litigation is expected to be time consuming and result in substantial costs and diversion of resources. Any failure by us to develop, implement, execute or maintain our technological capabilities and any litigation costs associated with protection of our technologies could have a material adverse effect on our business, financial condition and results of operations.

Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of theft of certain personally identifiable information of consumers, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our investor relationships.

As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems, both proprietary and those provided to us by third-party service providers such as cloud-based computing service providers. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, computer viruses and disabling devices, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers.

Despite our efforts to ensure the integrity of our systems our investment in significant physical and technological security measures, employee training, contractual precautions and business continuity plans, and our implementation of policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed. We also may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the methods of attack change frequently or may not be recognized until after such attack has been launched, and because security attacks can originate from a wide variety of sources, including third parties such as persons involved with organized crime or associated with external service providers. We are also held accountable for the actions and inactions of our third-party vendors regarding cybersecurity and other consumer-related matters.

Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Table of Contents

Terrorist attacks and other acts of violence or war may cause disruptions in our operations and in the financial markets, and could materially and adversely affect the real estate industry generally and our business, financial condition, liquidity and results of operations.

Terrorist attacks and other acts of violence or war may cause disruptions in the U.S. financial markets, including the real estate capital markets, and negatively impact the U.S. economy in general. Such attacks could also cause disruptions in our operations. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the United States and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. The economic impact of these events could also materially and adversely affect the credit quality of some of our loans and investments and the properties underlying our interests.

We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance and may cause the market value of our common stock to decline or be more volatile. A prolonged economic slowdown, recession or declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We cannot predict the severity of the effect that potential future armed conflicts and terrorist attacks would have on us. Losses resulting from these types of events may not be fully insurable.

We are subject to certain risks associated with investing in real estate and real estate related assets, including risks of loss from adverse weather conditions, man-made or natural disasters and the effects of climate change, which may cause disruptions in our operations and could materially and adversely affect the real estate industry generally and our business, financial condition, liquidity and results of operations.

Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can adversely impact properties that we own or that collateralize loans we own or service, as well as properties where we conduct business. Future adverse weather conditions and man-made or natural disasters could also adversely impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Potentially adverse consequences of global warming and climate change, including rising sea levels and increased intensity of extreme weather events, could similarly have an impact on our properties and the local economies of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition or may even cancel policies due to increasing costs of providing insurance coverage in certain geographic areas.

Certain types of losses, generally of a catastrophic nature, that result from events described above such as earthquakes, floods, hurricanes, tornados, terrorism or acts of war may also be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property, which could have an adverse effect on our business, financial condition, liquidity and results of operations.

Table of Contents

Catastrophic events may disrupt our business.

Our corporate headquarters are located in Westlake Village, California and we have additional locations around the greater Los Angeles metropolitan area and elsewhere in the State of California. Many areas of California, including the immediate area around our corporate headquarters, have experienced extensive damage and property loss due to a series of large wildfires. California and the other jurisdictions in which we operate are also prone to other types of natural disasters. In the event of a major earthquake, hurricane, or catastrophic event such as fire, flood, power loss, telecommunications failure, cyber attack, pandemic, war, or terrorist attack, we may be unable to continue our operations and may endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of our technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.

Risks Related to Our Organizational Structure

BlackRock and Highfields may be able to significantly influence the outcome of votes of our common stock, or exercise certain other rights pursuant to separate stockholder agreements we have entered into with each of them, and their interests may differ from those of our public stockholders.

Pursuant to separate stockholder agreements with BlackRock and Highfields, which were amended and restated in connection with the Reorganization in November 2018, Highfields has the right to nominate one or two individuals for election to our board of directors, depending on the percentage of the voting power of our outstanding shares common stock that it holds, and we are obligated to use our best efforts to cause the election of those nominees. In addition, these stockholder agreements require that we obtain the consent of BlackRock and Highfields with respect to amendments to our certificate of incorporation or bylaws. As a result, each of BlackRock and Highfields may be able to significantly influence our management and affairs. In addition, as a result of the size of their individual equity holding they may be able to significantly influence the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our board of directors or a change in control of our Company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

Our only material assets are our equity interests in PNMAC Holdings, Inc., PennyMac and their subsidiaries, and we are accordingly dependent upon distributions from such entities to pay taxes, make payments under the tax receivable agreement or pay dividends.

We are a holding company and have no material assets other than our direct ownership of PNMAC Holdings, Inc. and our direct and indirect ownership of all of the Class A units of PennyMac. We have no independent means of generating revenue. We are required to pay tax on the taxable income of PennyMac and make payments under the tax receivable agreement without regard to whether PennyMac distributes to us any cash or other property. To the extent that we need funds, and PennyMac is restricted from making such distributions under applicable laws or regulations or under the terms of financing arrangements, or is otherwise unable to provide such funds, it could materially and adversely affect our liquidity and financial condition.

We have not established a minimum dividend payment level and no assurance can be given that we will be able to make dividends to our stockholders in the future at current levels or at all.

In October 2019, we announced the initiation of a quarterly dividend for our common stockholders. We have not established a minimum dividend payment level, and our ability to pay dividends to our stockholders may be materially and adversely affected by the risk factors discussed in this Report and any subsequent Quarterly Reports on Form 10-Q. Although we paid, and anticipate continuing to pay, quarterly dividends to our stockholders, our board of directors has the sole discretion to determine the timing, form and amount of any future dividends to our stockholders, and such determination will depend upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, capital requirements and other expense obligations, debt covenants, contractual legal, tax, regulatory and other restrictions and such other factors as our board of directors may deem relevant from time to time.

Table of Contents

As a result, no assurance can be given that we will be able to continue to pay dividends to our stockholders in the future or that the level of any future dividends will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.

Anti‑takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:

| · | authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval; |

| --- | --- |

| · | prohibit stockholder action by written consent unless the matter as to which action is being taken has been approved by our board of directors; |

| --- | --- |

| · | provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws \(provided that, if that action adversely affects BlackRock or Highfields when that entity, together with its affiliates, holds at least 5% of the voting power of our outstanding shares of capital stock, our stockholder agreements provide that such action must be approved by that entity\); |

| --- | --- |

| · | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and |

| --- | --- |

| · | prevent a sale of substantially all of our assets or completion of a merger or other business combination that constitutes a change of control without the approval of a majority of our independent directors. |

| --- | --- |

These and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of and take other corporate actions.

Our certificate of incorporation contains provisions renouncing our interest and expectancy in certain corporate opportunities identified by or presented to BlackRock and Highfields.

BlackRock, Highfields and their respective affiliates are in the business of providing capital to growing companies, and may acquire interests in businesses that directly or indirectly compete with certain portions of our business. Our certificate of incorporation provides that neither BlackRock nor Highfields nor their respective affiliates has any duty to refrain from (i) engaging, directly or indirectly, in a corporate opportunity in the same or similar lines of business in which we now engage or propose to engage, or (ii) doing business with any of our clients, customers or vendors. In the event that either of BlackRock or Highfields or their respective affiliates acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or its affiliates and for us or our affiliates other than in the capacity as one of our officers or directors, then neither BlackRock nor Highfields has any duty to communicate or offer such transaction or business opportunity to us and may take any such opportunity for themselves or offer it to another person or entity. Neither BlackRock nor Highfields nor any officer, director or employee thereof, shall be liable to us or to any of our stockholders (or any affiliates thereof) for breach of any fiduciary or other duty by engaging in any such activity and we waive and renounce any claim based on such activity. This provision applies even if the business opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our separate stockholder agreements with BlackRock and Highfields provide that any amendment or repeal of the provisions related to corporate opportunities described above requires the consent of each of BlackRock and Highfields as long as it, or any of its affiliates, holds any equity interest in us. These potential conflicts of interest could have a material and adverse effect on our business, financial condition,

Table of Contents

liquidity, results of operations or prospects if attractive corporate opportunities are allocated by BlackRock or Highfields to themselves or their other affiliates instead of to us.

Our bylaws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees.

Our bylaws provide that the state or federal court located within the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, liquidity and results of operations.

Risks Related to Ownership of Our Common Stock

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

The market price and trading volume of our common stock has fluctuated significantly in the past and may be highly volatile in the future and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Further, if the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. Some of the factors that could negatively affect the market price or trading volume of our common stock include:

| · | variations in our actual and anticipated financial and operating results and those expected by investors and analysts; |

| --- | --- |

| · | changes in the manner that investors and securities analysts who provide research to the marketplace on us analyze the value of our common stock and similar companies; |

| --- | --- |

| · | changes in recommendations or in estimated financial results published by securities analysts who provide research to the marketplace on us, our competitors or our industry; |

| --- | --- |

| · | litigation and governmental investigations; |

| --- | --- |

| · | increases in market interest rates that may lead purchasers of our shares to demand a higher yield; |

| --- | --- |

| · | announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and |

| --- | --- |

| · | general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located. |

| --- | --- |

These broad market and industry factors may decrease the market price and trading volume of our common stock, regardless of our actual operating performance.

Table of Contents

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock into the public trading market.

PennyMac was founded in 2008 by members of our executive leadership team, BlackRock and Highfields. As a result of the Reorganization, BlackRock, Highfields, and certain other former owners of PennyMac contributed 37,497,607 Class A units of PennyMac to us in exchange for, on a one-for-one basis, shares of our common stock. These former owners of PennyMac are now eligible for long-term capital gains treatment (rather than ordinary income tax treatment) on future sales of such common stock now that they have satisfied the required one-year holding period. Sales of substantial numbers of shares of our common stock into the public trading market, or the perception that such sales could occur, could adversely affect the market price of our common stock and impede our ability to raise capital through the issuance of additional common stock or other equity securities.

The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.

As of December 31, 2019, we have an aggregate of 4.2 million shares of common stock authorized and remaining available for future issuance under our 2013 Equity Incentive Plan. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. We also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these acquisitions. Any common stock issued in connection with our incentive plans, acquisitions, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by investors who purchase our common stock.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium‑term notes, senior or subordinated notes, convertible debt securities or shares of preferred stock. The issuance of additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred stock, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Any issuance of securities in future offerings may reduce the market price of our common stock and dilute existing stockholders’ interests in us.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate offices are housed in a 60,000 square foot leased facility located at 3043 Townsgate Road, Westlake Village, California 91361 where we conduct executive management for all of our businesses and investment management activities.

Our loan servicing operations are primarily housed in a 142,000 square foot leased facility located in Moorpark, CA, a 116,000 square foot facility in Fort Worth, TX, and a 51,000 square foot facility in Summerlin, NV.

Table of Contents

Our consumer direct lending business occupies a 36,000 square foot leased facility in Pasadena, CA. Much of our loan processing activity is performed in a leased 60,000 square foot facility in close proximity to our corporate offices. We lease an additional 90,000 square feet in Tampa, FL, 75,000 square feet in Plano and 30,000 square feet in St. Louis, MO primarily for our correspondent production activities. We have three loan production centers located in Roseville, CA, Honolulu, HI, Edina, MN, and one collocated in our Summerlin, NV office.

Our information technology division is housed in a 50,000 square foot facility in Agoura Hills, CA and we lease a few small locations throughout the country, generally housing loan production and servicing activities.

The financial commitments of our leases are disclosed in Note—10 Leases to our consolidated financial statements included in Item 8 of this Report.

Item 3. 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 currently 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 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 December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. Nevertheless, the Company continues to believe the Garfield Action is without merit and plans to vigorously defend the matter, which remains pending.

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, 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 January 6, 2020, the Company filed a motion to compel arbitration, which has not yet been fully briefed or argued. The Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.

On November 6, 2019, the Company, through its wholly-owned subsidiary, PLS, filed a complaint in the U.S. District Court for the Central District of California (the “Federal Court”), captioned PennyMac Loan Services, LLC v. Black Knight, Inc., et al., Case No. 2:19−cv−09526 RGK (JEMx) (the “PLS Complaint”). The PLS Complaint alleges that BKI uses its market-dominating LoanSphere® MSP mortgage loan servicing system to engage in unfair business tactics that both entrap its licensees and create barriers to entry that stifle competition. The PLS Complaint further alleges that BKI violated the federal Sherman Act, the California Cartwright Act and California’s Unfair Competition Law and engaged in unfair competition under common law. The Company seeks, among other relief, to preliminarily and permanently enjoin BKI’s wrongful practices, and seeks the recovery of actual and statutory damages. On February 13, 2020, the Federal Court transferred the PLS complaint to the Middle District of Florida. The matter remains pending.

Table of Contents

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our shares of common stock are listed on the New York Stock Exchange (Symbol: PFSI). As of February 24, 2020, our shares of common stock were held by 12,099 holders of record.

We initiated a quarterly dividend for common stockholders in October 2019. The dividend level is reviewed each quarter and determined based on a number of factors, including, among other things, our earnings, our financial condition, growth outlook, the capital required to support ongoing growth opportunities and compliance with other internal and external requirements. Payments of dividends are subject to approval by our board of directors. Our ability to pay dividends may be adversely affected for the reasons described in Item 1A of this Report in the section entitled Risk Factors.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the year ended December 31, 2019.

Repurchase of our Common Stock

There was no stock repurchase activity for the quarter ended December 31, 2019.

Item 6. Selected Financial Data

The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.” The table below presents, as of and for the dates indicated, selected historical financial information for us. The condensed consolidated statements of income data for the years ended December 31, 2019, 2018, and 2017 and the condensed consolidated balance sheets data at December 31, 2019, and 2018 have been derived from our audited financial statements included elsewhere in this Report. The condensed consolidated statements of income data for the years ended December 31, 2016 and 2015 and the condensed consolidated balance sheets data at December 31, 2017, 2016, and 2015 have been derived from our Company’s audited consolidated financial statements that are not included in this Report.

Table of Contents

	Year ended December 31,
	2019		2018		2017		2016		2015
	(in thousands, except per share data)
Condensed Consolidated Statements of Income:
Revenues
Net gains on loans held for sale	$	725,528	$	249,022	$	391,804	$	531,780	$	320,715
Loan origination fees		174,156		101,641		119,202		125,534		91,520
Fulfillment fees from PennyMac Mortgage Investment Trust		160,610		81,350		80,359		86,465		58,607
Net loan servicing fees		293,665		445,393		306,059		185,466		229,543
Management fees and Carried Interest		36,492		24,104		22,545		23,726		30,865
Net interest income (expense)		76,721		71,819		(1,341)		(25,079)		(19,382)
Other		10,232		11,300		36,835		3,995		1,242
Total net revenue		1,477,404		984,629		955,463		931,887		713,110
Expenses
Compensation		503,458		403,270		358,721		342,153		274,262
Servicing		164,697		137,104		117,696		85,857		68,085
Loan origination		117,338		27,398		20,429		22,528		17,396
Other		162,467		149,160		122,708		98,266		74,174
Total expenses		947,960		716,932		619,554		548,804		433,917
Income before provision for income taxes		529,444		267,697		335,909		383,083		279,193
Provision for income taxes		136,479		23,254		24,387		46,103		31,635
Net income		392,965		244,443		311,522		336,980		247,558
Less: Net income attributable to noncontrolling interest		—		156,749		210,765		270,901		200,330
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	392,965	$	87,694	$	100,757	$	66,079	$	47,228
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	527,834	$	87,266	$	238,508	$	416,096	$	271,869
Servicing		(14,751)		172,302		58,672		(36,099)		1,297
Total mortgage banking		513,083		259,568		297,180		379,997		273,166
Investment management		16,361		7,003		5,789		2,486		7,722
Non-segment activities		—		1,126		32,940		600		(1,695)
	$	529,444	$	267,697	$	335,909	$	383,083	$	279,193
Condensed Consolidated Balance Sheets at Year End:
Assets
Loans held for sale at fair value	$	4,912,953	$	2,521,647	$	3,099,103	$	2,172,815	$	1,101,204
Mortgage servicing rights		2,926,790		2,820,612		2,119,588		1,627,672		1,411,935
Servicing advances		331,169		313,197		318,066		348,306		299,354
Investments in and advances to affiliates		157,343		165,886		181,421		239,769		241,352
Loans eligible for repurchase		1,046,527		1,102,840		1,208,195		382,268		166,070
Other		829,235		554,391		441,720		363,072		285,379
Total assets	$	10,204,017	$	7,478,573	$	7,368,093	$	5,133,902	$	3,505,294
Liabilities and stockholders' equity
Short-term debt	$	4,639,001	$	2,332,143	$	2,922,542	$	2,567,658	$	1,467,535
Long-term debt		1,493,466		1,648,973		1,135,401		301,917		421,208
Liability for mortgage loans eligible for repurchase		1,046,527		1,102,840		1,208,195		382,268		166,070
Income taxes payable		504,569		400,546		52,160		25,088		—
Other		458,947		340,280		330,121		457,615		388,131
Total liabilities		8,142,510		5,824,782		5,648,419		3,734,546		2,442,944
Stockholders' equity		2,061,507		1,653,791		1,719,674		1,399,356		1,062,350
Total liabilities and stockholders' equity	$	10,204,017	$	7,478,573	$	7,368,093	$	5,133,902	$	3,505,294
Per Common Share Data:
Earnings:
Basic	$	5.02	$	2.62	$	4.34	$	2.98	$	2.17
Diluted	$	4.89	$	2.59	$	4.03	$	2.94	$	2.17
Cash dividend declared	$	0.12	$	0.40	$	—	$	—	$	—
Year End:
Book value	$	26.26	$	21.34	$	19.95	$	15.49	$	12.32
Share price	$	34.04	$	21.26	$	22.35	$	16.65	$	15.36

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Preparation of financial statements in compliance with accounting principles generally accepted in the United States (“GAAP”) requires us to make 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. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

Fair Value

We group assets measured at or based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to determine fair value. These levels are:

|  |  | December 31, 2019 |  |  |  |

| --- | --- | --- | --- | --- | --- | | | | | | Percentage of | | | Level/Description | | Carrying value of assets (1) | | Total assets | Total stockholders' equity | | | | (in thousands) | | | | | Level 1: | Prices determined using quoted prices in active markets for identical assets or liabilities. | $ | 81,697 | 1% | 4% | | Level 2: | Prices determined 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 us. | | 4,536,649 | 44% | 220% | | Level 3: | Prices determined using significant unobservable inputs. Unobservable inputs reflect our judgements about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. | | 3,477,692 | 34% | 169% | | Total assets measured at or based on fair value (1) | | $ | 8,096,038 | 79% | 392% | | Total assets | | $ | 10,204,017 | | | | Total stockholders' equity | | $ | 2,061,507 | | |

| \(1\) | Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or liability and whether we have elected to carry the asset or liability at its fair value. |

| --- | --- |

As shown above, our consolidated balance sheet is substantially comprised of assets and liabilities that are measured at or based on their fair values. At December 31, 2019, $8.1 billion or 79% of our total assets were carried at fair value on a recurring basis and $20.3 million (real estate acquired in settlement of loans (“REO”)), were carried based on fair value on a non-recurring basis when fair value indicates evidence of impairment of individual properties. Of these assets carried at or based on fair value, $3.5 billion or 34% of total assets are measured using “Level 3” fair value inputs – significant inputs where there is difficulty in observing the inputs used by market participants in establishing fair value. Changes in inputs to measurement of these assets can have a significant effect on the amounts reported for these items including their reported balances and their effects on our income.

Table of Contents

As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets and liabilities, we are 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, subsequent transactions may be at values significantly different from those reported.

Because the fair value of “Level 3” fair value assets and liabilities are difficult to estimate, our valuation process includes performance of these items’ fair value estimation by specialized staff and significant senior management oversight. We have assigned the responsibility for estimating the fair values of non-interest rate lock commitment (“IRLC”) “Level 3” fair value assets and liabilities to our Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring these items and maintenance of our valuation policies and procedures for non-IRLC assets and liabilities. The FAV group submits the results of its valuations to our senior management valuation committee, which oversees the valuations. During 2019, our senior management valuation committee included the Company’s executive chairman, chief executive, chief financial, chief risk, and deputy chief financial officers.

The fair value of our IRLCs is developed by our Capital Markets Risk Management staff and is reviewed by our Capital Markets Operations group.

Following is a discussion of our approach to measuring the balance sheet items that are most affected by “Level 3” fair value estimates.

Loans Held for Sale

We carry loans at their fair values. We recognize changes in the fair value of loans in current period income as a component of Net gains on loans held for sale at fair value. How we estimate the fair value of loans is based on whether the loans are saleable into active markets with observable fair value inputs.

| · | We categorize loans that are saleable into active markets as “Level 2” fair value assets. We estimate the fair value of such loans using their quoted market price or market price equivalent. At December 31, 2019, we held $4.5 billion of such loans. |

| --- | --- |

| · | We categorize loans that are not saleable into active markets as “Level 3” fair value assets. “Level 3” fair value loans arise primarily from three sources: |

| --- | --- |

| - | We may purchase certain delinquent government guaranteed or insured loans from Ginnie Mae guaranteed securitizations included in our loan servicing portfolio. Our right to purchase such loans arises as the result of the loan being at least three months delinquent when we buy the loan. Our ability to purchase delinquent loans provides us with an alternative to our obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. To the extent such loans \(“early buyout” or “EBO” loans\) have not become saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the loan’s terms, we measure such loans using “Level 3” fair value inputs. At December 31, 2019, we held $374.1 million of such loans. |

| --- | --- |

| - | Certain of our loans may become non-saleable into active markets due to our identification of one or more defects. At December 31 2019, we held $9.2 million of such loans. |

| --- | --- |

| - | We originate home equity loans for sale to PMT. At present, an active, observable market for such loans does not exist. Because such loans are generally not saleable into active markets, we classify them as “Level 3” fair value assets. At December 31, 2019, we held $513,000 of such loans. |

| --- | --- |

Table of Contents

We use a discounted cash flow model to estimate the fair value of “Level 3” fair value loans. The significant unobservable inputs used in the fair value measurement of our “Level 3” fair value loans held for sale are discount rates, home price projections and prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

Interest Rate Lock Commitments

Our net gains on loans held for sale include our estimates of the gains or losses we expect to realize upon the sale of loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on loans held for sale at fair value before we fund or purchase the loans as the result of these commitments. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller, broker or loan applicant and adjust the fair value of such IRLCs as the loan approaches the point of funding or purchase or the prospective transaction is canceled.

We carry IRLCs as either Derivative assets or Derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to Loans held for sale at fair value when the loan is funded or purchased.

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that we will fund or purchase the loan (the “pull-through rate”).

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the marketplace. Our estimate of the probability that a loan will be funded and market interest rates are updated as the loans move through the funding or purchase process and as market interest rates change and may result in significant changes in our estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. Increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for the loan principal and interest payment cash flow component, which decreases in fair value.

A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of Net gains on loans held for sale at fair value for the period. We believe that the most significant “Level 3” fair value input to the measurement of IRLCs is the pull-through rate. At December 31, 2019, we held $136.7 million of net IRLC assets at fair value. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair value of IRLCs at December 31, 2019:

| Change in input \(1\) |  | Effect on fair value of IRLC of a change in pull-through rate |  |

| --- | --- | --- | --- | | | | (in thousands) | | | (20) | % | $ | (35,814) | | (10) | % | $ | (17,892) | | (5) | % | $ | (8,931) | | 5 | % | $ | 7,855 | | 10 | % | $ | 14,649 | | 20 | % | $ | 26,262 |

| \(1\) | The upward shift in input amount on a per-loan basis is limited to the amount of shift required to reach a 100% pull-through rate. |

| --- | --- |

Table of Contents

The preceding analysis holds constant all of the other inputs to show an estimate of the effect on fair value of a change in the pull-through rate. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analysis is not a projection of the effects of a shock event or a change in our estimate of an input and should not be relied upon as an earnings projection.

Mortgage Servicing Rights

MSRs represent the fair value assigned to contracts that obligate us to service the mortgage loans on behalf of the owners of the mortgage loans in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We recognize MSRs at our estimate of the fair value of the contract to service the loans.

We include changes in fair value of MSRs in current period income as a component of Net loan servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. Both our estimate of the change in fair value attributable to realization of cash flows and of the change in fair value are affected by changes in market inputs are affected by changes in inputs. During the year ended December 31, 2019, we recognized a $1.0 billion net reduction in fair value of MSRs: $455.5 million of the reduction was due to realization of cash flows underlying the fair value of MSR and a $550.7 million of the reduction was due to changes in market inputs.

We classify MSRs as “Level 3” fair value assets and determine their fair value using a discounted cash flow approach. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs are the pricing spread (used to develop periodic discount rates), prepayment speed and annual per-loan cost of servicing.

A shift in the market for MSRs or a change in our assessment of an input to the valuation of MSRs can have a significant effect on their fair value and in our income for the period. The fair value of MSRs that we held at December 31, 2019 was $2.9 billion.

Following is a summary of the effect on fair value of MSRs of various changes to these key inputs at December 31, 2019:

|  |  | Effect on fair value of MSRs of a change in input value |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | | Change in input | | Pricing spread | | Prepayment speed | | Servicing cost | | | | | (in thousands) | | | | | | | (20) | % | $ | 193,469 | $ | 285,318 | $ | 98,065 | | (10) | % | $ | 93,548 | $ | 136,043 | $ | 49,032 | | (5) | % | $ | 46,104 | $ | 66,474 | $ | 24,516 | | 5 | % | $ | (44,561) | $ | (63,569) | $ | (24,516) | | 10 | % | $ | (87,734) | $ | (124,411) | $ | (49,032) | | 20 | % | $ | (170,155) | $ | (238,549) | $ | (98,065) |

The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in a specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Excess Servicing Spread Financing

We finance a portion of the cost of Agency MSRs that we purchase from non-affiliate sellers through the sale to PMT of the servicing spread in excess of a specified level. We carry our ESS at fair value.

Table of Contents

Because the ESS is a claim to a portion of the cash flows from MSRs, the valuation of the ESS is similar to that of MSRs. We use the same discounted cash flow approach to measure the ESS and the related MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included in the ESS valuation as these cash flows do not accrue to the holder of the ESS.

A shift in the market for, or a change in our assessment of an input to, the valuation of ESS can have a significant effect on the fair value of ESS and in our income for the period. However, we believe that this change will be offset to a great extent by a change in the fair value of the MSRs that the ESS is financing. We record changes in the fair value of ESS in Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust. During the year ended December 31, 2019, we recorded $9.3 million of net gains due to changes in fair value of ESS.

We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (used to develop periodic discount rates) and prepayment speed. At December 31, 2019, we carried $178.6 million of ESS at fair value. Following is a summary of the effect on fair value of various changes to these inputs at December 31, 2019:

|  |  | Effect on fair value of excess servicing spread of a change in input value |  |  |  |

| --- | --- | --- | --- | --- | --- | | Change in input | | Pricing spread | | Prepayment speed | | | | | (in thousands) | | | | | (20) | % | $ | 4,907 | $ | 18,565 | | (10) | % | $ | 2,422 | $ | 8,878 | | (5) | % | $ | 1,203 | $ | 4,344 | | 5 | % | $ | (1,188) | $ | (4,164) | | 10 | % | $ | (2,361) | $ | (8,160) | | 20 | % | $ | (4,662) | $ | (15,680) |

The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Critical Accounting Policy Not Based on Fair Value- Liability for Losses Under Representations and Warranties

We record a provision for losses relating to our representations and warranties as part of our loan sale transactions and periodically update our estimates of our liability. The method we use to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future default and loan repurchase rates, the potential severity of loss in the event of default and, if applicable, the probability of reimbursement by the correspondent loan seller.

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. The liability estimate is reviewed and approved by our senior management credit committee which includes the senior executives of the Company and of the loan production, loan servicing and credit risk management areas.

During the year ended December 31, 2019, we recorded $8.4 million in provision for losses relating to current year loan sales in Net gain on loans held for sale at fair value and incurred net losses totaling $209,000.

Table of Contents

As economic fundamentals change, as purchaser and insurer evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic conditions affect our correspondent sellers, the level of repurchase activity and ensuing losses will change. As a result of these changes, we may be required to adjust the estimate of our liability for representations and warranties. Such an adjustment may be material to our financial condition and income. During the year ended December 31, 2019, we recorded reductions to our previously recorded representations and warranties liability amounts totaling $7.9 million in Net gain on loans held for sale at fair value. At December 31, 2019, the balance of our liability for losses under representations and warranties totaled $21.4 million.

Accounting Developments

Refer to Note 3 – Significant Accounting Policies ‒ Recently Issued Accounting Pronouncements to our consolidated financial statements for a discussion of recent accounting developments and the expected effect on the Company.

Table of Contents

Results of Operations

Our results of operations are summarized below:

	Year ended December 31,
	2019			2018			2017
	(dollars in thousands except per-share amounts)
Revenues:
Net gains on loans held for sale at fair value	$	725,528		$	249,022		$	391,804
Loan origination fees		174,156			101,641			119,202
Fulfillment fees from PennyMac Mortgage Investment Trust		160,610			81,350			80,359
Net loan servicing fees		293,665			445,393			306,059
Net interest income (expense)		76,721			71,819			(1,341)
Management fees & Carried Interest		36,492			24,104			22,545
Other		10,232			11,300			36,835
Total net revenue		1,477,404			984,629			955,463
Expenses		947,960			716,932			619,554
Income before provision for income taxes		529,444			267,697			335,909
Provision for income taxes		136,479			23,254			24,387
Net income	$	392,965		$	244,443		$	311,522
Earnings per share
Basic	$	5.02		$	2.62		$	4.34
Diluted	$	4.89		$	2.59		$	4.03
Return on average common stockholders' equity		21.6	%		12.7	%		26.0	%
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	527,834		$	87,266		$	238,508
Servicing		(14,751)			172,302			58,672
Total mortgage banking		513,083			259,568			297,180
Investment management		16,361			7,003			5,789
Non-segment activities (1)		—			1,126			32,940
	$	529,444		$	267,697		$	335,909
During the year:
Interest rate lock commitments issued	$	72,698,014		$	44,786,584		$	49,606,767
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees	$	56,033,704		$	26,194,303		$	22,971,119
Common stock closing prices
High	$	34.45		$	25.20		$	22.45
Low	$	20.34		$	18.77		$	15.65
At end of year	$	34.04		$	21.26		$	22.35
At end of year:
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights	$	225,787,104		$	201,054,144		$	166,249,237
Mortgage servicing liabilities		2,758,454			1,160,938			1,620,609
Loans held for sale		4,724,006			2,420,636			2,998,377
		233,269,564			204,635,718			170,868,223
Subserviced for PMT		135,414,668			94,658,154			74,980,268
	$	368,684,232		$	299,293,872		$	245,848,491
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	2,450,916		$	1,556,132		$	1,544,585
Investment Funds		—			—			29,329
	$	2,450,916		$	1,556,132		$	1,573,914
Book value per share	$	26.26		$	21.34		$	19.95

| \(1\) | Primarily represents Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement, of which, for 2017, $32.0 million was the result of the change in the federal tax rate under the Tax Act. |

| --- | --- |

Comparison of the years ended December 31, 2019, 2018 and 2017

During the year ended December 31, 2019, we recorded net income of $393.0 million, an increase of $148.5 million, or 61%, from 2018. The increase is due to an increase of $492.8 million in total net revenue, partially offset by an increase of $231.0 million in total expenses and $113.2 million in provision for income taxes.

Table of Contents

The increase in total revenue was primarily due to an increase of $476.5 million in Net gains on loans held for sale at fair value, $79.3 million in Fulfillment fees from PennyMac Mortgage Invest Trust, and $72.5 million in Loan origination fees resulting from higher production volume and improved profit margins, which was partially offset by a decrease of $151.7 million in Net loan servicing fees primarily attributable to the effect of lower interest rates on the fair value of our MSRs that resulted in fair value losses net of hedging results compared to the year ended December 31, 2018.

The increase in total expenses was primarily due to increases in loan origination and compensation expenses, reflecting the continuing growth of our mortgage banking activities. The provision for income taxes increased significantly as a result of the Reorganization which was completed in late 2018.

During the year ended December 31, 2018, we recorded net income of $244.4 million, a decrease of $67.1 million or 22% from 2017. The decrease was primarily due to an increase of $97.4 million in total expense, which was partially offset by an increase of $29.2 million in total net revenue. The increase in total expense was primarily due to expansion of our loan servicing and production businesses. The increase in total net revenue was primarily due to an increase of $139.3 million in Net loan servicing fees and an increase of $73.2 million in Net interest income, partially offset by decreases of $142.8 million in Net gains on loans held for sale at fair value, $17.6 million in Loan origination fees and $31.8 million in Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement. The decrease in our Net gains on loans held for sale at fair value reflected continued competitive pressures in the mortgage market place arising from the effect of then-increasing interest rates on borrower demand for mortgage loans. Increasing interest rates also contributed $70.8 million to Net loan servicing fees in the form of fair value gains net of hedging results during 2018 as compared to 2017.

Net gains on loans held for sale at fair value

During the year ended December 31, 2019, we recognized Net gains on loans held for sale at fair value totaling $725.5 million, compared to $249.0 million and $391.8 million during the years ended December 31, 2018 and 2017, respectively. The increase in 2019 compared to 2018 was primarily due to an increase in loan production volume and improved profit margins in our mortgage production business, reflecting increased demand for mortgage loans during 2019 as compared to 2018.

The increase in demand for mortgage loans during 2019 as compared to 2018 is attributable primarily to the decrease in market interest rates that prevailed during 2019 compared to 2018. The decreases in 2018 compared to 2017 was primarily due to decreases in both loan production volume for our own account and profit margins reflecting the effect of then-generally rising interest rates in the mortgage market, which has a negative influence on demand for mortgage lending. Reduced demand negatively influences profit margins by causing increased price competition in the acquisition and origination of mortgage loans.

Table of Contents

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | From non-affiliates: | | | | | | | | Cash loss: | | | | | | | | Loans | $ | (190,853) | $ | (469,647) | $ | (174,669) | | Hedging activities | | (175,305) | | 93,288 | | (16,866) | | Total cash loss | | (366,158) | | (376,359) | | (191,535) | | Non-cash gain: | | | | | | | | Change in fair value of loans and derivative financial instruments outstanding at year end: | | | | | | | | Interest rate lock commitments | | 87,312 | | (8,934) | | (1,120) | | Loans | | (42,878) | | (1,506) | | 4,576 | | Hedging derivatives | | 17,499 | | (11,766) | | (4,389) | | | | 61,933 | | (22,206) | | (933) | | Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales | | 846,888 | | 584,156 | | 563,872 | | Provision for losses relating to representations and warranties: | | | | | | | | Pursuant to loan sales | | (8,377) | | (5,824) | | (5,890) | | Reduction in liability due to change in estimate | | 7,877 | | 4,672 | | 4,301 | | Total non-cash gain | | 908,321 | | 560,798 | | 561,350 | | Total gains on sale from non-affiliates | | 542,163 | | 184,439 | | 369,815 | | From PennyMac Mortgage Investment Trust | | 183,365 | | 64,583 | | 21,989 | | | $ | 725,528 | $ | 249,022 | $ | 391,804 | | During the year: | | | | | | | | Interest rate lock commitments issued: | | | | | | | | Government-insured or guaranteed mortgage loans | $ | 62,772,725 | $ | 40,193,531 | $ | 46,341,356 | | Conventional mortgage loans | | 9,886,462 | | 4,592,412 | | 3,265,411 | | Jumbo mortgage loans | | 29,641 | | 641 | | — | | Home equity lines of credit | | 9,186 | | — | | — | | | $ | 72,698,014 | $ | 44,786,584 | $ | 49,606,767 | | At end of year: | | | | | | | | Loans held for sale at fair value | $ | 4,912,953 | $ | 2,521,647 | $ | 3,099,103 | | Commitments to fund and purchase loans | $ | 7,122,316 | $ | 2,805,400 | $ | 3,654,955 |

Our gain on sale of loans held for sale includes both cash and non-cash elements. We receive proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent loans we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.

Non-cash elements of gain on sale of loans

The MSRs, mortgage servicing liabilities (“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 125% of our gain on sale of loans at fair value for the year ended December 31, 2019, as compared to 225% and 143% for the years ended December 31, 2018 and 2017, respectively.

How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Annual Report.

Table of Contents

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 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 sold and review our liability estimate on a periodic basis.

During the years ended December 31, 2019, 2018, and 2017 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 $8.4 million, $5.8 million, and $5.9 million, respectively. We also recorded reductions in the liability relating to previously sold loans of $7.9 million, $4.7 million, and $4.3 million, for the years ended December 31, 2019, 2018 and 2017, respectively. The reductions in the liability relating to previously sold loans resulted from those loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | During the year: | | | | | | | | Indemnification activity: | | | | | | | | Loans indemnified by PFSI at beginning of year | $ | 8,899 | $ | 7,579 | $ | 5,599 | | New indemnifications | | 11,629 | | 4,511 | | 3,255 | | Less indemnified loans sold, repaid or refinanced | | 5,162 | | 3,191 | | 1,275 | | Loans indemnified by PFSI at end of year | $ | 15,366 | $ | 8,899 | $ | 7,579 | | Repurchase activity: | | | | | | | | Total loans repurchased by PFSI | $ | 18,660 | $ | 26,025 | $ | 20,152 | | Less: | | | | | | | | Loans repurchased by correspondent lenders | | 12,396 | | 18,127 | | 14,298 | | Loans repaid by borrowers or resold with defects resolved | | 6,735 | | 2,138 | | 8,792 | | Net loans repurchased (resolved) with losses chargeable to liability for representations and warranties | $ | (471) | $ | 5,760 | $ | (2,938) | | Net losses charged to liability for representations and warranties | $ | 209 | $ | 50 | $ | 603 | | At end of year: | | | | | | | | Unpaid principal balance of loans subject to representations and warranties | $ | 177,611,568 | $ | 137,849,704 | $ | 120,855,101 | | Liability for representations and warranties | $ | 21,446 | $ | 21,155 | $ | 20,053 |

Table of Contents

During the year ended December 31, 2019, we repurchased loans with unpaid principal balances totaling $18.7 million and charged $209,000 in net incurred losses relating to repurchases against our liability for representations and warranties. As the credit criteria relating to loans we originate and sell change, as the outstanding balance of loans we purchase and sell subject to representations and warranties increases and as the loans sold continue to season, we expect that the level of repurchase activity and corresponding losses 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 groups.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe

that the current UPB of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.

Loan origination fees

Following is a summary of our loan origination fees:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Loan origination fee revenue | $ | 174,156 | $ | 101,641 | $ | 119,202 | | Unpaid principal balance of loans purchased and originated for sale | $ | 61,531,095 | $ | 41,444,793 | $ | 46,027,911 |

Loan origination fees increased $72.5 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, and the increase was primarily due to an increase in the volume of loans we produced. Loan origination fees decreased $17.6 million during the years ended December 31, 2018 compared to the year ended December 31, 2017, and the decrease was primarily due to decreases in the volume of loans we produced.

Fulfillment fees fron PennyMac Mortgage Investment Trust

Following is a summary of our fulfillment fees:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (dollars in thousands) | | | | | | | Fulfillment fee revenue | $ | 160,610 | $ | 81,350 | $ | 80,359 | | Unpaid principal balance of loans fulfilled subject to fulfillment fees | $ | 56,033,704 | $ | 26,194,303 | $ | 22,971,119 | | Average fulfillment fee rate (in basis points) | | 29 | | 31 | | 35 |

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 calculated as a percentage of the UPB of the loans we fulfill for PMT.

Fulfillment fees increased $79.3 million and $1.0 million during the years ended December 31, 2019 and 2018, compared to the years ended December 31, 2018 and 2017, respectively. The increases were primarily due to increased volume of loans we fulfilled for PMT, partially offset by an increase in discretionary reductions in the fulfillment fee rate during the years ended December 31, 2019 and 2018 compared to the respective prior years.

Table of Contents

Net loan servicing fees

Following is a summary of our net loan servicing fees:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Net loan servicing fees: | | | | | | | | Loan servicing fees: | | | | | | | | From non-affiliates | $ | 730,165 | $ | 585,101 | $ | 475,848 | | From PennyMac Mortgage Investment Trust | | 48,797 | | 42,045 | | 43,064 | | From Investment Funds | | — | | 3 | | 1,461 | | Other | | 98,564 | | 64,133 | | 58,924 | | | | 877,526 | | 691,282 | | 579,297 | | Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | | (583,861) | | (245,889) | | (273,238) | | Net loan servicing fees | $ | 293,665 | $ | 445,393 | $ | 306,059 | | Average loan servicing portfolio | $ | 334,169,204 | $ | 269,402,670 | $ | 221,505,951 |

Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing net of hedging results are summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | | (in thousands) | | | | | | Amortization and realization of cash flows | $ | (429,571) | $ | (280,015) | $ | (236,584) | | Other changes in fair value of, and provision for impairment of, mortgage servicing rights and mortgage servicing liabilities | | (559,043) | | 163,671 | | (18,149) | | Change in fair value of excess servicing spread | | 9,256 | | (8,500) | | 19,350 | | Hedging results | | 395,497 | | (121,045) | | (37,855) | | Total amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | $ | (583,861) | $ | (245,889) | $ | (273,238) | | Average balances: | | | | | | | | Mortgage servicing rights | $ | 2,764,105 | $ | 2,433,758 | $ | 1,873,001 | | Mortgage servicing liabilities | $ | 18,718 | $ | 10,506 | $ | 15,587 | | Excess servicing spread financing | $ | 195,461 | $ | 229,607 | $ | 262,078 | | At year end: | | | | | | | | Mortgage servicing rights | $ | 2,926,790 | $ | 2,820,612 | $ | 2,119,588 | | Mortgage servicing liabilities | $ | 29,140 | $ | 8,681 | $ | 14,120 | | Excess servicing spread financing | $ | 178,586 | $ | 216,110 | $ | 236,534 |

Table of Contents

Following is a summary of our loan servicing portfolio:

	December 31,		December 31,
	2019		2018
	(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	166,188,825	$	144,296,544
Acquired		59,598,279		56,757,600
		225,787,104		201,054,144
Mortgage servicing liabilities		2,758,454		1,160,938
Loans held for sale		4,724,006		2,420,636
		233,269,564		204,635,718
Subserviced for PMT		135,288,944		94,276,938
Total prime servicing		368,558,508		298,912,656
Special servicing – Subserviced for PMT		125,724		381,216
Total loans serviced	$	368,684,232	$	299,293,872

Net loan servicing fees decreased $151.7 million during the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was primarily due to an increase of $338.0 million in losses in fair value of MSR, MSLs and excess servicing spread financing, net of hedging results, compared to the year ended December 31, 2018, resulting from the effect of decreasing interest rates on mortgage servicing asset and liability fair values. The increased losses were partially offset by an increase of $186.2 million in loan servicing fees, resulting from an increase of 24% in our average servicing portfolio for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Net loan servicing fees increased $139.3 million during the year ended December 31, 2018, compared to the year ended December 31, 2017. The increase was due to a combination of an increase of $112.0 million of mortgage loan servicing fees, resulting from growth in our loan servicing portfolio and a decrease of $27.3 million in fair value losses and impairment of MSRs and MSL, net of hedging results, resulting from the effect of generally rising interest rates during 2017.

Table of Contents

Net Interest Income

Net interest income increased $4.9 million during the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily due to: | · | an increase of $56.3 million in placement fees we receive relating to custodial funds that we manage, reflecting the growth of our servicing portfolio and net interest income relating to growth in our average inventory of loans held for sale, partially offset by | | --- | --- | | · | a $33.4 million decrease in the financing incentives we received from one of our lenders for financing mortgage loans approved for satisfying certain consumer relief characteristics; and | | --- | --- | | · | a $22.7 million increase in interest shortfall on repayment of loans serviced for Agency securitizations. When a borrower repays a loan, we are responsible for paying the full month’s interest to the holders of the Agency securities that are backed by the loan regardless of when in the month the borrower repays the loan. The increase in refinancing activity in our MSR portfolio caused the increase in the interest shortfall. | | --- | --- |

Net interest income increased $73.2 million during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase is primarily due to a $38.9 million increase of incentives relating to financing of mortgage loans under the master repurchase agreement described below and an increase of $37.4 million in the placement fees we received relating to the custodial funds that we manage, reflecting the growth of our servicing portfolio and higher placement fee rates, as well as an increase in interest income on loans held for sale.

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 recorded $14.7 million, $48.1 million and $9.2 million of such incentives as reductions of Interest expense during the years ended December 31, 2019, 2018 and 2017, respectively. The master repurchase agreement expired on August 21, 2019.

Management fees and Carried Interest

Management fees and Carried Interest are summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Management fees: | | | | | | | | PennyMac Mortgage Investment Trust: | | | | | | | | Base management | $ | 29,303 | $ | 23,033 | $ | 22,280 | | Performance incentive | | 7,189 | | 1,432 | | 304 | | | | 36,492 | | 24,465 | | 22,584 | | Investment Funds | | — | | 4 | | 1,001 | | Total management fees | | 36,492 | | 24,469 | | 23,585 | | Carried Interest | | — | | (365) | | (1,040) | | Total management fees and Carried Interest | $ | 36,492 | $ | 24,104 | $ | 22,545 | | Net assets of Advised Entities at year end: | | | | | | | | PennyMac Mortgage Investment Trust | $ | 2,450,916 | $ | 1,566,132 | $ | 1,544,585 | | Investment Funds | | — | | — | | 29,329 | | | $ | 2,450,916 | $ | 1,566,132 | $ | 1,573,914 |

Management fees from PMT increased by $12.0 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, reflecting the combined effect of the performance incentive fees arising from PMT’s increased profitability and the increase in PMT’s average shareholders’ equity upon which its management fees are based. The increase in average shareholders’ equity was primarily due to the issuance of new common shares by PMT during the year ended December 31, 2019.

Table of Contents

Management fees from PMT increased by $1.9 million during the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily reflecting the increase in PMT’s average shareholders’ equity upon which its management fees are based and an increase in performance incentive fees. Performance incentive fees increased $1.1 million during the year ended December 31, 2018, compared to the year ended December 31, 2017, resulting from an increase in PMT’s net income on which incentive fees are based.

Change in Fair Value of Investment in and Dividends Received from PMT

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Dividends from PennyMac Mortgage Investment Trust | $ | 141 | $ | 140 | $ | 141 | | Change in fair value of investment in PennyMac Mortgage Investment Trust | | 275 | | 192 | | (23) | | Dividends received and change in fair value | $ | 416 | $ | 332 | $ | 118 | | Fair value of PennyMac Mortgage Investment Trust shares at year end | $ | 1,672 | $ | 1,397 | $ | 1,205 |

Change in fair value of investment in and dividends received from PMT increased $84,000 during the year ended December 31, 2019, compared to the year ended December 31, 2018, and increased $214,000 during the year ended December 31, 2018, compared to the year ended December 31, 2017, due to changes in the fair value of our investment in PMT. We held 75,000 common shares of PMT during each of the three years ended December 31, 2019.

Other revenues

Other revenue decreased $1.2 million for the year ended December 31, 2019, compared to the year ended December 31, 2018. The decrease was primarily due to a decrease of $747,000 in Repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement as a result of a smaller change in tax rate in 2019 compared to 2018.

Other revenue decreased $25.5 million for the year ended December 31, 2018, compared to the year ended December 31, 2017. The decrease was primarily due to a decrease of $31.8 million in Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement as a result of the reduction in the federal tax rate which was recognized in 2017, partially offset by an increase of $5.1 million in reimbursements from PMT due to our adoption of the Financial Accounting Standard Board’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Subtopic 606) using the modified retrospective method effective January 1, 2018. Under Accounting Standard Update 2014-09, reimbursements must be accounted for as revenue. Those reimbursements were included as a reduction of expense in previous years.

Table of Contents

Expenses

Compensation

Our compensation expense is summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (dollars in thousands) | | | | | | | Salaries and wages | $ | 293,987 | $ | 256,750 | $ | 229,710 | | Incentive compensation | | 124,203 | | 70,574 | | 65,922 | | Taxes and benefits | | 60,497 | | 50,695 | | 42,392 | | Stock and unit-based compensation | | 24,771 | | 25,251 | | 20,697 | | | $ | 503,458 | $ | 403,270 | $ | 358,721 | | Head count: | | | | | | | | Average | | 3,709 | | 3,335 | | 3,024 | | Year end | | 4,215 | | 3,460 | | 3,189 |

Compensation expense increased $100.2 million during the year ended December 31, 2019, compared to the year ended December 31, 2018. The increase in compensation was primarily due 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 base salaries, taxes and benefits due to increased average head count resulting from the growth in our mortgage banking activities during 2019.

Compensation expense increased $44.5 million during the year ended December 31, 2018, compared to the year ended December 31, 2017. The increase in compensation was primarily due to increased base salaries, taxes and benefits due to increased average head count resulting from the growth in our mortgage banking activities during 2018.

Servicing

Servicing expense increased $27.6 million and $19.4 million in the years ended December 31, 2019 and 2018 compared to the years ended December 31, 2018 and 2017, respectively. The increases were due to growth in our government-insured or guaranteed mortgage servicing portfolio, which includes loans that are subject to nonreimbursable servicing advance losses, and to our EBO program to purchase defaulted loans from Ginnie Mae pools. During the year ended December 31, 2019, we purchased $4.4 billion in UPB of EBO loans as compared to $3.0 billion for the year ended December 31, 2018 and $2.9 billion for the year ended December 31, 2017.

The EBO program reduces the ongoing cost of servicing defaulted mortgage loans subject to 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 mortgage loan pools, it accelerates loss recognition when the mortgage loans are purchased. We recognize expense 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 mortgage loans’ insurer or guarantor at the debenture rate of interest applicable to the respective mortgage loans.

Technology

Technology expense increased $7.8 million and $8.1 million in the years ended December 31, 2019 and 2018 compared to the years ended December 31, 2018 and 2017, respectively. The increases were primarily due to growth in our loan servicing operations and continued investment in our loan production and servicing infrastructure.

Table of Contents

Occupancy and equipment

Occupancy and equipment expenses increased $1.8 million and $4.5 million during the years ended December 31, 2019 and 2018, compared to the years ended December 31, 2018 and 2017, respectively. The increases are primarily attributable to expansion of our facilities to accommodate our growth.

Provision for Income Taxes

For the years ended December 31, 2019, 2018 and 2017, our effective tax rates were 25.8%, 8.7%, and 7.3%, respectively. The difference in prior years between our effective tax rate and the statutory rates was primarily due to the allocation of earnings to the noncontrolling interest unitholders. Pursuant to the Reorganization, the noncontrolling interest unitholders converted their ownership units into our shares and as a result, we were allocated starting on that date and will in the future be allocated 100% of PNMAC earnings that will be subject to corporate federal and state statutory tax rates, which has in turn increased our effective income tax rate.

Balance Sheet Analysis

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

|  | December 31, |  | December 31, |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | ASSETS | | | | | | Cash and short-term investments | $ | 262,902 | $ | 273,113 | | Loans held for sale at fair value | | 4,912,953 | | 2,521,647 | | Servicing advances, net | | 331,169 | | 313,197 | | Investments in and advances to affiliates | | 157,343 | | 165,886 | | Mortgage servicing rights | | 2,926,790 | | 2,820,612 | | Loans eligible for repurchase | | 1,046,527 | | 1,102,840 | | Other | | 566,333 | | 281,278 | | Total assets | $ | 10,204,017 | $ | 7,478,573 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | Short-term debt | $ | 4,639,001 | $ | 2,332,143 | | Long-term debt | | 1,493,466 | | 1,648,973 | | Liability for loans eligible for repurchase | | 1,046,527 | | 1,102,840 | | Income taxes payable | | 504,569 | | 400,546 | | Other | | 458,947 | | 340,280 | | Total liabilities | | 8,142,510 | | 5,824,782 | | Stockholders' equity | | 2,061,507 | | 1,653,791 | | Total liabilities and stockholders' equity | $ | 10,204,017 | $ | 7,478,573 |

Total assets increased $2.7 billion from $7.5 billion at December 31, 2018 to $10.2 billion at December 31, 2019. The increase was primarily due to an increase of $2.4 billion in loans held for sale at fair value resulting from an increase in loan production inventory and $106.2 million in MSRs reflecting continued additions from our loan production activities and servicing portfolio acquisitions.

Total liabilities increased by $2.3 billion from $5.8 billion as of December 31, 2018 to $8.1 billion as of December 31, 2019. The increase was primarily attributable to an increase of $2.3 billion in borrowings required to finance a larger inventory of loans held for sale combined with a $91.3 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.

Table of Contents

Cash Flows

Our cash flows for the three years ended December 31, 2019 are summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Operating | $ | (2,245,123) | $ | 572,396 | $ | (883,412) | | Investing | | 148,782 | | (322,611) | | (339,231) | | Financing | | 2,128,995 | | (132,034) | | 1,161,174 | | Net increase (decrease) in cash and restricted cash | $ | 32,654 | $ | 117,751 | $ | (61,469) |

Operating activities

Net cash (used in) provided by operating activities totaled ($2.2) billion, $572.4 million, and ($883.4) million during the years ended December 31, 2019, 2018, and 2017 respectively. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of loans held for sale as shown below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Cash flows from: | | | | | | | | Loans held for sale | $ | (2,487,105) | $ | 338,838 | $ | (1,019,898) | | Other operating sources | | 241,982 | | 233,558 | | 136,486 | | | $ | (2,245,123) | $ | 572,396 | $ | (883,412) |

Cash provided by other operating sources for the year ended December 31, 2019 was consistent with the year ended December 31, 2018. The increase in cash flow from other operating sources during the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily attributable to our collection of $31.9 million in repurchase agreement derivatives and an increase in operating cash flows arising from net changes in other assets and accounts payable and accrued expenses in the amount of $68.2 million. The master repurchase agreement expired on August 21, 2019.

Investing activities

Net cash provided by investing activities was $148.8 million during the year ended December 2019, primarily comprised of $366.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by $227.4 million used in purchase of MSRs.

Net cash used in investing activities was $322.6 million and $339.2 million during the years ended December 31, 2018, and 2017, respectively, primarily comprised of cash used in purchase of MSRs and net settlements of derivative financial instruments used to hedge our investment in MSRs.

Table of Contents

Financing activities

Net cash provided by financing activities totaled $2.1 billion during the year ended December 31, 2019 which was primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSR.

Net cash used in financing activities totaled $132.0 million during the year ended December 31, 2018 which was primarily due to net repurchases of assets sold under agreements to repurchase and mortgage loan participation purchase and sale agreements of $440.9 million, reflecting a reduction in our financing of loans held for sale, and repayments of excess servicing spread financing of $46.8 million, partially offset by net proceeds from issuance of notes payable secured by of $400 million.

Net cash provided by financing activities was $1.2 billion during the year ended December 31, 2017, primarily due to an increase in loans sold under agreements to repurchase and notes payable used to finance the growth in our inventory of loans held for sale and MSRs.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and 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 and make distributions to our shareholders.

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 certificates, ESS financing, notes payable (including a revolving credit agreement) and a capital lease. Most 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.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. The table below presents the average outstanding, maximum and ending balances for each of the three years ended December 31, 2019, 2018 and 2017:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Average balance | $ | 2,185,830 | $ | 1,626,729 | $ | 1,829,257 | | Maximum daily balance | $ | 4,141,680 | $ | 2,380,121 | $ | 3,022,656 | | Balance at year end | $ | 4,141,680 | $ | 1,935,200 | $ | 2,380,866 |

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 calendar quarter; |

| --- | --- |

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

| --- | --- |

Table of Contents

·	a minimum tangible net worth of $500 million;

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

| --- | --- |

| · | at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under 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 and capital lease contain additional financial covenants including, but not limited to,

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

| --- | --- |

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

| --- | --- |

| · | a minimum of tangible net worth of $500 million; |

| --- | --- |

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

| --- | --- |

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

| --- | --- |

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

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

We are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers or issuers as summarized below:

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

| --- | --- |

| · | FHFA net worth requirement is a minimum net worth of $2.5 million plus 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 |

| --- | --- |

Table of Contents

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

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

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

In June 2017, our Board of Directors approved a stock repurchase program that allows us to repurchase up to $50 million of our common stock using open market stock purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. We intend to finance the stock repurchase program through cash on hand. From inception through December 31, 2019, we have repurchased $14.9 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

As of December 31, 2019, we have not entered into any off-balance sheet arrangements or guarantees.

Contractual Obligations

As of December 31, 2019 we had contractual obligations aggregating $13.7 billion, comprised of commitments to purchase and originate loans, borrowings, and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities.

Payment obligations under these agreements are summarized below:

|  | Payments due by year |  |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | Less than | | 1-3 | | 3-5 | | More than | | | Contractual obligations | Total | | 1 year | | years | | years | | 5 years | | | | (in thousands) | | | | | | | | | | | Commitments to purchase and originate loans | $ | 7,122,316 | $ | 7,122,316 | $ | — | $ | — | $ | — | | Short-term debt | | 4,639,628 | | 4,639,628 | | — | | — | | — | | Long-term debt | | 1,499,396 | | 8,249 | | 12,561 | | 1,300,000 | | 178,586 | | Interest on long-term debt | | 247,694 | | 66,899 | | 130,309 | | 32,411 | | 18,075 | | Office leases | | 109,301 | | 17,365 | | 30,702 | | 25,930 | | 35,304 | | Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | 46,158 | | 12,192 | | — | | — | | 33,966 | | Total | $ | 13,664,493 | $ | 11,866,649 | $ | 173,572 | $ | 1,358,341 | $ | 265,931 |

Table of Contents

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 subsidiary Issuer Trust with the exception of the revolving credit agreement, which is classified as a note payable, and the capital lease, in each case where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of December 31, 2019, 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.

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) | $ | 1,135,430 | $ | 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. | $ | 936,172 | $ | 1,000,000 | $ | 50,000 | October 9, 2020 | | Citibank, N.A. | $ | 653,170 | $ | 700,000 | $ | 300,000 | August 4, 2020 | | Morgan Stanley Bank, N.A. | $ | 582,941 | $ | 800,000 | $ | 100,000 | August 21, 2020 | | Bank of America, N.A. | $ | 374,190 | $ | 500,000 | $ | 500,000 | March 12, 2020 | | BNP Paribas | $ | 183,880 | $ | 200,000 | $ | 100,000 | July 31, 2020 | | Royal Bank of Canada | $ | 175,897 | $ | 350,000 | $ | 20,000 | March 31, 2020 | | Mortgage loan participation purchase and sale agreements | | | | | | | | | Bank of America, N.A. | $ | 497,948 | $ | 550,000 | $ | — | March 12, 2020 | | 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 30, 2020 | | Credit Suisse AG (3) | $ | — | $ | — | $ | — | April 24, 2020 | | Obligations under capital lease | | | | | | | | | Banc of America Leasing and Capital LLC | $ | 20,810 | $ | 25,000 | $ | — | June 13, 2022 |

| \(1\) | Outstanding indebtedness as of December 31, 2019. |

| --- | --- | | (2) | Total facility size, committed facility and maturity date include contractual changes through the date of this Report. | | --- | --- | | (3) | The total credit facility from Credit Suisse is $1.5 billion. The borrowing of $100 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 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. | | --- | --- |

Table of Contents

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of December 31, 2019:

|  |  |  | Weighted average |  |

| --- | --- | --- | --- | --- | | | | | maturity of | | | | | | advances under | | | Counterparty | Amount at risk | | repurchase agreement | Facility maturity | | | (in thousands) | | | | | Credit Suisse First Boston Mortgage Capital LLC (1) | $ | 1,709,197 | April 26, 2020 | April 26, 2020 | | Credit Suisse First Boston Mortgage Capital LLC (2) | $ | 72,865 | February 12, 2020 | April 24, 2020 | | JP Morgan Chase Bank, N.A. | $ | 61,561 | March 1, 2020 | October 9, 2020 | | Citibank, N.A. | $ | 48,017 | March 18, 2020 | August 4, 2020 | | Morgan Stanley Bank, N.A. | $ | 42,181 | March 16, 2020 | August 21, 2020 | | Bank of America, N.A. | $ | 29,252 | January 27, 2020 | January 27, 2020 | | Royal Bank of Canada | $ | 13,811 | March 31, 2020 | March 31, 2020 | | BNP Paribas | $ | 10,233 | March 12, 2020 | July 31, 2020 |

| \(1\) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase. |

| --- | --- |

| \(2\) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under an agreement to repurchase. |

| --- | --- |

All debt financing arrangements that matured between December 31, 2019 and the date of this Report have been renewed or extended and are described in Note 13—Borrowings to the accompanying consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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.

We engage in interest rate risk management activities in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk resulting from interest rate 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 IRLCs, inventory of mortgage loans held for sale and MSRs. We do not use derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.

Table of Contents

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 the MSRs, MSLs, and ESS financing and when we measured fair value as of the end of each reporting period, the carrying value of our investment in MSRs 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.

Credit Risk

We are subject to credit risk in connection with our mortgage loan sales activities. Our mortgage loan sales are generally made with contractual representations and warranties, which, if breached, can require us to repurchase the mortgage loan or reimburse the investor for any losses incurred due to such breach. These breaches are generally evidenced when the borrower defaults on a mortgage loan.

The amount of our liability for losses due to representations and warranties to the mortgage loans’ investors is not limited. However, we believe that the current UPB of mortgage loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties. We include a provision for potential losses due to the representations and warranties we make as part of our recognition of mortgage loan sales, based initially on our estimate of the fair value of such obligation. We review our loss experience relating to representations and warranties and adjust our liability estimate when necessary.

In the event of developments affecting the credit performance of mortgage loans we have sold subject to representations and warranties, such as a significant increase in unemployment or a significant deterioration in real estate values in markets where properties securing mortgage loans we produce are located, defaults could increase and result in credit losses arising from claims under our representations and warranties, which could materially and adversely affect our business, financial condition and results of operations.

Fair Value Risk

Our IRLCs, mortgage loans held for sale, our MSRs, MSLs and ESS financing are reported at their estimated fair values. The fair value of these assets fluctuates primarily due to changes in interest rates.

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

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of December 31, 2019, given

several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:

| Pricing spread shift in % | -20% |  |  | -10% |  |  | -5% |  |  | +5% |  |  | +10% |  |  | +20% |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | (dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | Fair value | $ | 3,120,259 | | $ | 3,020,338 | | $ | 2,972,803 | | $ | 2,882,228 | | $ | 2,839,055 | | $ | 2,756,634 | | | Change in fair value: | | | | | | | | | | | | | | | | | | | | $ | $ | 193,469 | | $ | 93,548 | | $ | 46,014 | | $ | (44,561) | | $ | (87,734) | | $ | (170,155) | | | % | | 6.6 | % | | 3.2 | % | | 1.6 | % | | (1.5) | % | | (3.0) | % | | (5.8) | % |

Table of Contents

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	3,212,107		$	3,062,832		$	2,993,263		$	2,863,220		$	2,802,379		$	2,688,240
Change in fair value:
$	$	285,318		$	136,043		$	66,474		$	(63,569)		$	(124,411)		$	(238,549)
%		9.7	%		4.6	%		2.3	%		(2.2)	%		(4.3)	%		(8.2)	%

| Per-loan servicing cost shift in % | -20% |  |  | -10% |  |  | -5% |  |  | +5% |  |  | +10% |  |  | +20% |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | (dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | Fair value | $ | 3,024,854 | | $ | 2,975,822 | | $ | 2,951,306 | | $ | 2,902,274 | | $ | 2,877,757 | | $ | 2,828,725 | | | Change in fair value: | | | | | | | | | | | | | | | | | | | | $ | $ | 98,065 | | $ | 49,032 | | $ | 24,516 | | $ | (24,516) | | $ | (49,032) | | $ | (98,065) | | | % | | 3.4 | % | | 1.7 | % | | 0.8 | % | | (0.8) | % | | (1.7) | % | | (3.4) | % |

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 December 31, 2019, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ fair values increases net income):

| Pricing spread shift in % | -20% |  |  | -10% |  |  | -5% |  |  | +5% |  |  | +10% |  |  | +20% |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | (dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | Fair value | $ | 183,492 | | $ | 181,007 | | $ | 179,789 | | $ | 177,398 | | $ | 176,225 | | $ | 173,923 | | | Change in fair value: | | | | | | | | | | | | | | | | | | | | $ | $ | 4,907 | | $ | 2,422 | | $ | 1,203 | | $ | (1,188) | | $ | (2,361) | | $ | (4,662) | | | % | | 2.7 | % | | 1.4 | % | | 0.7 | % | | (0.7) | % | | (1.3) | % | | (2.6) | % |

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

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | (dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | Fair value | $ | 197,151 | | $ | 187,463 | | $ | 182,929 | | $ | 174,421 | | $ | 170,426 | | $ | 162,906 | | | Change in fair value: | | | | | | | | | | | | | | | | | | | | $ | $ | 18,565 | | $ | 8,878 | | $ | 4,344 | | $ | (4,164) | | $ | (8,160) | | $ | (15,680) | | | % | | 10.4 | % | | 5.0 | % | | 2.4 | % | | (2.3) | % | | (4.6) | % | | (8.8) | % |

Item 8. Financial Statements and Supplementary Data

The information called for by this Item 8 is hereby incorporated by reference from our Financial Statements and Auditors’ Report in Part IV of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Table of Contents

Item 9A. 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 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

PennyMac Financial Services, Inc.

3043 Townsgate Road

Westlake Village, CA 91361

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of PennyMac Financial Services, Inc. and subsidiaries (“the Company”) as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 28, 2020, expressed an unqualified opinion on those financial statements and included explanatory paragraphs regarding the Company’s election in 2018 to prospectively change its method of accounting for the classes of mortgage servicing rights it had accounted for using the amortization method and the Company’s change in method of accounting for leases in 2019 due to adoption of Accounting Standards Update 2016-2, Leases (Topic 842).

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February 28, 2020

Table of Contents

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 has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have 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 are reasonably likely to materially affect, our internal control over financial reporting.

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 year ended December 31, 2019. We continue to monitor and test these controls for adequate design and operating effectiveness.

Item 9B. Other Information

None.

Table of Contents

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

Item 11. Executive Compensation

The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

We have adopted an equity incentive plan, the 2013 Equity Incentive Plan, which provides for the grant of incentive stock option and nonstatutory stock options, stock appreciation rights, restricted stock and stock unit awards, performance units, stock grants and qualified performance‑based awards, which we collectively refer to as “awards.” Directors, officers and other employees of our Company and our subsidiaries, as well as others performing consulting or advisory services for us, are eligible for grants under the 2013 Equity Incentive Plan. The plan administrator of the equity incentive plan is the compensation committee of the board of directors. The board of directors itself may also exercise any of the powers and responsibilities under the 2013 Equity Incentive Plan. Subject to the terms of the 2013 Equity Incentive Plan, the plan administrator will select the recipients of awards and determine, among other things, the:

| · | number of shares of common stock covered by the awards and the dates upon which such awards become exercisable or any restrictions lapse, as applicable; |

| --- | --- |

| · | type of award and the exercise or purchase price and method of payment for each such award; |

| --- | --- |

| · | performance measures, if applicable, required to be satisfied prior to vesting; |

| --- | --- |

| · | vesting period for awards, risks of forfeiture and any potential acceleration of vesting or lapses in risks of forfeiture; and |

| --- | --- |

| · | duration of awards. |

| --- | --- |

Table of Contents

The following table provides information as of December 31, 2019 concerning our shares of common stock authorized for issuance under our equity incentive plan.

|  | \(a\) |  | \(b\) | \(c\) |

| --- | --- | --- | --- | --- | | | | | | Number of securities | | | | | | remaining available for | | | | | | future issuance under | | | Number of securities to | Weighted average | | equity compensation | | | be issued upon exercise of | exercise price of | | plans (excluding | | | outstanding options, | outstanding options, | | securities reflected in | | Plan category | warrants and rights | warrants and rights (1) | | column (a)) (2) | | Equity compensation plans approved by security holders (3) | 6,147,999 | $ | 18.40 | 4,223,430 | | Equity compensation plans not approved by security holders (4) | — | | — | — | | Total | 6,147,999 | $ | 18.40 | 4,223,430 |

| \(1\) | The weighted average exercise price set forth in this column relates only to 3,699,164 shares of stock options outstanding under our 2013 Equity Incentive Plan. The remaining securities included in column \(a\) of this table are performance and time‑based restricted stock units, for which no exercise price applies. |

| --- | --- |

| \(2\) | This number includes a general pool of 4,223,430 shares of common stock authorized for future awards \(excluding securities reflected in column \(a\)\). This general pool initially consisted of 3,906,433 shares of common stock authorized under the 2013 Equity Incentive Plan for future awards, and has been, and will continue to be, increased pursuant to the terms of the 2013 Equity Incentive Plan on January 1st of each calendar year by an amount equal to the lesser of \(i\) 1.75% of our outstanding common stock on a fully diluted basis as of the end of our immediately preceding fiscal year, \(ii\) 1,322,024 shares, and \(iii\) any lower amount determined by our board of directors. The annual increase to this general pool on January 1, 2019 pursuant to the foregoing formula was 1,322,024. |

| --- | --- |

| \(3\) | Represents our 2013 Equity Incentive Plan. |

| --- | --- |

| \(4\) | We do not have any equity plans that have not been approved by our stockholders. |

| --- | --- |

The other information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 29, 2020, which is within 120 days after the end of fiscal year 2019.

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed April 29, 2020, which is within 120 days after the end of fiscal year 2019.

Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules

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

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.7†	Employment Agreement, dated December 28, 2018, among Stanford L. Kurland, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc.	8-K	December 31, 2018
10.8†	Employment Agreement, dated December 28, 2018, among David A. Spector, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc.	8-K	December 31, 2018
10.9†	Employment Agreement, dated December 28, 2018, among Doug Jones, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc.	8-K	December 31, 2018
10.10†	Form of PennyMac Financial Services, Inc. Indemnification Agreement.	S-1/A	April 5, 2013
10.11†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan.	8-K	May 14, 2013
10.12†	First Amendment to the PennyMac Financial Services, Inc. 2013 Equity Incentive Plan.	10-K	March 9, 2018
10.13†	Second Amendment to the PennyMac Financial Services, Inc. 2013 Equity Incentive Plan.	DEF14A	April 17, 2018
10.14†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors.	8-K	May 16, 2013
10.15†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive Officers.	10-Q	November 6, 2015
10.16†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible Participants.	10-Q	November 6, 2015
10.17†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement.	8-K	June 17, 2013
10.18†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (2018).	10-Q	August 2, 2018
10.19†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (2018).	10-Q	August 2, 2018
10.20†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (2018).	10-Q	August 2, 2018
10.21†	Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (2019).	10-K	March 5, 2019

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.22†	Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Stock Option Award Agreement (2019).	10-K	March 5, 2019
10.23†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (2019).	10-Q	May 6, 2019
10.24†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Net Share Withholding) (2020).	10-Q	November 4, 2019
10.25†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Sale to Cover) (2020).	10-Q	November 4, 2019
10.26†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Net Share Withholding) (2020).	10-Q	November 4, 2019
10.27†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Sale to Cover) (2020).	10-Q	November 4, 2019
10.28†	Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreements (Net Share Withholding) (2017-2019).	10-Q	November 4, 2019
10.29†	Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (Sale to Cover) (2017-2019).	10-Q	November 4, 2019
10.30	Second Amended and Restated Management Agreement, dated as of September 12, 2016, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	8-K	September 12, 2016
10.31	Amendment No. 1 to Second Amended and Restated Management Agreement, dated as of September 27, 2017, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	10-Q	November 7, 2017
10.32	Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.	8-K	September 12, 2016
10.33	Amendment No. 1 to Third Amended and Restated Flow Servicing Agreement, dated as of March 1, 2018, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services LLC.	10-Q	May 4, 2018

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.34	Amended and Restated Mortgage Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	September 12, 2016
10.35	Amendment No. 1 to Amended and Restated Mortgage Banking Services Agreement, dated as of May 25, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	August 8, 2017
10.36	Amendment No. 2 to Amended and Restated Mortgage Banking Services Agreement, dated as of October 31, 2017, by and among PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	November 7, 2017
10.37	Amendment No. 3 to Amended and Restated Mortgage Banking Services Agreement, dated as of December 1, 2017, by and among PennyMac Loan Services, LLC and PennyMac Corp.	10-K	March 9, 2018
10.38	Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp.	8-K	September 12, 2016
10.39	Amendment No. 1 to Amended and Restated MSR Recapture Agreement, dated as of December 1, 2017, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	March 9, 2018
10.40	Second Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2019, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC.	10-K	March 5, 2019
10.41	Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-K	March 10, 2016
10.42	Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC.	10-Q	August 7, 2015
10.43	HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.	10-Q	May 6, 2019
10.44	Third Amended and Restated Master Repurchase Agreement, dated as of April 28, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	8-K	May 3, 2017

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.45	Amendment No. 1 to Third Amended and Restated Master Repurchase Agreement, dated as of June 1, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	August 8, 2017
10.46	Amendment No. 2 to Third Amended and Restated Master Repurchase Agreement, dated as of December 20, 2017, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-K	March 9, 2018
10.47	Amendment No. 3 to Third Amended and Restated Master Repurchase Agreement, dated as of February 1, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	8-K	February 7, 2018
10.48	Amendment No. 4 to Third Amended and Restated Master Repurchase Agreement, dated as of April 27, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	August 2, 2018
10.49	Amendment No. 5 to Third Amended and Restated Master Repurchase Agreement, dated as of February 11, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-K	March 5, 2019
10.50	Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	May 6, 2019
10.51	Amendment No. 7 to the Third Amended and Restated Master Repurchase Agreement, dated as of September 11, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	November 4, 2019
10.52	Amended and Restated Guaranty, dated as of April 28, 2017, by Private National Mortgage Acceptance LLC in favor of Credit Suisse First Boston Mortgage Capital LLC.	8-K	May 3, 2017

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.53	Amended and Restated Credit Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, the lenders that are parties thereto, Credit Suisse AG and Credit Suisse Securities (USA) LLC.	8-K	November 22, 2016
10.54	Amendment No. 1 to Amended and Restated Credit Agreement, dated November 17, 2017, by and among Private National Mortgage Acceptance Company, LLC and Credit Suisse AG.	10-K	March 9, 2018
10.55	Amendment No. 2 to Amended and Restated Credit Agreement and Amendment No. 1 to Amended and Restated Collateral and Guaranty Agreement, dated November 1, 2018, by and among Private National Mortgage Acceptance Company, LLC, each of the Guarantors party thereto, the Lenders party hereto, Credit Suisse AG, Cayman Islands Branch and Credit Suisse AG.	10-K	March 5, 2019
10.56	Amendment No. 3 to Amended and Restated Credit Agreement, dated October 31, 2019, by and among Private National Mortgage Acceptance Company, LLC and Credit Suisse AG, Cayman Islands Branch.	*
10.57	Amended and Restated Collateral and Guaranty Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac Financial Services, Inc., PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC.	8-K	November 22, 2016
10.58	Collateral and Guaranty Agreement Supplement, dated November 1, 2018, by and between Credit Suisse AG as the Collateral Agent and PennyMac Financial Services, Inc.	10-K	March 5, 2019
10.59	Master Repurchase Agreement, dated as of August 19, 2016, between PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A.	8-K	August 23, 2016
10.60	First Amendment to Master Repurchase Agreement, dated as of May 23, 2017, between PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A.	8-K	May 30, 2017
10.61	Second Amendment to Master Repurchase Agreement, dated as of September 27, 2017, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	10-Q	November 7, 2017
10.62	Third Amendment to Master Repurchase Agreement, dated as of October 13, 2017, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	10-Q	November 7, 2017
10.63	Fourth Amendment to Master Repurchase Agreement, dated as of July 26, 2018, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	10-Q	November 2, 2018

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.64	Fifth Amendment to Master Repurchase Agreement, dated as of October 12, 2018, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	10-Q	November 2, 2018
10.65	Sixth Amendment to Master Repurchase Agreement, dated as of July 23, 2019, by and between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	8-K	July 25, 2019
10.66	Seventh Amendment to Master Repurchase Agreement, dated as of October 11, 2019, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.	10-Q	November 4, 2019
10.67	Guaranty, dated as of August 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank. N.A.	8-K	August 23, 2016
10.68	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-Q	November 4, 2019
10.69	Second Amended and Restated Base Indenture, dated as of August 10, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.	8-K	August 16, 2017
10.70	Amendment No. 1 to Second Amended and Restated Base Indenture, dated as of February 28, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.	8-K	March 6, 2018
10.71	Amendment No. 2 to Second Amended and Restated Base Indenture, dated as of August 10, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.	8-K	August 15, 2018
10.72	Amendment No. 3 to Second Amended and Restated Base Indenture, dated as of April 29, 2019, among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.	10-Q	August 6, 2019
10.73	Amended and Restated Series 2016-MSRVF1 Indenture Supplement to Indenture, dated as of February 28, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.	8-K	March 6, 2018
10.74	Amendment No. 1 to Amended and Restated Series 2016-MSRVF1 Indenture Supplement, dated as of August 10, 2018, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.	10-Q	November 2, 2018

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.75	Series 2018-GT1 Indenture Supplement, dated as of February 28, 2018, to Second Amended and Restated Base Indenture, dated as of August 10, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.	8-K	March 6, 2018
10.76	Series 2018-GT2 Indenture Supplement, dated as of August 10, 2018, to Second Amended and Restated Base Indenture, dated as of August 10, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.	8-K	August 15, 2018
10.77	Master Repurchase Agreement, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC.	8-K	December 21, 2016
10.78	Amendment No. 1 to Master Repurchase Agreement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC and consented to by Citibank, N.A., Credit Suisse AG, Cayman Islands Branch, and Credit Suisse First Boston Mortgage Capital LLC.	8-K	February 23, 2017
10.79	Amendment No. 2 to Master Repurchase Agreement, dated as of August 10, 2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC and consented to by Citibank, N.A., Credit Suisse AG, Cayman Islands Branch, and Credit Suisse First Boston Mortgage Capital LLC.	8-K	August 16, 2017
10.80	Guaranty, dated as of December 19, 2016, made by Private National Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR ISSUER TRUST.	8-K	December 21, 2016
10.81	Amendment No. 1 to Guaranty, dated as of February 16, 2017, by and between PNMAC GMSR ISSUER TRUST and Private National Mortgage Acceptance Company, LLC.	8-K	February 23, 2017
10.82	Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and PennyMac Mortgage Investment Trust.	8-K	December 21, 2016
10.83	Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC.	8-K	December 21, 2016
10.84	Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST and PennyMac Holdings, LLC.	8-K	December 21, 2016

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
10.85	Master Repurchase Agreement, dated as of December 19, 2016, by and among, Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, LLC.	8-K	December 21, 2016
10.86	Amendment No. 1 to Master Repurchase Agreement, dated as of February 28, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, LLC.	8-K	March 6, 2018
10.87	Guaranty, dated as of December 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC.	10-Q	November 7, 2017
10.88	Loan and Security Agreement, dated as of February 1, 2018, by and among Credit Suisse AG, Cayman Islands Branch, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	8-K	February 7, 2018
10.89	Amendment Number One to Loan and Security Agreement, dated as of January 29, 2020, by and among Credit Suisse AG, Cayman Islands Branch, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	*
10.90	Master Repurchase Agreement, dated as of September 11, 2019, by and among Credit Suisse AG, Cayman Islands Branch, Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	10-Q	November 4, 2019
21.1	Subsidiaries of PennyMac Financial Services, Inc.	*
23.1	Consent of Deloitte & Touche LLP.	*
31.1	Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*
31.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*
32.1	Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**
32.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

Table of Contents

<br><br> <br><br>	<br><br> <br><br>	<br><br> Incorporated by Reference<br>from the Below-Listed Form<br>(Each Filed under SEC File<br>Number 15-68669 or 001-38727)<br><br>
<br><br> Exhibit No.<br><br>	<br><br> Exhibit Description<br><br>	<br><br> Form<br><br>	<br><br> Filing Date<br><br>
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018 (ii) the Consolidated Statements of Income for the years ended December 31, 2019 and December 31, 2018, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019 and December 31, 2018, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2019 and December 31, 2018 and (v) the Notes to the Consolidated Financial Statements.

* 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.

† Indicates management contract or compensatory plan or arrangement.

Item 16. Form 10-K Summary

None.

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

|  | Page |

| --- | --- | | Report of Independent Registered Public Accounting Firm | F-2 | | Financial Statements: | | | Consolidated Balance Sheets | F-4 | | Consolidated Statements of Income | F-5 | | Consolidated Statements of Changes in Stockholders’ Equity | F-6 | | Consolidated Statements of Cash Flows | F-7 | | Notes to Consolidated Financial Statements | F-9 |

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

PennyMac Financial Services, Inc.

3043 Townsgate Road

Westlake Village, CA 91361

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PennyMac Financial Services, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2019 and 2018, the related consolidated statements of income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principles

As discussed in Note 3 to the financial statements, during 2018 the Company elected to prospectively change its method of accounting for the classes of mortgage servicing rights (“MSRs”) it had accounted for using the amortization method.

As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to adoption of Accounting Standards Update 2016-2, Leases (Topic 842) using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

F-2

Table of Contents

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Mortgage Servicing Rights - Refer to Notes 3, 6 and 9 to the Financial Statements

Critical Audit Matter Description

The Company accounts for MSRs at fair value and categorizes its MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (a component of the discount rate), the prepayment and default rates of the underlying loans (“prepayment speed”) and the annual per-loan cost of servicing, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSRs’ fair value measurement.

We identified the pricing spread and prepayment speed assumptions used in the valuation of MSRs as a critical audit matter because of the significant judgments made by management in determining these assumptions. Auditing these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the reasonableness of management’s estimates and assumptions related to selection of the pricing spread and prepayment speed.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the pricing spread and prepayment speed assumptions used by the Company to estimate the fair value of MSRs included the following, among others: | · | We tested the design and operating effectiveness of internal controls over determining the fair value of MSRs, including those over the determination of the pricing spread and prepayment speed assumptions | | --- | --- | | · | With the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment speed assumptions by comparing them to independent market information | | --- | --- | | · | We evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage loans, by comparing historical prepayment speed assumptions to actual results | | --- | --- | | · | We tested management’s process for determining the pricing spread assumptions by comparing them to the implied spreads within market transactions and other third-party information used by management | | --- | --- |

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February 28, 2020

We have served as the Company’s auditor since 2008.

F-3

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

		December 31,
		2018

ASSETS
Cash (includes 52,599 and 108,174 pledged to creditors)	188,291	$	155,289
Short-term investments at fair value	74,611		117,824
Loans held for sale at fair value (includes 4,846,138 and 2,478,858 pledged to creditors)	4,912,953		2,521,647
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors	107,512		131,025
Derivative assets	159,686		96,347
Servicing advances, net (includes valuation allowance of 82,157 and 70,582; 207,460 and 162,895 pledged to creditors)	331,169		313,197
Mortgage servicing rights at fair value (includes 2,920,603 and 2,807,333 pledged to creditors)	2,926,790		2,820,612
Real estate acquired in settlement of loans	20,326		2,250
Operating lease right-of-use assets	73,090		—
Furniture, fixtures, equipment and building improvements, net (includes 20,406 and 16,281 pledged to creditors)	30,480		33,374
Capitalized software, net (includes 12,192 and 1,017 pledged to creditors)	63,130		39,748
Investment in PennyMac Mortgage Investment Trust at fair value	1,672		1,397
Receivable from PennyMac Mortgage Investment Trust	48,159		33,464
Loans eligible for repurchase	1,046,527		1,102,840
Other	219,621		109,559
Total assets	10,204,017	$	7,478,573
LIABILITIES
Assets sold under agreements to repurchase	4,141,053	$	1,933,859
Mortgage loan participation purchase and sale agreements	497,948		532,251
Obligations under capital lease	20,810		6,605
Notes payable secured by mortgage servicing assets	1,294,070		1,292,291
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	178,586		216,110
Derivative liabilities	22,330		3,064
Operating lease liabilities	91,320		—
Accounts payable and accrued expenses	175,273		156,212
Mortgage servicing liabilities at fair value	29,140		8,681
Payable to PennyMac Mortgage Investment Trust	73,280		104,631
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement	46,158		46,537
Income taxes payable	504,569		400,546
Liability for loans eligible for repurchase	1,046,527		1,102,840
Liability for losses under representations and warranties	21,446		21,155
Total liabilities	8,142,510		5,824,782
Commitments and contingencies – Note 16
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of 0.0001 par value; issued and outstanding, 78,515,047 and 77,494,332 shares, respectively	8		8
Additional paid-in capital	1,335,107		1,310,648
Retained earnings	726,392		343,135
Total stockholders' equity	2,061,507		1,653,791
Total liabilities and stockholders’ equity	10,204,017	$	7,478,573

All values are in US Dollars.

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

F-4

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME | | Year ended December 31, | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands, except earnings per share) | | | | | | | Revenues | | | | | | | | Net gains on loans held for sale at fair value: | | | | | | | | From non-affiliates | $ | 542,163 | $ | 184,439 | $ | 369,815 | | From PennyMac Mortgage Investment Trust | | 183,365 | | 64,583 | | 21,989 | | | | 725,528 | | 249,022 | | 391,804 | | Loan origination fees: | | | | | | | | From non-affiliates | | 159,461 | | 94,208 | | 112,124 | | From PennyMac Mortgage Investment Trust | | 14,695 | | 7,433 | | 7,078 | | | | 174,156 | | 101,641 | | 119,202 | | Fulfillment fees from PennyMac Mortgage Investment Trust | | 160,610 | | 81,350 | | 80,359 | | Net loan servicing fees: | | | | | | | | Loan servicing fees: | | | | | | | | From non-affiliates | | 730,165 | | 585,101 | | 475,848 | | From PennyMac Mortgage Investment Trust | | 48,797 | | 42,045 | | 43,064 | | From Investment Funds | | — | | 3 | | 1,461 | | Other fees | | 98,564 | | 64,133 | | 58,924 | | | | 877,526 | | 691,282 | | 579,297 | | Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities | | (593,117) | | (237,389) | | (292,588) | | Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | 9,256 | | (8,500) | | 19,350 | | | | (583,861) | | (245,889) | | (273,238) | | Net loan servicing fees | | 293,665 | | 445,393 | | 306,059 | | Net interest income (expense): | | | | | | | | Interest income: | | | | | | | | From non-affiliates | | 282,398 | | 208,954 | | 135,141 | | From PennyMac Mortgage Investment Trust | | 6,302 | | 7,462 | | 8,038 | | | | 288,700 | | 216,416 | | 143,179 | | Interest expense: | | | | | | | | To non-affiliates | | 201,688 | | 129,459 | | 127,569 | | To PennyMac Mortgage Investment Trust | | 10,291 | | 15,138 | | 16,951 | | | | 211,979 | | 144,597 | | 144,520 | | Net interest income (expense) | | 76,721 | | 71,819 | | (1,341) | | Management fees, net: | | | | | | | | From PennyMac Mortgage Investment Trust | | 36,492 | | 24,465 | | 22,584 | | From Investment Funds | | — | | 4 | | 1,001 | | | | 36,492 | | 24,469 | | 23,585 | | Carried interest from Investment Funds | | — | | (365) | | (1,040) | | Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust | | 416 | | 332 | | 118 | | Results of real estate acquired in settlement of loans | | 557 | | 589 | | 94 | | Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | 379 | | 1,126 | | 32,940 | | Other | | 8,880 | | 9,253 | | 3,683 | | Total net revenues | | 1,477,404 | | 984,629 | | 955,463 | | Expenses | | | | | | | | Compensation | | 503,458 | | 403,270 | | 358,721 | | Servicing | | 164,697 | | 137,104 | | 117,696 | | Loan origination | | 117,338 | | 27,398 | | 20,429 | | Technology | | 67,946 | | 60,103 | | 52,013 | | Professional services | | 32,859 | | 27,615 | | 17,845 | | Occupancy and equipment | | 28,916 | | 27,152 | | 22,615 | | Other | | 32,746 | | 34,290 | | 30,235 | | Total expenses | | 947,960 | | 716,932 | | 619,554 | | Income before provision for income taxes | | 529,444 | | 267,697 | | 335,909 | | Provision for income taxes | | 136,479 | | 23,254 | | 24,387 | | Net income | | 392,965 | | 244,443 | | 311,522 | | Less: Net income attributable to noncontrolling interest | | — | | 156,749 | | 210,765 | | Net income attributable to PennyMac Financial Services, Inc. common stockholders | $ | 392,965 | $ | 87,694 | $ | 100,757 | | Earnings per share | | | | | | | | Basic | $ | 5.02 | $ | 2.62 | $ | 4.34 | | Diluted | $ | 4.89 | $ | 2.59 | $ | 4.03 | | Weighted average shares outstanding | | | | | | | | Basic | | 78,206 | | 33,524 | | 23,199 | | Diluted | | 80,340 | | 35,322 | | 24,999 | The accompanying notes are an integral part of these financial statements.

F-5

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

Balance at December 31, 2016	—	$	—	22,427	$	2	$	182,772	$	164,549	$	1,052,033	$	1,399,356
Net income	—		—	—		—		—		100,757		210,765		311,522
Stock and unit-based compensation	—		—	—		—		7,545		—		14,406		21,951
Issuance of Class A common stock in settlement of directors' fees	—		—	—		—		160		—		178		338
Repurchase of Class A common stock	—		—	(505)		—		(8,599)		—		—		(8,599)
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—	1,608		—		27,119		—		(27,119)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—	—		—		(4,894)		—		—		(4,894)
Balance at December 31, 2017	—		—	23,530		2		204,103		265,306		1,250,263		1,719,674
Cumulative effect of change in accounting principle - Adoption of fair value accounting for all existing classes of mortgage servicing rights at fair value	—		—	—		—		—		189		587		776
Balance at January 1, 2018	—		—	23,530		2		204,103		265,495		1,250,850		1,720,450
Net income	—		—	—		—		—		87,694		156,749		244,443
Stock and unit-based compensation	23		—	299		—		10,932		—		19,636		30,568
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.	—		—	1,635		1		33,155		—		(33,156)		—
Exchange of Class A common stock of subsidiary for common stock of PennyMac Financial Services, Inc. pursuant to a reorganization	25,228		3	(25,228)		(3)		—		—		—		—
Exchange of Class A unit of Private National Mortgage Acceptance Company, LLC for common stock of PennyMac Financial Services, Inc. pursuant to a reorganization, net of income tax effect	52,263		5	—		—		1,064,315		—		(1,390,973)		(326,653)
Issuance of common stock in settlement of directors' fees	4		—	—		—		85		—		—		85
Repurchase of common stock	(24)		—	—		—		(467)		—		—		(467)
Balance at December 31, 2018	77,494		8	—		—		1,310,648		343,135		—		1,653,791
Net income	—		—	—		—		—		392,965		—		392,965
Stock and unit-based compensation	1,062		—	—		—		25,282		—		—		25,282
Issuance of common stock in settlement of directors' fees	10		—	—		—		233		—		—		233
Common stock dividends (0.12 per share)	—		—	—		—		—		(9,708)		—		(9,708)
Repurchase of common stock	(51)		—	—		—		(1,056)		—		—		(1,056)
Balance at December 31, 2019	78,515	$	8	—	$	—	$	1,335,107	$	726,392	$	—	$	2,061,507

All values are in US Dollars.

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

F-6

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2019		2018		2017
	(in thousands)
Cash flow from operating activities
Net income	$	392,965	$	244,443	$	311,522
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value		(725,528)		(249,022)		(391,804)
Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		583,861		245,889		273,238
Accrual of servicing rebate payable to Investment Funds		—		—		129
Capitalization of interest and advance on loans held for sale at fair value		(73,611)		(79,317)		(44,922)
Accrual of interest on excess servicing spread financing		10,291		15,138		16,951
Amortization of net debt issuance (premiums) and costs		(4,100)		(29,170)		6,348
Carried Interest from Investment Funds		—		365		1,040
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(275)		(192)		23
Results of real estate acquired in settlement in loans		(557)		(589)		(94)
Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(379)		(1,126)		(32,940)
Stock-based compensation expense		24,771		25,251		20,697
Provision for servicing advance losses		36,149		40,306		43,249
Depreciation and amortization		15,021		12,925		8,395
Amortization of right-of-use assets		10,158		—		—
Loss from disposition of fixed assets and impairment of capitalized software		—		—		1,336
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(50,110,085)		(37,967,724)		(42,624,288)
Origination of loans held for sale		(11,831,703)		(5,000,193)		(5,557,244)
Purchase of loans held for sale from non-affiliates		(1,725,227)		(531,665)		—
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(6,271,447)		(4,036,147)		(3,957,384)
Sale to non-affiliates and principal payments of loans held for sale		61,214,102		44,557,560		50,235,245
Sale of loans held for sale to PennyMac Mortgage Investment Trust		6,255,915		3,343,028		904,097
Repurchase of loans subject to representations and warranties		(18,660)		(26,021)		(20,324)
Settlement of repurchase agreement derivatives		31,993		31,907		—
Increase in servicing advances		(98,121)		(33,415)		(15,675)
Sale of real estate acquired in settlement of loans		28,901		4,037		4,655
Increase in receivable from PennyMac Mortgage Investment Trust		(20,257)		(9,672)		(11,475)
(Increase) decrease in other assets		(62,549)		(7,791)		16,092
Decrease in operating lease liabilities		(12,680)		—		—
Increase (decrease) in accounts payable and accrued expenses		38,551		32,750		(59,378)
Decrease in payable to PennyMac Mortgage Investment Trust		(36,645)		(34,472)		(34,076)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		—		—		(6,726)
Increase in income taxes payable		104,023		25,313		29,901
Net cash (used in) provided by operating activities		(2,245,123)		572,396		(883,412)
Cash flow from investing activities
Decrease (increase) in short-term investments		43,213		52,256		(84,116)
Net change in assets purchased from PMT under agreement to resell		23,513		13,103		5,872
Net settlement of derivative financial instruments used for hedging		366,137		(122,227)		(36,618)
Purchase of mortgage servicing rights		(227,445)		(227,664)		(178,531)
Purchase of furniture, fixtures, equipment and leasehold improvements		(6,124)		(13,421)		(6,791)
Acquisition of capitalized software		(29,385)		(17,444)		(16,992)
Increase in margin deposits		(21,127)		(7,214)		(22,055)
Net cash provided by (used in) investing activities		148,782		(322,611)		(339,231)

F-7

Table of Contents

| | Year ended December 31, | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Cash flow from financing activities | | | | | | | | Sale of assets under agreements to repurchase | | 63,803,260 | | 41,375,177 | | 35,698,381 | | Repurchase of assets sold under agreements to repurchase | | (61,596,780) | | (41,820,843) | | (35,054,437) | | Issuance of mortgage loan participation purchase and sale certificates | | 23,451,400 | | 25,284,270 | | 23,011,607 | | Repayment of mortgage loan participation purchase and sale certificates | | (23,485,918) | | (25,279,510) | | (23,155,463) | | Advance of obligations under capital lease | | 25,123 | | — | | 10,298 | | Repayment of obligations under capital lease | | (10,918) | | (14,366) | | (12,751) | | Issuance of notes payable secured by mortgage servicing assets | | — | | 1,300,000 | | 935,000 | | Repayment of notes payable secured by mortgage servicing assets | | — | | (900,000) | | (186,935) | | Repayment of excess servicing spread financing | | (40,316) | | (46,750) | | (54,980) | | Payment of debt issuance costs | | (6,603) | | (19,982) | | (22,201) | | Issuance of common stock pursuant to exercise of stock options | | 5,145 | | 5,317 | | 1,254 | | Repurchase of common stock and Class A common stock | | (1,056) | | (5,293) | | (8,599) | | Payment of withholding taxes relating to stock-based compensation | | (4,634) | | — | | — | | Payment of dividend to common stock and Class A common stockholders | | (9,708) | | (10,054) | | — | | Net cash provided by (used in) financing activities | | 2,128,995 | | (132,034) | | 1,161,174 | | Net increase (decrease) in cash and restricted cash | | 32,654 | | 117,751 | | (61,469) | | Cash and restricted cash at beginning of year | | 155,924 | | 38,173 | | 99,642 | | Cash and restricted cash at end of year | $ | 188,578 | $ | 155,924 | $ | 38,173 | | Cash and restricted cash at end of year are comprised of the following: | | | | | | | | Cash | $ | 188,291 | $ | 155,289 | $ | 37,725 | | Restricted cash included in Other assets | | 287 | | 635 | | 448 | | | $ | 188,578 | $ | 155,924 | $ | 38,173 | The accompanying notes are an integral part of these financial statements.

F-8

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization

PennyMac Financial Services, Inc. (formerly known as New 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 consolidates the financial results of PennyMac and its subsidiaries.

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

| · | PennyMac Loan Services, LLC \(“PLS”\)—a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PennyMac Mortgage Investment Trust \(“PMT”\), a publicly held real estate investment trust, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT. |

| --- | --- |

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

| · | PNMAC 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 PMT. 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”). Together, PMT and the Investment Funds are referred to as the “Advised Entities”. The Investment Funds were dissolved during 2018.

On November 1, 2018, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings” or “Old PFSI”) 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 at Old PFSI before the Reorganization. As part of the Reorganization, the Company replaced Old PFSI as the top-level parent holding corporation of the consolidated PennyMac business and changed its name from New PennyMac Financial Services, Inc. (“New PFSI”).

As the result of the reorganization:

| · | Each outstanding share of Class A common stock of Old PFSI was converted on a one-for-one basis into shares of New PFSI common stock. |

| --- | --- |

| · | Each outstanding share of Class B common stock of Old PFSI was cancelled for no consideration. |

| --- | --- |

F-9

Table of Contents

·	Each Class A unit of PennyMac not held by Old PFSI was contributed to New PFSI and exchanged on a one-for-one basis for shares of New PFSI common stock.

| · | New PFSI replaced Old PFSI as the publicly-held entity and, through its subsidiaries, conducts all of the operations previously conducted by Old PFSI. |

| --- | --- |

| · | Old PFSI changed its name to PNMAC Holdings, Inc. and New PFSI changed its name to PennyMac Financial Services, Inc. |

| --- | --- |

| · | New PFSI assumed Old PFSI’s existing equity incentive plan—including all performance share awards, restricted share awards, common stock options and other incentive awards covering shares of Old PFSI’s Class A common stock, whether vested or not vested, that were outstanding at the effective time of the Reorganization. |

| --- | --- |

New PFSI reserved the same number of shares of its common stock as was reserved by Old PFSI before the effective time of the Reorganization, and the terms and conditions that were in effect immediately before the Reorganization under each outstanding incentive award assumed by New PFSI continue in full force and effect after the Reorganization, except that the shares of Class A common stock reserved under Old PFSI’s plans and issuable under each such award will be replaced by shares of common stock of New PFSI.

| · | The Reorganization 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. |

| --- | --- |

| · | After the completion of the Reorganization, PNMAC Holdings became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, PNMAC Holdings’ historical consolidated financial statements are the Company’s historical financial statements. |

| --- | --- |

Note 2—Concentration of Risk

A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these entities (generally comprised of gains on mortgage loans held for sale, loan origination fees, fulfillment fees, loan servicing fees, management fees, carried interest, less net interest paid to these entities) totaled 31%, 21%, and 20% of total net revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

Note 3—Significant Accounting Policies and Recently Issued Accounting Pronouncement

A description of the Company’s significant accounting policies applied in the preparation of these consolidated financial statements follows.

Basis of Presentation

The Company’s 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 (the “ASC” or the “Codification”).

F-10

Table of Contents

Principles of Consolidation

The consolidated financial statements include the accounts of PFSI and its wholly‑owned subsidiaries, including PennyMac. Intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Cash Flows

For the purpose of presentation in the statement of cash flows, the Company has identified tenant security deposits relating to rental properties owned by PMT and managed by the Company as restricted cash. Tenant security deposits are included in Other assets on the Company’s consolidated balance sheets.

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 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.

Short‑Term Investments

Short‑term investments, which represent investments in accounts with depository institutions, are carried at fair value. Changes in fair value are recognized in current period income. The Company classifies its short‑term investments as “Level 1” fair value assets.

F-11

Table of Contents

Loans Held for Sale at Fair Value

Management has elected to account for loans held for sale at fair value, with changes in fair value recognized in current period income, to more timely reflect the Company’s performance. All changes in fair value are recognized as a component of Net gains on loans held for sale at fair value. The Company classifies most of the loans held for sale at fair value as “Level 2” fair value assets. Certain of the Company’s loans held for sale may not be saleable into active markets due to identified defects or delinquency. Such loans are classified as “Level 3” fair value assets.

Sale Recognition

The Company recognizes transfers of loans as sales when it surrenders control over the loans. Control over transferred loans is deemed to be surrendered when (i) the loans have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred loans, and (iii) the Company does not maintain effective control over the transferred loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific loans.

Interest Income Recognition

Interest income on loans held for sale at fair value is recognized over the life of the loans using their contractual interest rates. Income recognition is suspended and the interest receivable is reversed against interest income when loans become 90 days delinquent, or when, in management’s opinion, a full recovery of interest and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current.

Derivative Financial Instruments

The Company holds and issues derivative financial instruments that are created as a result of certain of its operations. The Company also 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:

| · | Interest rate lock commitments \(“IRLCs”\) that are created when the Company commits to purchase or originate a loan acquired for sale at specified interest rates. |

| --- | --- |

| · | Derivatives that are embedded in a master repurchase agreement with a non-affiliate that provides for the Company to receive incentives for financing loans that satisfy certain consumer relief characteristics as provided in the master repurchase agreement. |

| --- | --- |

The Company is exposed to price risk relative to:

| · | Its loans held for sale as well as to IRLCs. The Company bears price risk from the time a commitment to fund a loan is made to a borrower or to purchase a loan from PMT, to the time either the prospective transaction is cancelled or the loan is sold. During this period, the Company is exposed to losses if market interest rates increase, because the fair value of the purchase commitment or prospective loan decreases. |

| --- | --- |

| · | The fair value of its mortgage servicing rights \(“MSRs”\) when interest rates decrease. MSRs are generally subject to reduction in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the mortgage loans underlying the MSRs, thereby reducing their fair value. Reductions in the fair value of MSRs affect earnings primarily through change in fair value and impairment charges. |

| --- | --- |

F-12

Table of Contents

The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of the Company’s 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 MSRs.

IRLCs are accounted for as derivative financial instruments. The Company manages the risk created by IRLCs relating to mortgage loans held for sale by entering into forward sale agreements to sell the mortgage loans and by the purchase and sale of options and futures on mortgage‑backed securities (“MBS”). Such agreements are also accounted for as derivative financial instruments. These and other interest-rate derivatives are also used to manage the fair value risk created by changes in prepayment speeds on certain of the MSRs the Company holds.

The Company classifies its IRLCs as “Level 3” fair value assets and liabilities. Fair value of exchange-traded hedging derivative financial instruments that are actively traded on an exchange are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.

The Company does not designate its derivative financial instruments for hedge accounting. Therefore, the Company accounts for its derivative financial instruments as free‑standing derivatives. All derivative financial instruments are recognized on the consolidated balance sheet at fair value with changes in the fair values being reported in current period income. Changes in fair value of derivative financial instruments hedging IRLCs, loans held for sale at fair value and MSRs are included in Net gains on loans held for sale at fair value or in Amortization, impairment, and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the Company’s consolidated statements of income. Changes in fair value of derivative assets relating to a master repurchase agreement are included in Interest expense.

When the Company has multiple derivative financial instruments with the same counterparty subject to a master netting arrangement, it offsets the amounts recorded as assets and liabilities and amounts recognized for the right to reclaim cash collateral it has deposited with the counterparty or the obligation to return cash collateral it has collected from the counterparty arising from that master netting arrangement. Such offset amounts are presented as either a net asset or liability by counterparty on the Company’s consolidated balance sheets.

Servicing Advances

Servicing advances represent advances made on behalf of borrowers and the mortgage loans’ investors to fund property taxes, insurance premiums and out-of-pocket collection costs (e.g., preservation and restoration of mortgaged property or real estate acquired in the settlement of loans (“REO”), legal fees, and appraisals). Servicing advances are made in accordance with the Company’s servicing agreements and, when made, are deemed recoverable. A valuation allowance is provided for amounts expected to become uncollectable. Servicing advances are written off when they are deemed uncollectable.

Mortgage Servicing Rights and Mortgage Servicing Liabilities

MSRs and MSLs arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and mortgage loans. Under these contracts, the Company performs loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition and disposition of REO.

The fair value of MSRs and MSLs is derived from the net positive or negative, respectively, cash flows associated with the servicing contracts. The Company receives a servicing fee, net of related guarantee fees based on the remaining outstanding principal balances of the mortgage loans subject to the servicing contracts. The servicing fees are collected from the monthly payments made by the mortgagors.

F-13

Table of Contents

The Company is contractually entitled to receive other remuneration including various mortgagor‑contracted fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain the placement fees earned on funds held pending remittance related to its collection of mortgagor payments. The Company also generally has the right to solicit the mortgagors for other products and services as well as for new mortgages for those considering refinancing their existing loan or purchasing a new home.

The Company recognizes MSRs and MSLs initially at fair value, either as proceeds from or liabilities incurred in, sales of mortgage loans where the Company assumes the obligation to service the mortgage loan in the sale transaction, or from the purchase of MSRs or receipt of cash for acceptance of MSLs.

Through December 31, 2017, the Company’s subsequent accounting for MSRs and MSLs was based on the class of MSR or MSL. The Company identified three classes of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%, MSRs backed by mortgage loans with initial interest rates of more than 4.5%, and purchased MSRs financed in part through the transfer of the right to receive excess servicing spread (“ESS”) cash flows.

| · | Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% were accounted for using the amortization method \(discussed below\). |

| --- | --- |

| · | Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs financed in part by ESS were accounted for at fair value with changes in fair value recorded in current period income. |

| --- | --- |

| · | MSLs were and continue to be carried at fair value with changes in fair value recorded in current period income. |

| --- | --- |

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

The fair value of MSRs and MSLs is difficult to determine because MSRs and MSLs are not actively traded in observable stand‑alone markets. Considerable judgment is required to estimate the fair values of MSRs and MSLs and the exercise of such judgment can significantly affect the Company’s income. Therefore, the Company classifies its MSRs and MSLs as “Level 3” fair value assets and liabilities.

MSRs and MSLs Accounted for at Fair Value

Changes in fair value of MSLs and MSRs accounted for at fair value are recognized in current period income in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

MSRs Accounted for Using the Amortization Method

Through December 2017, the Company amortized MSRs that were accounted for using the amortization method. MSR amortization was determined by applying the ratio of the net MSR cash flows projected for the current period to the estimated total remaining projected net MSR cash flows. The estimated total net MSR cash flows were determined at the beginning of each month using prepayment inputs applicable at that time.

F-14

Table of Contents

MSRs accounted for using the amortization method were periodically evaluated for impairment. Impairment occurred when the current fair value of the MSRs decreased below the asset’s amortized cost. If MSRs were impaired, the impairment was recognized in current‑period income and the carrying value (carrying value is the MSR’s amortized cost reduced by any related valuation allowance) of the MSRs was adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increased, the increase in fair value was recognized in current‑period income. When an increase in fair value of MSR was recognized, the valuation allowance was adjusted to increase the carrying value of the MSRs only to the extent of the valuation allowance.

For impairment evaluation purposes, the Company stratified its MSRs by predominant risk characteristic when evaluating for impairment. For purposes of performing its MSR impairment evaluation, the Company stratified its servicing portfolio on the basis of certain risk characteristics including mortgage loan type (fixed‑rate or adjustable‑rate) and note interest rate. Fixed‑rate mortgage loans were stratified into note rate pools of 50 basis points for note rates between 3.0% and 4.5% and a single pool for note rates of less than or equal to 3.0%. If the fair value of MSRs in any of the note interest rate pools was below the carrying value of the MSRs for that pool, impairment was recognized to the extent of the difference between the fair value and the carrying value of that pool.

Management periodically reviewed the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum was likely to recover. When management deemed recovery of the fair value to be unlikely in the foreseeable future, a write‑down of the cost of the MSRs for that stratum to its estimated recoverable value was charged to the valuation allowance.

Both amortization and changes in the amount of the MSR valuation allowance were recorded in current period income in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Leases

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, except leases with initial terms less than or equal to 12 months. Lease expense is recognized on the straight-line basis over the lease term and is recorded in Occupancy and equipment in the consolidated statements of income.

The Company’s lease agreements 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. As such, lease payments represent payments on both lease and non-lease components. At lease commencement, lease liabilities are recognized based on the present value of the remaining lease payments and discounted using the Company’s incremental borrowing rate. Right-of-use assets initially equal the lease liability, adjusted for any lease payments made before lease commencement and for any lease incentives.

Furniture, Fixtures, Equipment and Building Improvements

Furniture, fixtures, equipment and building improvements are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight‑line method over the estimated useful lives of the various classes of assets, which range from five to seven years for furniture and equipment and the lesser of the asset’s estimated useful life or the remaining lease term for fixtures and building improvements.

Capitalized Software

The Company capitalizes certain consulting, payroll, and payroll‑related costs related to the development of computer software for internal use. Once development is complete and the software is placed in service, the Company amortizes the capitalized costs over three to seven years using the straight‑line method.

F-15

Table of Contents

The Company also periodically assesses capitalized software for recoverability when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the Company identifies an indicator of impairment, it assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value.

Investment in PennyMac Mortgage Investment Trust at Fair Value

Common shares of beneficial interest in PMT are carried at their fair value with changes in fair value recognized in current period income. Fair value for purposes of the Company’s holdings in PMT is based on the published closing price of the shares as of period end. The Company classifies its investment in common shares of PMT as a “Level 1” fair value asset.

Loans Eligible for Repurchase

The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase loans when the loan is at least three months delinquent when it is repurchased. As a result of this right, the Company recognizes the loans in Loans eligible for repurchase at their unpaid principal balances and records a corresponding liability in Liability for loans eligible for repurchase on its consolidated balance sheets.

Borrowings

The carrying values of borrowings other than ESS are based on the accrued cost of the agreements. The costs of creating the facilities underlying the agreements are included in the carrying value of the agreements and are amortized to Interest expense over the terms of the respective borrowing facilities:

| · | Debt issuance costs relating to revolving facilities, such as repurchase agreement and mortgage loan participation purchase and sale facilities are amortized on the straight line basis over the term of the facility; |

| --- | --- |

| · | Debt issuance cost relating to non-revolving debts, such as the Company’s Notes payable secured by mortgage servicing assets, are amortized over the contractual term of the non-revolving debt using the interest method; |

| --- | --- |

| · | Debt issuance premiums recorded as the results of recognition of repurchase agreement derivatives are amortized to Interest expense over the contractual term of the repurchase agreement. Unamortized premiums relating to repurchase agreements repaid before the transaction’s contractual maturity are credited to Interest expense. |

| --- | --- |

Excess Servicing Spread Financing at Fair Value

The Company finances certain of its purchases of Agency MSRs through the sale to PMT of the right to receive the excess of the servicing fee rate over a specified rate of the underlying MSRs. This excess is referred to as the ESS. ESS is carried at its fair value. Changes in fair value of ESS are recognized in current period income in Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.

Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS through the expected life of the underlying mortgage loans.

F-16

Table of Contents

Liability for Losses Under Representations and Warranties

The Company’s agreements with the Agencies and other investors include representations and warranties related to the loans the Company sells to the Agencies and other investors. The representations and warranties require adherence to Agency and other investor 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 its representations and warranties, the Company may be required to either repurchase the loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the loans. The Company’s credit loss may be reduced by any recourse it may have to correspondent loan sellers that, in turn, had sold such mortgage loans to PMT and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent loan seller, through PMT.

As a result of providing representations and warranties to investors and insurers, the Company records a provision for losses relating to representations and warranties as part of its loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates, the estimated severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time loans are sold and periodically updates its liability estimate. The level of the liability for representations and warranties is reviewed and approved by the Company’s management credit committee.

The level of the liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of loan repurchase losses is dependent on economic factors, investor repurchase demand or insurer claim denial strategies, and other external conditions that may change over the lives of the underlying loans. The Company’s representations and warranties are generally not subject to stated limits of exposure. However, the Company believes that the current unpaid principal balance of loans sold to date represents the maximum exposure to repurchases related to representations and warranties.

Loan Servicing Fees

Loan servicing fees are received by the Company for servicing loans. Loan servicing activities include loan administration, collection, and default management, including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and REO property dispositions.

Loan servicing fee amounts are based upon fee schedules established by the applicable investor and depend on whether the Company is directly servicing loans, where it holds the MSRs, is subservicing MSRs or loans held by PMT or another third party or is subservicing distressed mortgage loans for the Advised Entities.

The Company’s obligations under its loan servicing agreements are fulfilled as the Company services the loans. Fees are collected when the loan payments are received from the borrowers in the case of MSRs held by the Company or within 30 days of the applicable month-end from the Advised Entities.

Owned loan servicing fees are recorded net of Agency guarantee fees paid by the Company and are recognized when the loan payments are received from the borrowers. Loan servicing fees relating to loans serviced for the Advised Entities are recognized in the month in which the loans are serviced.

F-17

Table of Contents

Fulfillment Fees

Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection with the acquisition, packaging and sale of loans. Fulfillment fee amounts are based upon a negotiated fee schedule and the unpaid principal balance of the loans purchased by PMT. The Company’s obligation under the agreement is fulfilled when PMT completes the sale or securitization of a loan it purchases. Fulfillment fee revenue is recognized in the month the loan is purchased by PMT. Fulfillment fees are generally collected within 30 days of purchase by PMT.

Management fees

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

Stock‑Based Compensation

The Company establishes the cost of its share-based awards at the awards’ fair values at the grant date of the awards. The Company estimates the fair value of time‑based restricted stock units and performance‑based restricted stock units awarded with reference to the fair value of its underlying common stock and expected forfeiture rates on the date of the award. The Company estimates the fair value of its stock option awards with reference to the expected price volatility of its shares of common stock and risk-free interest rate for the period that exercisable stock options are expected to be outstanding.

Compensation costs are fixed, except for performance‑based restricted stock units, as of the award date. The cost of performance‑based restricted stock units is adjusted in each reporting period after the grant for changes in expected performance attainment until the performance share units vest. The Company amortizes the cost of stock based awards to compensation expense over the vesting period using the graded vesting method. Expense relating to awards is included in Compensation expense in the consolidated statements of income.

Income Taxes

The Company is subject to federal and state income taxes. Income taxes are provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. A valuation allowance is established if, in management’s judgment, it is not more likely than not that a deferred tax asset will be realized.

The Company recognizes tax benefits relating to its tax positions only if, in the opinion of management, it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this standard is recognized as the largest amount that is greater than 50% likely to be realized upon ultimate settlement with the appropriate taxing authority. The Company will classify any penalties and interest as a component of provision for income taxes.

As a result of the PennyMac recapitalization and reorganization in 2013, the Company expects to benefit from amortization and other tax deductions resulting from increases in the tax basis of PennyMac’s assets from the exchange of PennyMac Class A units to the shares of the Company’s common stock. Those deductions will be allocated to the Company and will be taken into account in reporting the Company’s taxable income.

The Company assumed an agreement with certain of the former unitholders of PennyMac that provides for the

F-18

Table of Contents

additional payment by the Company to exchanging unitholders of PennyMac equal to 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that PFSI realizes due to (i) increases in tax basis resulting from exchanges of the then existing unitholders and (ii) certain other tax benefits related to PFSI entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Although the Company’s Reorganization in 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 provide payment when applicable for units exchanged before the Reorganization.

Recently Issued Accounting Pronouncements

Effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), 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. At the adoption date, ASU 2016-02 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, the Company 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.

In June 2016, the FASB issued Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13, as amended, replaces the existing measurement of the allowance for credit losses that is based on incurred loss accounting model with an expected loss model, which requires the Company to use a forward-looking expected credit loss model for accounts receivable, loans and other financial instruments that measured at amortized cost basis. Most of the Company’s financial assets are measured at their fair values and are therefore not subject to the requirements of ASU 2016-13.

ASU 2016-13 is effective January 1, 2020 for the Company. Adoption of ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. Because of the Company’s current accounting, the adoption of ASU 2016-13 on January 1, 2020 is not expected to have a significant effect on the Company’s allowance for credit losses on its assets subject to ASU 2016-13 due to the assets’ relatively short-term lives.

F-19

Table of Contents

Note 4—Transactions with Affiliates

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

The Company sells newly originated conforming balance non-government insured or guaranteed loans to PMT under a mortgage loan purchase agreement.

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 mortgage loans for which PMT previously held the MSRs, the Company is 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 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, the Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking services agreement, the monthly fulfillment fee is 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 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 a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days the respective mortgage loans are held by PMT before being purchased by the Company. The Company purchases these mortgage loans “as is” and without recourse of any kind from PMT; however, where the Company has a claim for repurchase, indemnity or otherwise as against a correspondent seller, the Company is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.

F-20

Table of Contents

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Net gains on loans held for sale at fair value: | | | | | | | | Net gains on loans held for sale to PMT | $ | 190,416 | $ | 69,359 | $ | 28,238 | | Mortgage servicing rights and excess servicing spread recapture incurred | | (7,051) | | (4,776) | | (6,249) | | | $ | 183,365 | $ | 64,583 | $ | 21,989 | | Sale of loans held for sale to PMT | $ | 6,255,915 | $ | 3,343,028 | $ | 904,097 | | Tax service fees earned from PMT included in Loan origination fees | $ | 14,695 | $ | 7,433 | $ | 7,078 | | Fulfillment fee revenue | $ | 160,610 | $ | 81,350 | $ | 80,359 | | Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees | $ | 56,033,704 | $ | 26,194,303 | $ | 22,971,119 | | Sourcing fees paid to PMT | $ | 14,381 | $ | 10,925 | $ | 12,084 | | Unpaid principal balance of loans purchased from PMT | $ | 47,937,306 | $ | 36,415,933 | $ | 40,561,241 |

Loan Servicing

The Company has a loan servicing agreement with PMT (“Servicing Agreement”). The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or REO. The Company also remains entitled to customary ancillary income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

| · | The base servicing fee rates for distressed whole mortgage 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. |

| --- | --- |

| · | 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. |

| --- | --- |

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

| --- | --- |

F-21

Table of Contents

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

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

| --- | --- |

| · | The Company is entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a 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 mortgage 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:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Loan type serviced: | | | | | | | | Loans acquired for sale at fair value | $ | 1,772 | $ | 1,037 | $ | 954 | | Loans at fair value | | 2,207 | | 7,555 | | 15,610 | | Mortgage servicing rights | | 44,818 | | 33,453 | | 26,500 | | | $ | 48,797 | $ | 42,045 | $ | 43,064 | | Property management fees received from PMT included in Other income | $ | 314 | $ | 442 | $ | 350 |

F-22

Table of Contents

Investment Management Activities

The Company has a management agreement with PMT (“Management Agreement”), which was amended and restated effective September 12, 2016. Pursuant to the Management Agreement, 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 it 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 basis and before deducting the incentive fee, exceeds certain levels of return on “equity.” |

| --- | --- |

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

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

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non‑cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

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

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

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

F-23

Table of Contents

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:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Base management | $ | 29,303 | $ | 23,033 | $ | 22,280 | | Performance incentive | | 7,189 | | 1,432 | | 304 | | | $ | 36,492 | $ | 24,465 | $ | 22,584 | 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 reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

F-24

Table of Contents

The Company received reimbursements from PMT for expenses as follows:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Reimbursement of: | | | | | | | | Common overhead incurred by the Company (1) | $ | 5,340 | $ | 4,640 | $ | 5,306 | | Compensation (1) | | 480 | | 480 | | — | | Expenses incurred on PMT's behalf, net | | 4,362 | | 1,113 | | 2,257 | | | $ | 10,182 | $ | 6,233 | $ | 7,563 | | Payments and settlements during the year (2) | $ | 177,116 | $ | 71,943 | $ | 64,945 |

| \(1\) | The Company adopted Accounting Standards Update 2014-09 Revenues from Contracts with Customers \(Topic 606\) \(“ASU 2014-09”\) using the modified retrospective method effective January 1, 2018. Adoption of ASU 2014-09 using the modified retrospective method required the Company to include those reimbursements from PMT in Other revenue starting January 1, 2018. Before adoption of ASU 2014-09, the Company included such reimbursements as offsets to the respective expense line items. |

| --- | --- |

| \(2\) | Payments and settlements include payments for the operating, investing and financing activities summarized in this note and netting settlements made pursuant to master netting agreements between the Company and PMT. |

| --- | --- |

Conditional Reimbursement of Underwriting Fees

In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $580,000, $69,000 and $30,000 in reimbursement from PMT during the years ended December 31, 2019, 2018, and 2017, respectively.

Investing Activities

Master Repurchase Agreement

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

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

F-25

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) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

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:

|  |  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | | Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell: | | | | | | | | | Activity during the year: | | | | | | | | | Net repayments of assets purchased from PMT under agreement to resell | | $ | 23,513 | $ | 13,103 | $ | 5,872 | | Interest income | | $ | 6,302 | $ | 7,462 | $ | 8,038 | | Balance at end of year | | $ | 107,512 | $ | 131,025 | | | | Common shares of beneficial interest of PennyMac Mortgage Investment Trust: | | | | | | | | | Activity during the year: | | | | | | | | | Dividends earned from PennyMac Mortgage Investment Trust | | $ | 141 | $ | 140 | $ | 141 | | Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust | | | 275 | | 192 | | (23) | | | | $ | 416 | $ | 332 | $ | 118 | | Balance at end of year: | | | | | | | | | Fair value | | $ | 1,672 | $ | 1,397 | | | | Number of shares | | | 75 | | 75 | | |

Financing Activities

Spread Acquisition and MSR Servicing Agreements

On December 19, 2016, the Company amended and restated a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), 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 acquired, 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 equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 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, pay cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

F-26

Table of Contents

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Excess servicing spread financing: | | | | | | | | Issuance pursuant to recapture agreement | $ | 1,757 | $ | 2,688 | $ | 5,244 | | Repayment | $ | 40,316 | $ | 46,750 | $ | 54,980 | | Gain (loss) recognized | $ | 9,256 | $ | (8,500) | $ | 19,350 | | Interest expense | $ | 10,291 | $ | 15,138 | $ | 16,951 | | 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 | $ | 1,726 | $ | 2,584 | $ | 4,820 | | | December 31, | | December 31, | | | | | | 2019 | | 2018 | | | | | | (in thousands) | | | | | | | Excess servicing spread financing at fair value | $ | 178,586 | $ | 216,110 | | |

Receivable from and Payable to PMT

Amounts due from and payable to PMT are summarized below:

|  | December 31, |  | December 31, |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | Receivable from PMT: | | | | | | Fulfillment fees | $ | 18,285 | $ | 10,006 | | Management fees | | 10,579 | | 6,559 | | Correspondent production fees | | 10,606 | | 2,071 | | Servicing fees | | 4,659 | | 4,841 | | Allocated expenses and expenses incurred on PMT's behalf | | 3,724 | | 9,066 | | Conditional reimbursement | | 221 | | 801 | | Interest on assets purchased under agreements to resell | | 85 | | 120 | | | $ | 48,159 | $ | 33,464 | | Payable to PMT: | | | | | | Amounts advanced by PMT to fund its servicing advances | $ | 70,520 | $ | 100,554 | | Mortgage servicing rights recapture payable | | 149 | | 179 | | Other | | 2,611 | | 3,898 | | | $ | 73,280 | $ | 104,631 |

F-27

Table of Contents

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company has 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.

The Reorganization eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement. However, 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 before the closing of the Reorganization in November 2018.

Following is a summary of activity in Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Activity during the year: | | | | | | | | Liability resulting from unit exchanges | $ | — | $ | 3,652 | $ | 7,723 | | Payments under tax receivable agreement | $ | — | $ | — | $ | (6,726) | | Repricing of liability (1) | $ | (379) | $ | (1,126) | $ | (32,940) | | Balance at end of year | $ | 46,158 | $ | 46,537 | $ | 44,011 |

| \(1\) | A $32.0 million reduction in the payable to exchanged PennyMac unitholders under the tax receivable agreement in 2017 was the result of the change in the federal corporate tax rate to 21% from the previous maximum of 35% under Tax Cuts and Jobs Act of 2017 \(“the Tax Act”\). |

| --- | --- |

Note 5—Loan Sales and Servicing Activities

The Company originates or purchases and sells mortgage loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Cash flows: | | | | | | | | Sales proceeds | $ | 61,214,102 | $ | 44,557,560 | $ | 50,235,245 | | Servicing fees received (1) | $ | 587,919 | $ | 488,483 | $ | 376,160 | | Net servicing advances | $ | 36,277 | $ | 28,557 | $ | 52,353 |

| \(1\) | Net of guarantee fees paid to the Agencies |

| --- | --- |

F-28

Table of Contents

The following table summarizes unpaid principal balance (the “UPB”) of the loans sold by the Company in which it maintains continuing involvement:

|  | December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | Unpaid principal balance of loans outstanding | $ | 168,842,011 | $ | 145,224,596 | | Delinquencies: | | | | | | 30-89 days | $ | 7,947,560 | $ | 6,222,864 | | 90 days or more: | | | | | | Not in foreclosure | $ | 3,237,563 | $ | 2,208,083 | | In foreclosure | $ | 888,136 | $ | 720,894 | | Foreclosed | $ | 15,387 | $ | 24,243 | | Bankruptcy | $ | 1,343,816 | $ | 970,329 |

The following tables summarize the UPB of the Company’s loan servicing portfolio:

|  | December 31, 2019 |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | | | Contract | | | | | | Servicing | | servicing and | | Total | | | | rights owned | | subservicing | | loans serviced | | | | (in thousands) | | | | | | | Investor: | | | | | | | | Non-affiliated entities: | | | | | | | | Originated | $ | 168,842,011 | $ | — | $ | 168,842,011 | | Purchased | | 59,703,547 | | — | | 59,703,547 | | | | 228,545,558 | | — | | 228,545,558 | | PennyMac Mortgage Investment Trust | | — | | 135,414,668 | | 135,414,668 | | Loans held for sale | | 4,724,006 | | — | | 4,724,006 | | | $ | 233,269,564 | $ | 135,414,668 | $ | 368,684,232 | | Delinquent loans: | | | | | | | | 30 days | $ | 7,987,132 | $ | 857,660 | $ | 8,844,792 | | 60 days | | 2,490,797 | | 172,263 | | 2,663,060 | | 90 days or more: | | | | | | | | Not in foreclosure | | 4,070,482 | | 274,592 | | 4,345,074 | | In foreclosure | | 1,113,806 | | 68,331 | | 1,182,137 | | Foreclosed | | 18,315 | | 89,421 | | 107,736 | | | $ | 15,680,532 | $ | 1,462,267 | $ | 17,142,799 | | Bankruptcy | $ | 1,898,367 | $ | 136,818 | $ | 2,035,185 | | Custodial funds managed by the Company (1) | $ | 6,412,291 | $ | 2,529,984 | $ | 8,942,275 |

| \(1\) | 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’ investors. Placement fees are included in Interest income in the Company’s consolidated statements of income. |

| --- | --- |

F-29

Table of Contents

	December 31, 2018
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	145,224,596	$	—	$	145,224,596
Purchased		56,990,486		—		56,990,486
		202,215,082		—		202,215,082
PennyMac Mortgage Investment Trust		—		94,658,154		94,658,154
Loans held for sale		2,420,636		—		2,420,636
	$	204,635,718	$	94,658,154	$	299,293,872
Subserviced for the Company (1)	$	414,219	$	—	$	414,219
Delinquent loans:
30 days	$	6,677,179	$	525,989	$	7,203,168
60 days		1,983,381		113,238		2,096,619
90 days or more:
Not in foreclosure		3,102,492		217,115		3,319,607
In foreclosure		1,027,493		127,025		1,154,518
Foreclosed		33,493		176,377		209,870
	$	12,824,038	$	1,159,744	$	13,983,782
Bankruptcy	$	1,415,106	$	107,083	$	1,522,189
Custodial funds managed by the Company (2)	$	3,033,658	$	970,328	$	4,003,986

| \(1\) | 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. |

| --- | --- |

| \(2\) | 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’ investors. Placement fees are included in Interest income in the Company’s consolidated statements of income. |

| --- | --- |

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

|  | December 31, |  | December 31, |  |

| --- | --- | --- | --- | --- | | State | 2019 | | 2018 | | | | (in thousands) | | | | | California | $ | 57,311,867 | $ | 51,377,441 | | Florida | | 28,940,696 | | 22,650,926 | | Texas | | 27,909,821 | | 23,648,042 | | Virginia | | 22,115,619 | | 19,011,950 | | Maryland | | 16,829,320 | | 13,774,011 | | All other states | | 215,576,909 | | 168,831,502 | | | $ | 368,684,232 | $ | 299,293,872 |

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 application of fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the following paragraphs.

F-30

Table of Contents

Fair Value Accounting Elections

The Company identified all of its MSRs, MSLs and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, 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.

Before January 1, 2018, originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% were accounted for using the amortization method. Effective January 1, 2018, the Company elected to change the accounting for the classes of MSRs it had accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The Company determined that a single accounting treatment across all currently existing classes of MSRs is consistent with lender valuation under its financing arrangements and simplifies the Company’s hedging activities.

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:

|  | 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 |

F-31

Table of Contents

	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

F-32

Table of Contents

As shown above, certain of the Company’s loans held for sale, IRLCs, repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for each of the three years ended December 31, 2019:

|  | Year ended December 31, 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 | | 5,163,730 | | 570,072 | | 15,019 | | 227,445 | | 5,976,266 | | Capitalization of interest and advances | | 72,302 | | — | | — | | — | | 72,302 | | Sales and repayments | | (3,456,856) | | — | | (31,993) | | — | | (3,488,849) | | Mortgage servicing rights resulting from loan sales | | — | | — | | — | | 884,876 | | 884,876 | | Changes in fair value included in income arising from: | | | | | | | | | | | | Changes in instrument-specific credit risk | | (6,332) | | — | | — | | — | | (6,332) | | Other factors | | — | | 331,067 | | (1,609) | | (1,006,143) | | (676,685) | | | | (6,332) | | 331,067 | | (1,609) | | (1,006,143) | | (683,017) | | Transfers from Level 3 to Level 2 | | (1,646,554) | | — | | — | | — | | (1,646,554) | | Transfers to real estate acquired in settlement of loans | | (2,420) | | — | | — | | — | | (2,420) | | Transfers of interest rate lock commitments to loans held for sale | | — | | (813,827) | | — | | — | | (813,827) | | Balance, December 31, 2019 | $ | 383,878 | $ | 136,650 | $ | 8,187 | $ | 2,926,790 | $ | 3,455,505 | | Changes in fair value recognized during the year relating to assets still held at December 31, 2019 | $ | (5,755) | $ | 136,650 | $ | 165 | $ | (1,006,143) | $ | (875,083) |

| \(1\) | For the purpose of this table, the IRLC asset and liability positions are shown net. |

| --- | --- |

|  | Year ended December 31, 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 | | 1,757 | | — | | 1,757 | | Accrual of interest | | 10,291 | | — | | 10,291 | | Repayments | | (40,316) | | — | | (40,316) | | Mortgage servicing liabilities resulting from loan sales | | — | | 37,988 | | 37,988 | | Changes in fair value included in income | | (9,256) | | (17,529) | | (26,785) | | Balance, December 31, 2019 | $ | 178,586 | $ | 29,140 | $ | 207,726 | | Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2019 | $ | (9,256) | $ | (17,529) | $ | (26,785) |

F-33

Table of Contents

	Year ended December 31, 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		2,972,042		195,974		49,725		237,803		3,455,544
Sales and repayments		(1,360,667)		—		(31,907)		—		(1,392,574)
Mortgage servicing rights resulting from loan sales		—		—		—		591,757		591,757
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		158		—		—		—		158
Other factors		—		1,285		(1,704)		(129,384)		(129,803)
		158		1,285		(1,704)		(129,384)		(129,645)
Transfers from Level 3 to Level 2		(2,128,551)		—		—		—		(2,128,551)
Transfers to real estate acquired in settlement of loans		(5,185)		—		—		—		(5,185)
Transfers of interest rate lock commitments to loans held for sale		—		(206,193)		—		—		(206,193)
Balance, December 31, 2018	$	260,008	$	49,338	$	26,770	$	2,820,612	$	3,156,728
Changes in fair value recognized during the year relating to assets still held at December 31, 2018	$	(263)	$	49,338	$	—	$	(129,384)	$	(80,309)

| \(1\) | For the purpose of this table, the IRLC asset and liability positions are shown net. |

| --- | --- |

|  | Year ended December 31, 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 | | 2,688 | | — | | 2,688 | | Accrual of interest | | 15,138 | | — | | 15,138 | | Repayments | | (46,750) | | — | | (46,750) | | Mortgage servicing liabilities resulting from loan sales | | — | | 7,601 | | 7,601 | | Changes in fair value included in income | | 8,500 | | (13,040) | | (4,540) | | Balance, December 31, 2018 | $ | 216,110 | $ | 8,681 | $ | 224,791 | | Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2018 | $ | 8,500 | $ | (13,040) | $ | (4,540) |

F-34

Table of Contents

	Year ended December 31, 2017
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights			Total
	(in thousands)
Balance, December 31, 2016	$	47,271	$	59,391	$	—	$	515,925	$	622,587
Purchases and issuances, net		2,928,249		302,389		10,986		183,850		3,425,474
Sales and repayments		(1,339,580)		—		—		—		(1,339,580)
Mortgage servicing rights resulting from loan sales		—		—		—		24,471		24,471
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(1,794)		—		—		—		(1,794)
Other factors		—		115,434		(330)		(86,236)		28,868
		(1,794)		115,434		(330)		(86,236)		27,074
Transfers from Level 3 to Level 2		(851,935)		—		—		—		(851,935)
Transfers of interest rate lock commitments to loans held for sale		—		(418,942)		—		—		(418,942)
Balance, December 31, 2017	$	782,211	$	58,272	$	10,656	$	638,010	$	1,489,149
Changes in fair value recognized during the year relating to assets still held at December 31, 2017	$	(556)	$	58,272	$	(330)	$	(86,236)	$	(28,850)

| \(1\) | For the purpose of this table, the IRLC asset and liability positions are shown net. |

| --- | --- |

|  | Year ended December 31, 2017 |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | Excess | | | | | | | | servicing | | Mortgage | | | | | | spread | | servicing | | | | | Liabilities | financing | | liabilities | | Total | | | | (in thousands) | | | | | | | Balance, December 31, 2016 | $ | 288,669 | $ | 15,192 | $ | 303,861 | | Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | 5,244 | | — | | 5,244 | | Accrual of interest | | 16,951 | | — | | 16,951 | | Repayments | | (54,980) | | — | | (54,980) | | Mortgage servicing liabilities resulting from loan sales | | — | | 17,229 | | 17,229 | | Changes in fair value included in income | | (19,350) | | (18,301) | | (37,651) | | Balance, December 31, 2017 | $ | 236,534 | $ | 14,120 | $ | 250,654 | | Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2017 | $ | (19,350) | $ | (18,301) | $ | (37,651) |

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 years presented. 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.

F-35

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 the Company’s election of the fair value option by income statement line item are summarized below:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | | | | 2018 | | | | | | 2017 | | | | | | | | Net | | Net gains on | | | | Net | | Net gains on | | | | Net | | Net gains on | | | | | | loan | | loans held | | | | loan | | loans held | | | | loan | | loans held | | | | | | servicing | | for sale at | | | | servicing | | for sale at | | | | servicing | | for sale at | | | | | | fees | | fair value | | Total | | fees | | fair value | | Total | | fees | | fair value | | Total | | | | (in thousands) | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | Loans held for sale | $ | — | $ | 811,895 | $ | 811,895 | $ | — | $ | 188,611 | $ | 188,611 | $ | — | $ | 426,092 | $ | 426,092 | | Mortgage servicing rights | | (1,006,143) | | — | | (1,006,143) | | (129,384) | | — | | (129,384) | | (86,236) | | — | | (86,236) | | | $ | (1,006,143) | $ | 811,895 | $ | (194,248) | $ | (129,384) | $ | 188,611 | $ | 59,227 | $ | (86,236) | $ | 426,092 | $ | 339,856 | | Liabilities: | | | | | | | | | | | | | | | | | | | | Excess servicing spread financing payable to PennyMac Mortgage Investment Trust | $ | 9,256 | $ | — | $ | 9,256 | $ | (8,500) | $ | — | $ | (8,500) | $ | 19,350 | $ | — | $ | 19,350 | | Mortgage servicing liabilities | | 17,529 | | — | | 17,529 | | 13,040 | | — | | 13,040 | | 18,301 | | — | | 18,301 | | | $ | 26,785 | $ | — | $ | 26,785 | $ | 4,540 | $ | — | $ | 4,540 | $ | 37,651 | $ | — | $ | 37,651 |

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

|  | December 31, 2019 |  |  |  |  |  | December 31, 2018 |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | Principal | | | | | | Principal | | | | | | | | amount | | | | | | amount | | | | | | Fair | | due upon | | | | Fair | | due upon | | | | | Loans held for sale | value | | maturity | | Difference | | value | | maturity | | Difference | | | | (in thousands) | | | | | | | | | | | | | Current through 89 days delinquent | $ | 4,628,333 | $ | 4,431,854 | $ | 196,479 | $ | 2,324,203 | $ | 2,220,371 | $ | 103,832 | | 90 days or more delinquent: | | | | | | | | | | | | | | Not in foreclosure | | 236,650 | | 241,958 | | (5,308) | | 143,631 | | 144,011 | | (380) | | In foreclosure | | 47,970 | | 50,194 | | (2,224) | | 53,813 | | 56,254 | | (2,441) | | | $ | 4,912,953 | $ | 4,724,006 | $ | 188,947 | $ | 2,521,647 | $ | 2,420,636 | $ | 101,011 |

Assets Measured at Fair Value on a Nonrecurring Basis

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

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

| --- | --- | --- | --- | --- | --- | --- | --- | --- | | | (in thousands) | | | | | | | | | December 31, 2019 | $ | — | $ | — | $ | 9,850 | $ | 9,850 | | December 31, 2018 | $ | — | $ | — | $ | 2,150 | $ | 2,150 |

F-36

Table of Contents

The following table summarizes the total net losses on assets measured at fair values on a nonrecurring basis:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Real estate acquired in settlement of loans | $ | (1,913) | $ | (75) | $ | (125) | | Mortgage servicing rights at lower of amortized cost or fair value | | — | | — | | (6,853) | | | $ | (1,913) | $ | (75) | $ | (6,978) |

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by mortgage servicing assets and Obligations under capital lease 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 Term Notes included in Notes payable secured by mortgage servicing assets approximate their carrying values due to their short terms and/or variable interest rates.

The fair value of the Term Notes at December 31, 2019 was 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 are summarized below:

| Term Notes | December 31, 2019 |  | December 31, 2018 |  |

| --- | --- | --- | --- | --- | | | (in thousands) | | | | | Fair value | $ | 1,303,047 | $ | 1,285,894 | | Carrying value | $ | 1,294,070 | $ | 1,292,291 |

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 all of its MSRs, ESS and MSLs are “Level 3” fair value assets and liabilities which 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.

F-37

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. During the years presented, the Company’s senior management valuation committee included the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.

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 quoted market or contracted selling price or market price equivalent.

Certain of the Company’s loans held for sale are not saleable into active markets with observable inputs that are significant to the estimation of fair value 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 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 loan being at least three months delinquent on the date of repurchase by the Company and provides an alternative to its 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 pool. Such eligibility for resale generally occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s terms. |

| --- | --- |

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

| --- | --- |

| · | 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.

F-38

Table of Contents

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

|  | December 31, 2019 |  | December 31, 2018 |  |

| --- | --- | --- | --- | --- | | Fair value (in thousands) | $ | 383,878 | $ | 260,008 | | Key inputs (1): | | | | | | Discount rate: | | | | | | Range | | 3.0% – 9.2% | | 2.8% – 9.2% | | Weighted average | | 3.0% | | 2.9% | | Twelve-month projected housing price index change: | | | | | | Range | | 2.6% – 3.2% | | 2.2% – 5.0% | | Weighted average | | 2.8% | | 3.5% | | Voluntary prepayment/resale speed (2): | | | | | | Range | | 0.4% – 21.4% | | 0.1% – 21.8% | | Weighted average | | 18.2% | | 20.1% | | Total prepayment speed (3): | | | | | | Range | | 0.5% – 39.2% | | 0.1% – 40.5% | | Weighted average | | 36.2% | | 37.7% |

| \(1\) | Weighted average inputs are based on fair value of loans. |

| --- | --- |

| \(2\) | Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate \(“CPR”\). |

| --- | --- |

| \(3\) | Total prepayment speed is measured using Life Total CPR. |

| --- | --- |

All changes in fair value relating to loans held for sale are the result of changes in the loan’s instrument specific credit risk as indicated by successful modifications of the loan’s terms or changes in the respective loan’s delinquency status and performance history at year end from the later of the beginning of the year or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

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

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans acquired for sale at fair value in the consolidated statements of income.

F-39

Table of Contents

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

|  | December 31, 2019 |  | December 31, 2018 |  |

| --- | --- | --- | --- | --- | | Fair value (in thousands) (1) | $ | 136,650 | $ | 49,338 | | Key inputs (2): | | | | | | Pull-through rate: | | | | | | Range | | 12.2% – 100% | | 16.6% – 100% | | Weighted average | | 86.5% | | 84.1% | | Mortgage servicing rights value expressed as: | | | | | | Servicing fee multiple: | | | | | | Range | | 1.4 – 5.7 | | 1.5 – 5.5 | | Weighted average | | 4.2 | | 3.8 | | Percentage of unpaid principal balance: | | | | | | Range | | 0.3% – 2.8% | | 0.4% – 3.2% | | Weighted average | | 1.6% | | 1.5% |

| \(1\) | For purposes of this table, the IRLC assets and liability positions are shown net. |

| --- | --- |

| \(2\) | Weighted average inputs are based on the committed amounts. |

| --- | --- |

Hedging Derivatives

Fair value of hedging derivative financial instruments that are actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.

Changes in the fair value of hedging derivatives are included in Net gains on loans acquired for sale at fair value, or Net loan servicing fees – Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.

Repurchase Agreement Derivatives

Through August 21, 2019, the Company had a master repurchase agreement that included incentives for financing loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master repurchase agreement. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the Company’s expected approval rate of the loans financed under the master repurchase agreement. The resulting ratios included in the Company’s fair value estimate were 99.0% and 97.0% at December 31, 2019 and December 31, 2018, respectively.

F-40

Table of Contents

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying mortgage loans, the applicable pricing spread (discount rate) and annual per-loan cost to service mortgage loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Recognized changes in the fair value of MSRs are included in Net loan servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Following are the key inputs, separated by the Company’s basis of accounting for the respective asset, used in determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:

|  | Year ended December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | 2018 | 2017 | | | | Fair | Fair | Fair | Amortized | | | value | value | value | cost | | | (Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands) | | | | | MSR and pool characteristics: | | | | | | Amount recognized | $884,876 | $591,757 | $24,471 | $556,630 | | Unpaid principal balance of underlying mortgage loans | $56,038,354 | $42,008,585 | $2,316,539 | $44,664,551 | | Weighted average servicing fee rate (in basis points) | 41 | 36 | 31 | 31 | | Key inputs (1): | | | | | | Pricing spread (2): | | | | | | Range | 5.5% – 16.2% | 5.8% – 16.4% | 7.6% – 11.2% | 7.6% – 15.2% | | Weighted average | 8.5% | 9.9% | 10.5% | 10.7% | | Prepayment speed (3): | | | | | | Range | 7.7% – 32.8% | 3.9% – 61.8% | 3.9% – 71.8% | 3.4% – 47.6% | | Weighted average | 13.5% | 10.8% | 12.6% | 9.1% | | Average life (in years): | | | | | | Range | 2.6 – 8.2 | 0.5 – 11.6 | 0.8 – 11.7 | 1.5 – 12.2 | | Weighted average | 6.2 | 7.3 | 6.6 | 8.1 | | Annual per-loan cost of servicing: | | | | | | Range | $78 – $100 | $78 – $99 | $78 – $101 | $79 – $101 | | Weighted average | $97 | $91 | $89 | $89 |

| \(1\) | Weighted average inputs are based on UPB of the underlying mortgage loans. |

| --- | --- |

| \(2\) | 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. |

| --- | --- |

| \(3\) | Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes. |

| --- | --- |

F-41

Table of Contents

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:

|  | December 31, 2019 | December 31, 2018 |

| --- | --- | --- | | | (Fair value, unpaid principal balance of underlying | | | | loans and effect on fair value amounts in thousands) | | | Fair value | $ 2,926,790 | $ 2,820,612 | | Pool characteristics: | | | | Unpaid principal balance of underlying loans | $ 225,787,103 | $ 201,054,144 | | Weighted average note interest rate | 3.9% | 4.0% | | Weighted average servicing fee rate (in basis points) | 35 | 33 | | Key inputs (1): | | | | Pricing spread (2): | | | | Range | 6.8% – 15.8% | 5.8% – 16.1% | | Weighted average | 8.5% | 8.7% | | Effect on fair value of: | | | | 5% adverse change | ($44,561) | ($45,268) | | 10% adverse change | ($87,734) | ($89,073) | | 20% adverse change | ($170,155) | ($172,556) | | Prepayment speed (3): | | | | Range | 9.3% – 40.9% | 8.4% – 32.6% | | Weighted average | 12.7% | 9.9% | | Average life (in years): | | | | Range | 1.4 – 7.4 | 1.5 – 7.9 | | Weighted average | 6.1 | 7.2 | | Effect on fair value of: | | | | 5% adverse change | ($63,569) | ($47,687) | | 10% adverse change | ($124,411) | ($93,626) | | 20% adverse change | ($238,549) | ($180,623) | | Annual per-loan cost of servicing: | | | | Range | $77 – $100 | $78 – $99 | | Weighted average | $97 | $93 | | Effect on fair value of: | | | | 5% adverse change | ($24,516) | ($22,944) | | 10% adverse change | ($49,032) | ($45,888) | | 20% adverse change | ($98,065) | ($91,775) |

| \(1\) | Weighted average inputs are based on UPB of the underlying mortgage loans. |

| --- | --- |

| \(2\) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs. |

| --- | --- |

| \(3\) | Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes. |

| --- | --- |

F-42

Table of Contents

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

Excess Servicing Spread Financing at Fair Value

ESS are categorized as a “Level 3” fair value liability. Because the ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.

The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related.

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

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

|  | December 31, | December 31, |

| --- | --- | --- | | | 2019 | 2018 | | Fair value (in thousands) | $ 178,586 | $ 216,110 | | Pool characteristics: | | | | Unpaid principal balance of underlying loans (in thousands) | $ 19,904,571 | $ 23,196,033 | | Average servicing fee rate (in basis points) | 34 | 34 | | Average excess servicing spread (in basis points) | 19 | 19 | | Key inputs (1): | | | | Pricing spread (2): | | | | Range | 3.0% – 3.3% | 2.8% – 3.2% | | Weighted average | 3.1% | 3.1% | | Annualized prepayment speed (3): | | | | Range | 8.7% – 16.2% | 8.2% – 29.5% | | Weighted average | 11.0% | 9.7% | | Average life (in years): | | | | Range | 2.7 – 7.2 | 1.6 – 7.6 | | Weighted average | 6.1 | 6.8 |

| \(1\) | Weighted average inputs are based on UPB of the underlying mortgage loans. |

| --- | --- |

| \(2\) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS. |

---	---		(3)	Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes.

F-43

Table of Contents

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that the Company believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread (discount rate), the prepayment rates of the underlying mortgage loans, and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSLs are included in Net servicing fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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

|  |  | December 31, |  |  |

| --- | --- | --- | --- | --- | | | | 2019 | | 2018 | | Fair value (in thousands) | $ | 29,140 | $ | 8,681 | | Pool characteristics: | | | | | | Unpaid principal balance of underlying loans (in thousands) | $ | 2,758,454 | $ | 1,160,938 | | Servicing fee rate (in basis points) | | 25 | | 25 | | Key inputs: | | | | | | Pricing spread (1) | | 8.2% | | 7.3% | | Prepayment speed (2) | | 29.2% | | 32.2% | | Average life (in years) | | 3.9 | | 3.8 | | Annual per-loan cost of servicing | $ | 300 | $ | 373 |

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

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

|  | December 31, |  | December 31, |  |

| --- | --- | --- | --- | --- | | Loan type | 2019 | | 2018 | | | | (in thousands) | | | | | Government-insured or guaranteed | $ | 4,222,010 | $ | 2,116,126 | | Conventional conforming | | 307,065 | | 144,872 | | Jumbo | | — | | 641 | | Home equity lines of credit | | 513 | | — | | Purchased from Ginnie Mae pools serviced by the Company | | 374,121 | | 250,585 | | Repurchased pursuant to representations and warranties | | 9,244 | | 9,423 | | | $ | 4,912,953 | $ | 2,521,647 | | Fair value of loans pledged to secure: | | | | | | Assets sold under agreements to repurchase | $ | 4,322,789 | $ | 1,923,857 | | Mortgage loan participation purchase and sale agreements | | 523,349 | | 555,001 | | | $ | 4,846,138 | $ | 2,478,858 |

F-44

Table of Contents

Note 8—Derivative Activities

Derivative Notional Amounts and Fair Value of Derivatives

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

|  | December 31, 2019 |  |  |  |  | December 31, 2018 |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | Fair value | | | | | Fair value | | | | | | Notional | Derivative | | Derivative | | Notional | Derivative | | Derivative | | | Instrument | amount | assets | | liabilities | | amount | assets | | liabilities | | | | (in thousands) | | | | | | | | | | | Not subject to master netting arrangements: | | | | | | | | | | | | Interest rate lock commitments | 7,122,316 | $ | 138,511 | $ | 1,861 | 2,805,400 | $ | 50,507 | $ | 1,169 | | Repurchase agreement derivatives | | | 8,187 | | — | | | 26,770 | | — | | Used for hedging purposes: | | | | | | | | | | | | Forward purchase contracts | 13,618,361 | | 12,364 | | 19,040 | 6,657,026 | | 35,916 | | 215 | | Forward sales contracts | 16,220,526 | | 17,097 | | 18,045 | 6,890,046 | | 437 | | 26,762 | | MBS put options | 6,100,000 | | 3,415 | | — | 4,635,000 | | 720 | | — | | MBS call options | — | | — | | — | 1,450,000 | | 2,135 | | — | | Swaptions | 1,750,000 | | 2,409 | | — | — | | — | | — | | Put options on interest rate futures purchase contracts | 2,250,000 | | 3,945 | | — | 3,085,000 | | 866 | | — | | Call options on interest rate futures purchase contracts | 750,000 | | 1,469 | | — | 1,512,500 | | 5,965 | | — | | Treasury futures purchase contracts | 1,276,000 | | — | | — | 835,000 | | — | | — | | Treasury futures sale contracts | 1,010,000 | | — | | — | 1,450,000 | | — | | — | | Interest rate swap futures purchase contracts | 3,210,000 | | — | | — | 625,000 | | — | | — | | Total derivatives before netting | | | 187,397 | | 38,946 | | | 123,316 | | 28,146 | | Netting | | | (27,711) | | (16,616) | | | (26,969) | | (25,082) | | | | $ | 159,686 | $ | 22,330 | | $ | 96,347 | $ | 3,064 | | Collateral placed with (received from) derivative counterparties | | $ | (11,095) | | | | $ | (1,887) | | |

F-45

Table of Contents

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

|  | Notional amounts, year ended December 31, 2019 |  |  |  |

| --- | --- | --- | --- | --- | | | Beginning of | | Dispositions/ | End of | | Instrument | year | Additions | expirations | year | | | (in thousands) | | | | | Forward purchase contracts | 6,657,026 | 331,273,011 | (324,311,676) | 13,618,361 | | Forward sale contracts | 6,890,046 | 395,584,533 | (386,254,053) | 16,220,526 | | MBS put options | 4,635,000 | 97,035,000 | (95,570,000) | 6,100,000 | | MBS call options | 1,450,000 | 6,750,000 | (8,200,000) | — | | Put options on interest rate futures purchase contracts | 3,085,000 | 23,322,500 | (24,157,500) | 2,250,000 | | Call options on interest rate futures purchase contracts | 1,512,500 | 14,377,800 | (15,140,300) | 750,000 | | Swaptions | — | 1,750,000 | — | 1,750,000 | | Put options on interest rate futures sale contracts | — | 33,297,800 | (33,297,800) | — | | Call options on interest rate futures sale contracts | — | 5,937,500 | (5,937,500) | — | | Treasury futures purchase contracts | 835,000 | 14,344,400 | (13,903,400) | 1,276,000 | | Treasury futures sale contracts | 1,450,000 | 13,463,400 | (13,903,400) | 1,010,000 | | Interest rate swap futures purchase contracts | 625,000 | 5,300,000 | (2,715,000) | 3,210,000 | | Interest rate swap futures sales contracts | — | 2,715,000 | (2,715,000) | — |

|  | Notional amounts, year ended December 31, 2018 |  |  |  |

| --- | --- | --- | --- | --- | | | Beginning of | | Dispositions/ | End of | | Instrument | year | Additions | expirations | year | | | (in thousands) | | | | | Forward purchase contracts | 4,920,883 | 184,780,152 | (183,044,009) | 6,657,026 | | Forward sale contracts | 5,204,796 | 230,735,936 | (229,050,686) | 6,890,046 | | MBS put options | 4,925,000 | 31,085,000 | (31,375,000) | 4,635,000 | | MBS call options | — | 14,325,000 | (12,875,000) | 1,450,000 | | Put options on interest rate futures purchase contracts | 2,125,000 | 20,559,800 | (19,599,800) | 3,085,000 | | Call options on interest rate futures purchase contracts | 100,000 | 4,387,500 | (2,975,000) | 1,512,500 | | Put options on interest rate futures sale contracts | — | 20,474,800 | (20,474,800) | — | | Call options on interest rate futures sale contracts | — | 2,100,000 | (2,100,000) | — | | Treasury futures purchase contracts | 100,000 | 9,837,500 | (9,102,500) | 835,000 | | Treasury futures sale contracts | — | 11,213,800 | (9,763,800) | 1,450,000 | | Interest rate swap futures purchase contracts | 1,400,000 | 1,510,000 | (2,285,000) | 625,000 | | Interest rate swap futures sales contracts | — | 2,285,000 | (2,285,000) | — |

|  | Notional amounts, year ended December 31, 2017 |  |  |  |

| --- | --- | --- | --- | --- | | | Beginning of | | Dispositions/ | End of | | Instrument | year | Additions | expirations | year | | | (in thousands) | | | | | Forward purchase contracts | 12,746,191 | 181,761,564 | (189,586,872) | 4,920,883 | | Forward sale contracts | 16,577,942 | 226,000,107 | (237,373,253) | 5,204,796 | | MBS put options | 1,175,000 | 25,050,000 | (21,300,000) | 4,925,000 | | MBS call options | 1,600,000 | 17,700,000 | (19,300,000) | — | | Put options on interest rate futures purchase contracts | 1,125,000 | 11,360,000 | (10,360,000) | 2,125,000 | | Call options on interest rate futures purchase contracts | 900,000 | 1,939,300 | (2,739,300) | 100,000 | | Put options on interest rate futures sale contracts | — | 10,010,000 | (10,010,000) | — | | Call options on interest rate futures sale contracts | — | 2,739,300 | (2,739,300) | — | | Treasury futures purchase contracts | — | 544,900 | (444,900) | 100,000 | | Treasury futures sale contracts | — | 444,900 | (444,900) | — | | Interest rate swap futures purchase contracts | 200,000 | 2,100,000 | (900,000) | 1,400,000 | | Interest rate swap futures sale contracts | — | 900,000 | (900,000) | — |

F-46

Table of Contents

Derivative Balances and Netting of Financial Instruments

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

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts.

|  | December 31, 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) | | | | | | | | | | | | | Derivatives not subject to master netting arrangements: | | | | | | | | | | | | | | Interest rate lock commitments | $ | 138,511 | $ | — | $ | 138,511 | $ | 50,507 | $ | — | $ | 50,507 | | Repurchase agreement derivatives | | 8,187 | | — | | 8,187 | | 26,770 | | — | | 26,770 | | | | 146,698 | | — | | 146,698 | | 77,277 | | — | | 77,277 | | Derivatives subject to master netting arrangements: | | | | | | | | | | | | | | Forward purchase contracts | | 12,364 | | — | | 12,364 | | 35,916 | | — | | 35,916 | | Forward sale contracts | | 17,097 | | — | | 17,097 | | 437 | | — | | 437 | | MBS put options | | 3,415 | | — | | 3,415 | | 720 | | — | | 720 | | MBS call options | | — | | — | | — | | 2,135 | | — | | 2,135 | | Swaptions | | 2,409 | | — | | 2,409 | | | | | | | | Put options on interest rate futures purchase contracts | | 3,945 | | — | | 3,945 | | 866 | | — | | 866 | | Call options on interest rate futures purchase contracts | | 1,469 | | — | | 1,469 | | 5,965 | | — | | 5,965 | | Netting | | — | | (27,711) | | (27,711) | | — | | (26,969) | | (26,969) | | | | 40,699 | | (27,711) | | 12,988 | | 46,039 | | (26,969) | | 19,070 | | | $ | 187,397 | $ | (27,711) | $ | 159,686 | $ | 123,316 | $ | (26,969) | $ | 96,347 |

F-47

Table of Contents

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 qualify for setoff accounting.

|  | December 31, 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) | | | | | | | | | | | | | | | | | Interest rate lock commitments | $ | 138,511 | $ | — | $ | — | $ | 138,511 | $ | 50,507 | $ | — | $ | — | $ | 50,507 | | Deutsche Bank | | 9,138 | | — | | — | | 9,138 | | 26,770 | | — | | — | | 26,770 | | RJ O'Brien | | 5,414 | | — | | — | | 5,414 | | 6,831 | | — | | — | | 6,831 | | Goldman Sachs | | 2,548 | | — | | — | | 2,548 | | — | | — | | — | | — | | JPMorgan Chase Bank, N.A. | | 2,196 | | — | | — | | 2,196 | | 1,399 | | — | | — | | 1,399 | | Mizuho Securities | | 1,597 | | — | | — | | 1,597 | | — | | — | | — | | — | | Wells Fargo Bank, N.A. | | — | | — | | — | | — | | 3,707 | | — | | — | | 3,707 | | Bank of America, N.A. | | — | | — | | — | | — | | 2,781 | | — | | — | | 2,781 | | Citibank, N.A. | | — | | — | | — | | — | | 2,488 | | — | | — | | 2,488 | | Others | | 282 | | — | | — | | 282 | | 1,864 | | — | | — | | 1,864 | | | $ | 159,686 | $ | — | $ | — | $ | 159,686 | $ | 96,347 | $ | — | $ | — | $ | 96,347 |

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 setoff accounting.

|  | December 31, 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) | | | | | | | | | | | | | Derivatives not subject to master netting arrangements – Interest rate lock commitments | $ | 1,861 | $ | — | $ | 1,861 | $ | 1,169 | $ | — | $ | 1,169 | | Derivatives subject to a master netting arrangement: | | | | | | | | | | | | | | Forward purchase contracts | | 19,040 | | — | | 19,040 | | 215 | | — | | 215 | | Forward sale contracts | | 18,045 | | — | | 18,045 | | 26,762 | | — | | 26,762 | | Netting | | — | | (16,616) | | (16,616) | | — | | (25,082) | | (25,082) | | | | 37,085 | | (16,616) | | 20,469 | | 26,977 | | (25,082) | | 1,895 | | Total derivatives | | 38,946 | | (16,616) | | 22,330 | | 28,146 | | (25,082) | | 3,064 | | Assets sold under agreements to repurchase: | | | | | | | | | | | | | | Amount outstanding | | 4,141,680 | | — | | 4,141,680 | | 1,935,200 | | — | | 1,935,200 | | Unamortized debt issuance cost, net | | (627) | | — | | (627) | | (1,341) | | — | | (1,341) | | | | 4,141,053 | | — | | 4,141,053 | | 1,933,859 | | — | | 1,933,859 | | | $ | 4,179,999 | $ | (16,616) | $ | 4,163,383 | $ | 1,962,005 | $ | (25,082) | $ | 1,936,923 |

F-48

Table of Contents

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

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

|  | December 31, 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) | | | | | | | | | | | | | | | | | Interest rate lock commitments | $ | 1,861 | $ | — | $ | — | $ | 1,861 | $ | 1,169 | $ | — | $ | — | $ | 1,169 | | Credit Suisse First Boston Mortgage Capital LLC | | 1,235,430 | | (1,235,430) | | — | | — | | 691,030 | | (690,766) | | — | | 264 | | JPMorgan Chase Bank, N.A. | | 936,172 | | (936,172) | | — | | — | | 54,326 | | (54,326) | | — | | — | | Citibank, N.A. | | 655,831 | | (653,170) | | — | | 2,661 | | 14,960 | | (14,960) | | — | | — | | Morgan Stanley Bank, N.A. | | 582,941 | | (582,941) | | — | | — | | 77,687 | | (77,687) | | — | | — | | Bank of America, N.A. | | 379,400 | | (374,190) | | — | | 5,210 | | 170,820 | | (170,820) | | — | | — | | BNP Paribas | | 183,880 | | (183,880) | | — | | — | | 149,675 | | (149,482) | | — | | 193 | | Royal Bank of Canada | | 175,897 | | (175,897) | | — | | — | | 35,181 | | (35,181) | | — | | — | | Wells Fargo Bank, N.A. | | 11,212 | | — | | — | | 11,212 | | — | | — | | — | | — | | Deutsche Bank | | — | | — | | — | | — | | 741,978 | | (741,978) | | — | | — | | Others | | 1,386 | | — | | — | | 1,386 | | 1,438 | | — | | — | | 1,438 | | | $ | 4,164,010 | $ | (4,141,680) | $ | — | $ | 22,330 | $ | 1,938,264 | $ | (1,935,200) | $ | — | $ | 3,064 |

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

|  |  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | | Derivative activity | Income statement line | 2019 | | 2018 | | 2017 | | | | | (in thousands) | | | | | | | Interest rate lock commitments | Net gains on loans held for sale at fair value | $ | 87,312 | $ | (8,934) | $ | (1,120) | | Repurchase agreement derivatives | Interest expense | $ | (1,609) | $ | (1,704) | $ | (330) | | Hedged item: | | | | | | | | | Interest rate lock commitments and loans held for sale | Net gains on loans held for sale at fair value | $ | (157,806) | $ | 81,522 | $ | (21,255) | | Mortgage servicing rights | Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities | $ | 395,497 | $ | (121,045) | $ | (37,855) |

F-49

Table of Contents

Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilties

Mortgage Servicing Rights Carried at Fair Value:

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Balance at beginning of year | $ | 2,820,612 | $ | 638,010 | $ | 515,925 | | 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 | | 2,820,612 | | 2,120,436 | | 515,925 | | Additions: | | | | | | | | Resulting from loan sales | | 884,876 | | 591,757 | | 24,471 | | Purchases | | 227,445 | | 237,803 | | 183,850 | | | | 1,112,321 | | 829,560 | | 208,321 | | Change in fair value due to: | | | | | | | | Changes in inputs used in valuation model (1) | | (550,666) | | 174,458 | | (4,771) | | Other changes in fair value (2) | | (455,477) | | (303,842) | | (81,465) | | Total change in fair value | | (1,006,143) | | (129,384) | | (86,236) | | Balance at end of year | $ | 2,926,790 | $ | 2,820,612 | $ | 638,010 | | | December 31, | | | | | | | | 2019 | | 2018 | | | | | | | (in thousands) | | | | | | Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable | $ | 2,920,603 | $ | 2,807,333 | | |

| \(1\) | Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and changes in expected borrower performance and servicer losses given default. |

| --- | --- |

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

| --- | --- |

F-50

Table of Contents

Mortgage Servicing Rights Carried at Lower of Amortized Cost or Fair Value:

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

|  |  | Year ended December 31, |  |  |  |

| --- | --- | --- | --- | --- | --- | | | | 2018 | | 2017 | | | | ( in thousands) | | | | | | Amortized cost: | | | | | | | Balance at beginning of year | | $ | 1,583,378 | $ | 1,206,694 | | Transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to adoption of the fair value method of accounting | | | (1,583,378) | | — | | Balance after reclassification | | | — | | 1,206,694 | | Mortgage servicing rights resulting from mortgage loan sales | | | — | | 556,630 | | Amortization | | | — | | (179,946) | | Balance at end of year | | | — | | 1,583,378 | | Valuation allowance: | | | | | | | Balance at beginning of year | | | (101,800) | | (94,947) | | Reduction resulting from transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to adoption of the fair value method of accounting | | | 101,800 | | — | | Balance after reclassification | | | — | | (94,947) | | Increase in valuation allowance | | | — | | (6,853) | | Balance at end of year | | | — | | (101,800) | | Mortgage servicing rights, net at end of year | | $ | — | $ | 1,481,578 | | Fair value of mortgage servicing rights at: | | | | | | | Beginning of year | | | | $ | 1,112,302 | | End of year | | | | $ | 1,482,426 |

Mortgage Servicing Liabilities Carried at Fair Value:

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Balance at beginning of year | $ | 8,681 | $ | 14,120 | $ | 15,192 | | Mortgage servicing liabilities resulting from loan sales | | 37,988 | | 7,601 | | 17,229 | | Changes in fair value due to: | | | | | | | | Changes in valuation inputs used in valuation model (1) | | 8,377 | | 10,787 | | 6,526 | | Other changes in fair value (2) | | (25,906) | | (23,827) | | (24,827) | | Total change in fair value | | (17,529) | | (13,040) | | (18,301) | | Balance at end of year | $ | 29,140 | $ | 8,681 | $ | 14,120 |

| \(1\) | Principally reflects changes in expected borrower performance and servicer losses given default. |

| --- | --- |

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

| --- | --- |

F-51

Table of Contents

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; late charges and other ancillary 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:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Contractual servicing fees | $ | 730,165 | $ | 585,101 | $ | 475,848 | | Other fees: | | | | | | | | Late charges | | 43,350 | | 27,940 | | 25,097 | | Other | | 14,258 | | 6,276 | | 4,603 | | | $ | 787,773 | $ | 619,317 | $ | 505,548 |

Note 10—Leases

Substantially all of the Company’s lease agreements are operating leases and relate to its office 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.

|  | Year ended |  |

| --- | --- | --- | | | December 31, 2019 | | | | (dollars in thousands) | | | Lease expense: | | | | Operating leases | $ | 13,644 | | Short-term leases | | 821 | | Sublease income | | (94) | | Net lease expense included in Occupancy and equipment | $ | 14,371 | | Other information: | | | | Cash payments for operating leases | $ | 16,167 | | Operating lease right-of-use assets recognized: | | | | Upon adoption of ASU 2016-02 | $ | 58,713 | | New leases | | 24,535 | | | $ | 83,248 | | Period end: | | | | Weighted averages: | | | | Remaining lease term (in years) | | 7.1 | | Discount rate | | 4.3% |

Lease expense during the years ended December 31, 2019, 2018 and 2017 was $14.4 million, $12.3 million and $12.3 million, respectively.

F-52

Table of Contents

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

| Year ended December 31, | Operating leases |  |

| --- | --- | --- | | | (in thousands) | | | 2020 | $ | 17,102 | | 2021 | | 16,051 | | 2022 | | 13,791 | | 2023 | | 14,006 | | 2024 | | 11,673 | | Thereafter | | 35,178 | | Total lease payments | | 107,801 | | Less imputed interest | | (16,481) | | Total | $ | 91,320 |

As of December 31, 2019, the Company has 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—Furniture, Fixtures, Equipment and Building Improvements

Furniture, fixtures, equipment and building improvements is summarized below:

|  | December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | Furniture, fixtures, equipment and building improvements | $ | 57,012 | $ | 55,251 | | Less: Accumulated depreciation and amortization | | (26,532) | | (21,877) | | | $ | 30,480 | $ | 33,374 | | Fixed assets pledged to secure obligations under capital lease | $ | 20,406 | $ | 16,281 |

Depreciation and amortization expenses are summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Depreciation and amortization expenses | $ | 9,018 | $ | 9,500 | $ | 8,150 | | Less: Depreciation and amortization allocated to PMT(1) | | — | | — | | (1,396) | | Depreciation and amortization expenses included in Occupancy and equipment | $ | 9,018 | $ | 9,500 | $ | 6,754 |

| \(1\) | The Company’s management agreement with PMT provides for allocation by the Company of certain common overhead costs to PMT. The Company adopted ASU 2014-09, using the modified retrospective method effective January 1, 2018. Adoption of ASU 2014-09 required the Company to include those reimbursements from PMT of  $1.2 million and $1.2 million in Other revenue for the years ended December 31, 2019 and 2018, respectively. Before adoption of ASU 2014-09, the Company included  such reimbursements in the respective expense line items. |

| --- | --- |

F-53

Table of Contents

Note 12—Capitalized Software

Capitalized software is summarized below:

|  | December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | Cost | $ | 74,325 | $ | 45,039 | | Less: Accumulated amortization | | (11,195) | | (5,291) | | | $ | 63,130 | $ | 39,748 | | Capitalized software pledged to secure obligations under capital lease | $ | 12,192 | $ | 1,017 |

Software amortization expense totaled $6.0 million, $3.4 million and $1.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recorded $827,000 of impairment of capitalized software during the year ended December 31, 2017. No such impairment was recorded for the years ended December 31, 2019 and 2018.

Note 13—Borrowings

The borrowing facilities described throughout this Note 13 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 December 31, 2019.

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. Loans and MSRs financed under these agreements may be re-pledged by the lenders.

F-54

Table of Contents

Assets sold under agreements to repurchase are summarized below:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | 2017 | | | | | (dollars in thousands) | | | | | | | | | | Average balance of assets sold under agreements to repurchase | $ | 2,185,830 | | $ | 1,626,729 | | $ | 1,829,257 | | | Weighted average interest rate (1) | | 3.74 | % | | 3.87 | % | | 3.18 | % | | Total interest expense (2) | $ | 74,215 | | $ | 22,463 | | $ | 60,286 | | | Maximum daily amount outstanding | $ | 4,141,680 | | $ | 2,380,121 | | $ | 3,022,656 | |

|  | December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | | | (dollars in thousands) | | | | | | | Carrying value: | | | | | | | | Unpaid principal balance | $ | 4,141,680 | | $ | 1,935,200 | | | Unamortized debt issuance premiums and costs, net | | (627) | | | (1,341) | | | | $ | 4,141,053 | | $ | 1,933,859 | | | Weighted average interest rate | | 3.29 | % | | 4.22 | % | | Available borrowing capacity (3): | | | | | | | | Committed | $ | 125,810 | | $ | 695,767 | | | Uncommitted | | 782,510 | | | 2,354,033 | | | | $ | 908,320 | | $ | 3,049,800 | | | Fair value of assets securing repurchase agreements: | | | | | | | | Loans held for sale | $ | 4,322,789 | | $ | 1,923,857 | | | Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | $ | 107,512 | | $ | 131,025 | | | Servicing advances (4) | $ | 207,460 | | $ | 162,895 | | | Mortgage servicing rights (4) | $ | 2,902,721 | | $ | 2,807,333 | | | Margin deposits placed with counterparties (5) | $ | 5,000 | | $ | 3,750 | |

| \(1\) | Excludes the effect of amortization of net debt issuance premiums totaling $7.5 million, $40.5 million and $1.3 million, for the years ended December 31, 2019, 2018 and 2017, respectively. |

| --- | --- |

| \(2\) | In 2017, PFSI entered into a master repurchase agreement that provided the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $14.7 million, $48.1 million and $9.2 million of such incentives as a reduction in Interest expense during the years ended December 31, 2019, 2018 and 2017, respectively. The master repurchase agreement expired on August 21, 2019. |

| --- | --- |

| \(3\) | 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. |

| --- | --- |

| \(4\) | Beneficial interests in the Ginnie Mae MSRs of $2.8 billion and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes described in Notes payable secured by mortgage servicing assets. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheet. |

| --- | --- |

| \(5\) | Margin deposits are included in Other assets on the Company’s consolidated balance sheets. |

| --- | --- |

F-55

Table of Contents

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

| Remaining maturity at December 31, 2019 | Unpaid principal balance |  |

| --- | --- | --- | | | (dollars in thousands) | | | Within 30 days | $ | 715,059 | | Over 30 to 90 days | | 3,157,444 | | Over 90 to 180 days | | 269,177 | | Total assets sold under agreements to repurchase | $ | 4,141,680 | | Weighted average maturity (in months) | | 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 December 31, 2019:

|  |  |  | Weighted average |  |

| --- | --- | --- | --- | --- | | | | | maturity of advances | | | | | | under repurchase | | | Counterparty | Amount at risk | | agreement | Facility maturity | | | (in thousands) | | | | | Credit Suisse First Boston Mortgage Capital LLC | $ | 1,709,197 | April 26, 2020 | April 26, 2020 | | Credit Suisse First Boston Mortgage Capital LLC | $ | 72,865 | February 12, 2020 | April 24, 2020 | | JP Morgan Chase Bank, N.A. | $ | 61,561 | March 1, 2020 | October 9, 2020 | | Citibank, N.A. | $ | 48,017 | March 18, 2020 | August 4, 2020 | | Morgan Stanley Bank, N.A. | $ | 42,181 | March 16, 2020 | August 21, 2020 | | Bank of America, N.A. | $ | 29,252 | January 27, 2020 | January 27, 2020 | | Royal Bank of Canada | $ | 13,811 | March 31, 2020 | March 31, 2020 | | BNP Paribas | $ | 10,233 | March 12, 2020 | July 31, 2020 |

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

Mortgage Loan Participation Purchase and Sale Agreements

Certain of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities which generally occurs within 30 days. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

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

F-56

Table of Contents

The mortgage loan participation and sale agreements are summarized below:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | 2017 | | | | | (dollars in thousands) | | | | | | | | | | Average balance | $ | 244,203 | | $ | 248,539 | | $ | 208,613 | | | Weighted average interest rate (1) | | 3.42 | % | | 3.29 | % | | 2.34 | % | | Total interest expense | $ | 8,874 | | $ | 8,754 | | $ | 5,496 | | | Maximum daily amount outstanding | $ | 548,038 | | $ | 722,611 | | $ | 532,266 | |

| \(1\) | Excludes the effect of amortization of debt issuance costs totaling $514,000,  $588,000 and $545,000 for the years ended December 31, 2019, 2018 and 2017, respectively. |

| --- | --- |

|  | December 31, |  |  | December 31, |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | | | (dollars in thousands) | | | | | | | Carrying value: | | | | | | | | Unpaid principal balance | $ | 497,948 | | $ | 532,466 | | | Unamortized debt issuance costs | | — | | | (215) | | | | $ | 497,948 | | $ | 532,251 | | | Weighted average interest rate | | 3.05 | % | | 3.77 | % | | Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements | $ | 523,349 | | $ | 555,001 | |

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:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | 2017 | | | | | (dollars in thousands) | | | | | | | | | | Average balance | $ | 17,021 | | $ | 13,498 | | $ | 24,830 | | | Weighted average interest rate | | 4.07 | % | | 3.96 | % | | 3.07 | % | | Total interest expense | $ | 693 | | $ | 536 | | $ | 769 | | | Maximum daily amount outstanding | $ | 28,295 | | $ | 20,971 | | $ | 30,044 | |

|  | December 31, |  |  | December 31, |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | | | (dollars in thousands) | | | | | | | Unpaid principal balance | $ | 20,810 | | $ | 6,605 | | | Weighted average interest rate | | 3.74 | % | | 4.46 | % | | Assets pledged to secure obligations under capital lease: | | | | | | | | Furniture, fixtures and equipment | $ | 20,406 | | $ | 16,281 | | | Capitalized software | $ | 12,192 | | $ | 1,017 | |

F-57

Table of Contents

Notes Payable Secured by Mortgage Servicing Assets

Term Notes

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

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

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

On February 28, 2018, in connection with its issuance of the 2018-GT1 Notes, the Company also redeemed all of the 2017-GT1 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT1 Notes was $400 million plus all accrued and unpaid interest. As a result, the Company recognized the unamortized debt issuance cost of $3.4 million in Interest Expense.

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).

On August 10, 2018, in connection with its issuance of the 2018-GT2 Notes, the Company also redeemed all of the 2017-GT2 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT2 Notes was $500 million plus all accrued and unpaid interest. As a result, the Company recognized the unamortized debt issuance cost of $4.6 million in Interest Expense.

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

MSR Note Payable

On February 1, 2018, the Company issued a note payable in favor of Credit Suisse AG, Cayman Islands Branch (“CS Cayman”) that is secured by Fannie Mae and Freddie Mac MSRs. On September 11, 2019, CS Cayman terminated and released the portion of its security interest relating to the Fannie Mae MSRs in connection with the Loan and Security Agreement and entered a separate repurchase facility to purchase a participation certificate relating to the Fannie Mae MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on February 1, 2020. The maximum amount that the Company may borrow under the note payable is $400 million, less any amount outstanding under agreements to repurchase pursuant to which the Company finances the VFN and Fannie Mae MSRs. The Company did not borrow under this note payable during the year ended December 31, 2019.

F-58

Table of Contents

Notes payable are summarized below:

|  | Year ended December 31, |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | 2017 | | | | | (dollars in thousands) | | | | | | | | | | Average balance | $ | 1,300,000 | | $ | 1,169,452 | | $ | 586,135 | | | Weighted average interest rate (1) | | 5.08 | % | | 5.29 | % | | 5.86 | % | | Total interest expense | $ | 67,789 | | $ | 71,697 | | $ | 37,001 | | | Maximum daily amount outstanding | $ | 1,300,000 | | $ | 1,300,000 | | $ | 900,006 | |

| \(1\) | Excluding the effect of amortization of debt issuance costs totaling $1.8 million, $9.8 million and $3.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. |

| --- | --- |

|  | December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | 2018 | | | | | (dollars in thousands) | | | | | | | Carrying value: | | | | | | | | Unpaid principal balance | $ | 1,300,000 | | $ | 1,300,000 | | | Unamortized debt issuance costs | | (5,930) | | | (7,709) | | | | $ | 1,294,070 | | $ | 1,292,291 | | | Weighted average interest rate | | 4.46 | % | | 5.07 | % | | Assets pledged to secure notes payable: | | | | | | | | Servicing advances (1) | $ | 207,460 | | $ | 162,895 | | | Mortgage servicing rights (1) | $ | 2,861,442 | | $ | 2,807,333 | |

| \(1\) | Beneficial interests in the Ginnie Mae MSRs of $2.8 billion and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheet. |

| --- | --- |

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.

F-59

Table of Contents

The primary purposes of the Amendments were to (i) extend the maturity date of the Credit Agreement to October 30, 2020; (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. The Company did not borrow under this facility during the years ended December 31, 2019 and 2018.

Corporate revolving line of credit is summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Interest expense (1) | $ | 1,921 | $ | 1,913 | $ | 2,368 | | | | | December 31, | | | | | | | | 2019 | | 2018 | | | | | | (in thousands) | | | | | Carrying value | | | $ | — | $ | — | | Unused amount | | | $ | 150,000 | $ | 150,000 | | Cash pledged to secure corporate revolving line of credit | | | $ | 52,599 | $ | 108,174 |

| \(1\) | Interest expenses for the years ended December 31, 2019 and 2018 represent debt issuance costs and non-utilization fees. |

| --- | --- |

Excess Servicing Spread Financing at Fair Value

In conjunction with the Company’s purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has entered into sale and assignment agreements with PMT. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained a fixed base servicing fee and all ancillary income associated with servicing the loans. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances.

Following is a summary of ESS:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Balance at beginning of year | $ | 216,110 | $ | 236,534 | $ | 288,669 | | Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement | | 1,757 | | 2,688 | | 5,244 | | Accrual of interest | | 10,291 | | 15,138 | | 16,951 | | Repayment | | (40,316) | | (46,750) | | (54,980) | | Change in fair value | | (9,256) | | 8,500 | | (19,350) | | Balance at end of year | $ | 178,586 | $ | 216,110 | $ | 236,534 |

F-60

Table of Contents

Note 14—Liability for Losses Under Representations and Warranties

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Balance at beginning of year | $ | 21,155 | $ | 20,053 | $ | 19,067 | | Provision for losses on loans sold: | | | | | | | | Resulting from sales of loans | | 8,377 | | 5,824 | | 5,890 | | Reduction in liability due to change in estimate | | (7,877) | | (4,672) | | (4,301) | | Losses incurred , net | | (209) | | (50) | | (603) | | Balance at end of year | $ | 21,446 | $ | 21,155 | $ | 20,053 | | Unpaid principal balance of loans subject to representations and warranties at end of year | $ | 177,611,568 | $ | 137,849,704 | | |

Note 15—Income Taxes

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PennyMac. The Company’s federal tax returns are subject to examination for 2016 and forward and its state tax returns are generally subject to examination for 2015 and forward. PennyMac’s federal partnership returns are subject to examination for 2016 and forward, and its state tax returns are generally subject to examination for 2015 and forward. No returns are currently under examination.

As a result of the Reorganization, the Company recorded through equity a net deferred tax liability attributable to the noncontrolling interest in the amount of $320.5 million. Beginning from November 1, 2018, the Company’s income subject to the corporate federal and state income taxes will include the portion of its income formerly attributed to the noncontrolling interest. As a result, the Company has recognized an increase in its effective income tax rate.

The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code (“IRC”) and/or a transfer described in Section 351(a) of the IRC.

PFSI received a ruling from the California Franchise Tax Board in November 2018 which allows the Company to apply a reduced California statutory rate of 8.84% compared to the 10.84% rate previously applied by the Company. As a result, the Company recorded a tax benefit of $8.5 million due to remeasurement of deferred tax assets and tax liabilities.

The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the Tax Act. The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. Other than the change in the applicable federal rate, the changes introduced by the Tax Act did not have a significant impact on the 2018 tax expense.

In 2017, the Company recorded a tax benefit of $13.7 million due to a re-measurement of deferred tax assets and liabilities resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on a reduction to the federal rate as described above which will result in lower tax expense when these deferred tax assets and liabilities are realized.

Revaluation of the deferred tax asset resulting from PennyMac unitholder exchanges under the tax receivable agreement resulted in the repricing of the Company’s corresponding liability under the tax receivable agreement. The Company recorded a reduction of $32.0 million in the Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement for the year ended December 31, 2017 as a result of the Tax Act.

F-61

Table of Contents

The following table details the Company’s provision for income taxes:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Current expense: | | | | | | | | Federal | $ | 17,661 | $ | 12 | $ | (81) | | State | | 8,071 | | 274 | | 56 | | Total current expense | | 25,732 | | 286 | | (25) | | Deferred expense: | | | | | | | | Federal | | 85,296 | | 23,395 | | 14,674 | | State | | 25,451 | | (427) | | 9,738 | | Total deferred expense | | 110,747 | | 22,968 | | 24,412 | | Total provision for income taxes | $ | 136,479 | $ | 23,254 | $ | 24,387 |

The following table is a reconciliation of the Company’s provision for income taxes at statutory rates to the provision for income taxes at the Company’s effective tax rate:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | Federal income tax statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | | Less: Income attributable to noncontrolling interest | — | % | (12.3) | % | (22.0) | % | | State income taxes, net of federal benefit | 5.6 | % | 2.3 | % | 2.2 | % | | Tax rate revaluation | (0.6) | % | (2.2) | % | (8.0) | % | | Other | (0.2) | % | (0.1) | % | 0.1 | % | | Effective income tax rate | 25.8 | % | 8.7 | % | 7.3 | % | The components of the Company’s provision for deferred income taxes are as follows:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Mortgage servicing rights | $ | 91,592 | $ | 46,064 | $ | — | | Net operating loss | | 23,445 | | (14,902) | | (9,675) | | Compensation accruals | | (12,286) | | (3,596) | | — | | Additional tax basis in partnership from exchanges of partnership units into the Company's common stock | | 4,269 | | (1,391) | | — | | Reserves and losses | | (2,945) | | (1,848) | | — | | Other | | 6,106 | | (1,302) | | — | | Tax credits | | 566 | | (57) | | 76 | | Investment in PennyMac | | — | | — | | 34,011 | | Total provision for deferred income taxes | $ | 110,747 | $ | 22,968 | $ | 24,412 |

As the result of the Company’s reclassification of the noncontrolling interest to paid-in capital pursuant to the Reorganization on November 1, 2018, beginning in 2018, the provision for deferred taxes reflects each individual adjustment item in PFSI’s underlying investment in PennyMac. The provision for deferred income taxes for the year ended December 31, 2017 primarily relates to PFSI’s investment in PennyMac partially offset by the Company’s generation and utilization of a net operating loss and generation of tax credits. The provision for income taxes attributable to PFSI’s investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and carried interest from the Investment Funds.

F-62

Table of Contents

The components of Income taxes payable are as follows:

|  | December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | Income taxes currently (receivable) payable | $ | (6,506) | $ | 218 | | Deferred income tax liability, net | | 511,075 | | 400,328 | | Income taxes payable | $ | 504,569 | $ | 400,546 |

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

	December 31,
	2019		2018
	(in thousands)
Deferred income tax assets:
Compensation accruals	$	41,038	$	28,752
Additional tax basis in partnership from exchanges of partnership units into the Company's common stock		39,897		44,165
Reserves and losses		29,534		26,589
Net operating loss carryforward		1,658		25,104
Tax credits carryforward		50		616
Gross deferred tax assets		112,177		125,226
Deferred income tax liabilities:
Mortgage servicing rights		608,635		517,042
Other		14,617		8,512
Gross deferred tax liabilities		623,252		525,554
Net deferred income tax liability	$	511,075	$	400,328

The Company recorded a deferred tax asset of $1.7 million related to California and other states’ net operating loss carryforwards, which were mostly incurred in 2018 and expire in 2038, and are expected to be fully utilized in 2020. All of the federal net operating loss carryforward has been fully utilized in 2019. The Company has tax credits of $0.1 million, which generally have no expiration date.

At December 31, 2019 and 2018, the Company had no unrecognized tax benefits and does not anticipate any unrecognized tax benefits. Should the recognition of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such expenses in the Company’s income tax accounts. No such accruals existed at December 31, 2019 and 2018.

Note 16—Commitments and Contingencies

Litigation

F-63

Table of Contents

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 December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the Garfield Action is without merit and plans to vigorously defend the matter, which remains pending.

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, 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 January 6, 2020, the Company filed a motion to compel arbitration, which has not yet been fully briefed or argued. While no assurance can be provided at 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.

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, the Federal Housing Administration as well as subject to the requirements of the Agencies it sells loans to and performs loan servicing for. As the result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by the various federal, state and local regulatory bodies.

Commitments to Purchase and Fund Loans

The Company’s commitments to purchase and fund loans totaled $7.1 billion as of December 31, 2019.

Note 17—Stockholders’ Equity

In June 2017, the Company’s board of directors authorized a stock repurchase program under which the Company may repurchase up to $50 million of its outstanding common stock.

The following table summarizes the Company’s stock repurchase activity:

|  | Year ended December 31, |  |  |  |  |  | Cumulative |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | total (1) | | | | (in thousands) | | | | | | | | | Shares of common stock repurchased | | 51 | | 260 | | 505 | | 816 | | Cost of shares of common stock repurchased | $ | 1,056 | $ | 5,293 | $ | 8,599 | $ | 14,948 |

| \(1\) | Amounts represent the total shares common stock repurchased under the stock repurchase program through December 31, 2019. |

| --- | --- |

F-64

Table of Contents

The shares of repurchased common stock were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued common stock pool.

Note 18—Noncontrolling Interest

As a result of the Reorganization on November 1, 2018, noncontrolling interest unitholders contributed their Class A units of PNMAC for shares of PFSI common stock without any cash consideration on a one-for-one basis and became stockholders of the Company. Consequently, the noncontrolling interest was reclassified to the Company’s paid-in capital accounts.

Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac for the years ended December 31, 2018 and 2017 is summarized below:

|  | Year ended December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2018 | | 2017 | | | | (in thousands) | | | | | Net income attributable to PennyMac Financial Services, Inc. common stockholders | $ | 87,694 | $ | 100,757 | | 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. | $ | 33,156 | $ | 27,119 | | 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 | | 1,635 | | 1,608 | | Increase in the Company's paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to common stock of PennyMac Financial Services, Inc. pursuant to the Reorganization | $ | 1,064,320 | $ | — | | Shares of common stock of PennyMac Financial Services, Inc. issued for exchange of Class A units of Private National Mortgage Acceptance Company, LLC by noncontrolling interest unitholders pursuant to the Reorganization | | 52,263 | | — |

|  | December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2018 | | | 2017 | | | | Percentage of Private National Mortgage Acceptance Company, LLC held by noncontrolling interest | | — | % | | 69.2 | % |

F-65

Table of Contents

Note 19—Net Gains on Loans Held for Sale

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

|  | Year ended December 31, |  |  |  |  |  |

F-66

Table of Contents

Note 20—Net Interest Income (Expense)

Net interest income (expense) is summarized below:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Interest income: | | | | | | | | From non-affiliates: | | | | | | | | Cash and short-term investments | $ | 9,776 | $ | 2,038 | $ | 2,356 | | Loans held for sale at fair value | | 138,124 | | 128,732 | | 91,972 | | Placement fees relating to custodial funds | | 134,498 | | 78,184 | | 40,813 | | | | 282,398 | | 208,954 | | 135,141 | | From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | 6,302 | | 7,462 | | 8,038 | | | | 288,700 | | 216,416 | | 143,179 | | Interest expense: | | | | | | | | To non-affiliates: | | | | | | | | Assets sold under agreements to repurchase (1) | | 74,215 | | 22,463 | | 60,286 | | Mortgage loan participation purchase and sale agreements | | 8,874 | | 8,754 | | 5,496 | | Obligations under capital lease | | 693 | | 536 | | 769 | | Notes payable | | 69,710 | | 73,610 | | 39,369 | | Interest shortfall on repayments of mortgage loans serviced for Agency securitizations | | 41,439 | | 18,777 | | 16,933 | | Interest on mortgage loan impound deposits | | 6,757 | | 5,319 | | 4,716 | | | | 201,688 | | 129,459 | | 127,569 | | To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value | | 10,291 | | 15,138 | | 16,951 | | | | 211,979 | | 144,597 | | 144,520 | | | $ | 76,721 | $ | 71,819 | $ | (1,341) |

| \(1\) | In 2017, the Company entered a master repurchase agreement that provided it with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the years ended December 31, 2019, 2018 and 2017, the Company included $14.7 million, $48.1 million and $9.2 million, respectively of such incentives as a reduction in Interest expense. The master repurchase agreement expired on August 21, 2019. |

| --- | --- |

Note 21—Stock‑based Compensation

The Company has adopted an equity incentive plan that provides for grants of stock options, time-based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of December 31, 2019, the Company has 4.2 million units available for future awards.

F-67

Table of Contents

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Performance-based RSUs | $ | 14,820 | $ | 12,425 | $ | 11,020 | | Time-based RSUs | | 6,659 | | 6,608 | | 4,768 | | Stock options | | 3,292 | | 6,218 | | 4,909 | | | $ | 24,771 | $ | 25,251 | $ | 20,697 |

Performance‑Based RSUs

The performance‑based RSUs provide for the issuance of shares of the Company’s common stock based on the attainment of earnings per share and/or return on equity and are generally adjusted for grantee job performance ratings. The satisfaction of the performance goals and issuance of shares will be approved by a committee of the Company’s board of directors. Approximately 603,000 shares vested under the grants with a performance period ended December 31, 2019 will be issued to the grantees in March 2020.

The fair value of the performance‑based RSUs is measured based on the fair value of the Company’s common stock at the grant date, taking into consideration management’s estimate of the expected outcome of the performance goal, and the number of shares to be forfeited during the vesting period. The Company assumes forfeiture rates of 0 ‑ 23.2% per year based on the grantees’ employee classification. The actual number of shares that vest could vary from zero, if the performance goals are not met, to as much as 130% of the units granted, if the performance goals are meaningfully exceeded.

The table below summarizes performance‑based RSU activity:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands, except per unit amounts) | | | | | | | Number of units: | | | | | | | | Outstanding at beginning of year | | 1,892 | | 2,389 | | 2,475 | | Granted | | 682 | | 524 | | 694 | | Vested (1) | | (735) | | (730) | | (446) | | Forfeited or cancelled | | (32) | | (291) | | (334) | | Outstanding at end of year | | 1,807 | | 1,892 | | 2,389 | | Weighted average grant date fair value per unit: | | | | | | | | Outstanding at beginning of year | $ | 14.48 | $ | 15.57 | $ | 14.24 | | Granted | $ | 23.11 | $ | 24.40 | $ | 18.04 | | Vested | $ | 11.28 | $ | 12.86 | $ | 13.65 | | Forfeited | $ | 21.72 | $ | 16.17 | $ | 14.45 | | Outstanding at end of year | $ | 21.67 | $ | 14.48 | $ | 15.57 |

| \(1\) | The actual number of performance-based RSUs vested during the year ended December 31, 2019 and 2018 was 648,000 and 774,000 shares, respectively, which is approximately  88% and 106% of the 735,000 and 730,000 originally granted units, respectively, due to the performance varying from the established target for the respective grant. |

| --- | --- |

Following is a summary of performance-based RSUs as of December 31, 2019:

| Unamortized compensation cost \(in thousands\) | $ | 14,252 |

| --- | --- | --- | | Number of shares expected to vest (in thousands) | | 1,596 | | Weighted average remaining vesting period (in months) | | 12 |

F-68

Table of Contents

Time‑Based RSUs

The RSU grant agreements provide for the award of time‑based RSUs, entitling the award recipient to one share of the Company’s common stock for each RSU. One‑third of the time‑based RSUs vest on each of the first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary.

Compensation cost relating to time‑based RSUs is based on the grant date fair value of the Company’s common stock and the number of shares expected to vest. For purposes of estimating the cost of the time‑based RSUs granted, the Company assumes forfeiture rates of 0 ‑ 22.7% per year based on the grantees’ employee classification.

The table below summarizes time‑based RSU activity:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands, except per unit amounts) | | | | | | | Number of units: | | | | | | | | Outstanding at beginning of year | | 627 | | 600 | | 382 | | Granted | | 334 | | 328 | | 408 | | Vested | | (300) | | (254) | | (173) | | Forfeited | | (19) | | (47) | | (17) | | Outstanding at end of year | | 642 | | 627 | | 600 | | Weighted average grant date fair value per unit: | | | | | | | | Outstanding at beginning of year | $ | 20.39 | $ | 16.37 | $ | 13.71 | | Granted | $ | 22.88 | $ | 24.25 | $ | 18.02 | | Vested | $ | 18.73 | $ | 16.08 | $ | 14.66 | | Forfeited | $ | 22.29 | $ | 19.40 | $ | 14.87 | | Outstanding at end of year | $ | 22.40 | $ | 20.39 | $ | 16.37 |

Following is a summary of RSUs as of December 31, 2019:

| Unamortized compensation cost \(in thousands\) | $ | 4,107 |

| --- | --- | --- | | Number of units expected to vest (in thousands) | | 570 | | Weighted average remaining vesting period (in months) | | 10 |

Stock Options

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

F-69

Table of Contents

The fair value of each stock option award is estimated on the date of grant using a variant of the Black Scholes model based on the following inputs:

|  | Year ended December 31, |  |  |

| --- | --- | --- | --- | | | 2019 | 2018 | 2017 | | Expected volatility (1) | 30% | 30% | 31% | | Expected dividends | 0% | 0% | 0% | | Risk-free interest rate | 2.5% - 2.7% | 1.7% - 3.0% | 0.8% - 2.7% | | Expected grantee forfeiture rate | 2.3% - 22.7% | 0.0% - 23.2% | 0.0% - 21.1% |

| \(1\) | Based on historical volatilities of the Company’s common stock. |

| --- | --- |

The Company uses its historical employee departure behavior to estimate the grantee forfeiture rates used in its option‑pricing model. The expected term of common stock options granted is derived from the Company’s option pricing model and represents the period that common stock options granted are expected to be outstanding. The risk‑free interest rate for periods within the contractual term of the common stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

The table below summarizes stock option award activity:

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands, except per option amounts) | | | | | | | Number of stock options: | | | | | | | | Outstanding at beginning of year | | 3,693 | | 3,457 | | 2,738 | | Granted | | 344 | | 674 | | 861 | | Exercised | | (317) | | (322) | | (90) | | Forfeited | | (21) | | (116) | | (52) | | Outstanding at end of year | | 3,699 | | 3,693 | | 3,457 | | Weighted average exercise price per option: | | | | | | | | Outstanding at beginning of year | $ | 17.81 | $ | 16.40 | $ | 15.81 | | Granted | $ | 22.92 | $ | 24.40 | $ | 18.05 | | Exercised | $ | 16.26 | $ | 16.24 | $ | 15.04 | | Forfeited | $ | 20.70 | $ | 18.46 | $ | 15.58 | | Outstanding at end of year | $ | 18.40 | $ | 17.81 | $ | 16.40 |

Following is a summary of stock options as of December 31, 2019:

| Number of options exercisable at end of year \(in thousands\) |  | 2,676 |

| --- | --- | --- | | Weighted average exercise price per exercisable option | $ | 16.91 | | Weighted average remaining contractual term (in years): | | | | Outstanding | | 6.3 | | Exercisable | | 5.5 | | Aggregate intrinsic value: | | | | Outstanding (in thousands) | $ | 57,858 | | Exercisable (in thousands) | $ | 45,837 | | Expected vesting amounts: | | | | Number of options expected to vest (in thousands) | | 929 | | Weighted average vesting period (in months) | | 9 |

F-70

Table of Contents

Note 22—Earnings Per Share of Common Stock

Basic earnings per share of common stock is determined using net income attributable to the Company’s common stockholders divided by the weighted average number of shares of common stock outstanding during the year. 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 PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding based on the outstanding non-vested stock-based compensation awards. As a result of the Reorganization on November 1, 2018, all Class A units of PNMAC converted for shares of PFSI common stock on a one-for-one basis.

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

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands, except per share data) | | | | | | | Basic earnings per share of common stock: | | | | | | | | Net income attributable to common stockholders | $ | 392,965 | $ | 87,694 | $ | 100,757 | | Weighted average shares of common stock outstanding | | 78,206 | | 33,524 | | 23,199 | | Basic earnings per share of common stock | $ | 5.02 | $ | 2.62 | $ | 4.34 | | Diluted earnings per share of common stock: | | | | | | | | Net income attributable to common stockholders | $ | 392,965 | $ | 87,694 | $ | 100,757 | | Net income attributable to dilutive stock-based compensation units | | — | | 3,868 | | — | | Net income attributable to common stockholders for diluted earnings per share | $ | 392,965 | $ | 91,562 | $ | 100,757 | | Weighted average shares of common stock outstanding applicable to basic earnings per share | | 78,206 | | 33,524 | | 23,199 | | Effect of dilutive shares: | | | | | | | | Common shares issuable under stock-based compensation plan | | 2,134 | | 1,798 | | 1,800 | | Weighted average shares of common stock applicable to diluted earnings per share | | 80,340 | | 35,322 | | 24,999 | | Diluted earnings per share of common stock | $ | 4.89 | $ | 2.59 | $ | 4.03 |

F-71

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 weighted-average number of anti-dilutive outstanding performance-based RSUs, time-based RSUs, stock options and Exchangeable PNMAC Class A units excluded from the calculation of diluted earnings per share:

	Year ended December 31,
	2019		2018		2017
	(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)		1,032		1,084		497
Time-based RSUs		—		3		—
Stock options (2)		572		740		1,323
Exchangeable PNMAC Class A units (3)		—		43,700		53,299
Total anti-dilutive shares and units		1,604		45,527		55,119
Weighted average exercise price of anti-dilutive stock options (2)	$	23.70	$	17.81	$	16.40

| \(1\) | Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved. |

| --- | --- |

| \(2\) | Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices during the year. |

| --- | --- |

| \(3\) | Exchangeable PNMAC units were anti-dilutive during 2017 primarily due to the effect of adoption of the Tax Act on earnings attributable to PNMAC unitholders. |

| --- | --- |

Note 23—Supplemental Cash Flow Information

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | | (in thousands) | | | | | | Cash paid for interest | $ | 188,346 | $ | 161,001 | $ | 158,147 | | Cash paid (refunds received) for income taxes , net | $ | 32,457 | $ | (2,059) | $ | (5,513) | | Non-cash investing activity: | | | | | | | | Mortgage servicing rights resulting from loan sales | $ | 884,876 | $ | 591,757 | $ | 581,101 | | Mortgage servicing liabilities resulting from loan sales | $ | 37,988 | $ | 7,601 | $ | 17,229 | | Unsettled portion of MSR acquisitions | $ | — | $ | 10,139 | $ | 5,319 | | Operating right-of-use assets recognized | $ | 83,248 | $ | — | $ | — | | Non-cash financing activity: | | | | | | | | Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement | $ | 1,757 | $ | 2,688 | $ | 5,244 | | Issuance of common stock and Class A common stock in settlement of director fees | $ | 233 | $ | 330 | $ | 338 |

Note 24—Regulatory Capital and Liquidity Requirements

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

The Company is subject to financial eligibility requirements for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include tangible net worth of

$2.5 million plus 25 basis points of the Company’s total 1-4 unit servicing portfolio, excluding loans subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB in excess of 600 basis points.

F-72

Table of Contents

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:

	December 31, 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	$	2,247,751		$	585,674		$	1,788,430		$	514,089
Ginnie Mae – PLS	$	1,907,398		$	910,456		$	1,535,826		$	733,342
HUD – PLS	$	1,907,398		$	2,500		$	1,535,826		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	257,794		$	79,991		$	271,802		$	70,775
Ginnie Mae – PLS	$	257,794		$	216,119		$	271,802		$	189,592
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		22	%		6	%		21	%		6	%

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

| --- | --- |

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

Note 25—Segments

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

Two 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 newly originated loans, execution and management of early buyout 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, managing the acquired assets and correspondent production activities for PMT.

F-73

Table of Contents

Financial performance and results by segment are as follows:

|  | Year ended December 31, 2019 |  |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Mortgage Banking | | | | | | Investment | | | | | | Production | | Servicing | | Total | | Management | | Total | | | | (in thousands) | | | | | | | | | | | Revenue: (1) | | | | | | | | | | | | Net gains on loans held for sale at fair value | $ | 635,464 | $ | 90,064 | $ | 725,528 | $ | — | $ | 725,528 | | Loan origination fees | | 174,156 | | — | | 174,156 | | — | | 174,156 | | Fulfillment fees from PennyMac Mortgage Investment Trust | | 160,610 | | — | | 160,610 | | — | | 160,610 | | Net loan servicing fees | | — | | 293,665 | | 293,665 | | — | | 293,665 | | Net interest income (expense): | | | | | | | | | | | | Interest income | | 82,338 | | 206,362 | | 288,700 | | — | | 288,700 | | Interest expense | | 59,973 | | 151,950 | | 211,923 | | 56 | | 211,979 | | | | 22,365 | | 54,412 | | 76,777 | | (56) | | 76,721 | | Management fees | | — | | — | | — | | 36,492 | | 36,492 | | Other | | 1,289 | | 2,643 | | 3,932 | | 6,300 | | 10,232 | | Total net revenue | | 993,884 | | 440,784 | | 1,434,668 | | 42,736 | | 1,477,404 | | Expenses | | 466,050 | | 455,535 | | 921,585 | | 26,375 | | 947,960 | | Income before provision for income taxes | $ | 527,834 | $ | (14,751) | $ | 513,083 | $ | 16,361 | $ | 529,444 | | Segment assets at year end | $ | 4,836,472 | $ | 5,347,549 | $ | 10,184,021 | $ | 19,996 | $ | 10,204,017 |

| \(1\) | All revenues are from external customers. |

| --- | --- |

F-74

Table of Contents

	Year ended December 31, 2018
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	141,959	$	107,063	$	249,022	$	—	$	249,022
Loan origination fees		101,641		—		101,641		—		101,641
Fulfillment fees from PennyMac Mortgage Investment Trust		81,350		—		81,350		—		81,350
Net loan servicing fees		—		445,393		445,393		—		445,393
Net interest income (expense):
Interest income		66,408		149,992		216,400		16		216,416
Interest expense		7,371		137,177		144,548		49		144,597
		59,037		12,815		71,852		(33)		71,819
Management fees		—		—		—		24,469		24,469
Carried Interest from Investment Funds		—		—		—		(365)		(365)
Other		2,008		2,650		4,658		5,516		10,174
Total net revenue		385,995		567,921		953,916		29,587		983,503
Expenses		298,729		395,619		694,348		22,584		716,932
Income before provision for income taxes and non-segment activities		87,266		172,302		259,568		7,003		266,571
Non-segment activities (2)		—		—		—		—		1,126
Income before provision for income taxes	$	87,266	$	172,302	$	259,568	$	7,003	$	267,697
Segment assets at year end (3)	$	2,434,897	$	5,031,920	$	7,466,817	$	11,681	$	7,478,498

| \(1\) | All revenues are from external customers. |

| --- | --- |

| \(2\) | Represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement. |

| --- | --- |

| \(3\) | Excludes parent company assets, which consist primarily of working capital of $75,000. |

| --- | --- |

F-75

Table of Contents

	Year ended December 31, 2017
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenues: (1)
Net gains on loans held for sale at fair value	$	286,242	$	105,562	$	391,804	$	—	$	391,804
Loan origination fees		119,202		—		119,202		—		119,202
Fulfillment fees from PennyMac Mortgage Investment Trust		80,359		—		80,359		—		80,359
Net loan servicing fees		—		306,059		306,059		—		306,059
Net interest income (expense):
Interest income		61,195		81,984		143,179		—		143,179
Interest expense		35,359		109,112		144,471		49		144,520
		25,836		(27,128)		(1,292)		(49)		(1,341)
Management fees		—		—		—		23,585		23,585
Carried Interest from Investment Funds		—		—		—		(1,040)		(1,040)
Other		2,002		1,710		3,712		183		3,895
Total net revenue		513,641		386,203		899,844		22,679		922,523
Expenses		275,133		327,531		602,664		16,890		619,554
Income before provision for income taxes and non-segment activities		238,508		58,672		297,180		5,789		302,969
Non-segment activities (2)		—		—		—		—		32,940
Income before provision for income taxes	$	238,508	$	58,672	$	297,180	$	5,789	$	335,909
Segment assets at year end (3)	$	2,459,014	$	4,886,594	$	7,345,608	$	19,880	$	7,365,488

| \(1\) | All revenues are from external customers. |

| --- | --- |

| \(2\) | Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement, of which $32.0 million is the result of the change in the federal tax rate under the Tax Act. |

| --- | --- |

| \(3\) | Excludes parent Company assets, which consist primarily of working capital of $2.6 million. |

| --- | --- |

F-76

Table of Contents

Note 26—Selected Quarterly Data (Unaudited)

Following is a presentation of selected quarterly financial data:

|  | Quarter ended |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2019 | | | | | | | | 2018 | | | | | | | | | | Dec. 31 | | Sept. 30 | | June. 30 | | Mar. 31 | | Dec. 31 | | Sept. 30 | | June. 30 | | Mar. 31 | | | | | (in thousands, except per share data) | | | | | | | | | | | | | | | | During the quarter: | | | | | | | | | | | | | | | | | | Net gains on loans held for sale at fair value | $ | 257,487 | $ | 235,732 | $ | 147,533 | $ | 84,776 | $ | 59,748 | $ | 56,914 | $ | 60,946 | $ | 71,414 | | Loan origination fees | | 63,868 | | 49,434 | | 36,924 | | 23,930 | | 26,165 | | 26,485 | | 24,428 | | 24,563 | | Fulfillment fees from PennyMac Mortgage Investment Trust | | 58,297 | | 45,149 | | 29,590 | | 27,574 | | 28,591 | | 26,256 | | 14,559 | | 11,944 | | Net loan servicing fees | | 87,731 | | 66,229 | | 59,134 | | 80,571 | | 105,212 | | 109,703 | | 113,689 | | 116,789 | | Other income | | 22,992 | | 39,803 | | 29,796 | | 30,854 | | 31,485 | | 31,571 | | 30,676 | | 13,491 | | | | 490,375 | | 436,347 | | 302,977 | | 247,705 | | 251,201 | | 250,929 | | 244,298 | | 238,201 | | Expenses | | 287,009 | | 270,150 | | 203,387 | | 187,414 | | 192,895 | | 189,232 | | 169,600 | | 165,205 | | Income before provision for income taxes | | 203,366 | | 166,197 | | 99,590 | | 60,291 | | 58,306 | | 61,697 | | 74,698 | | 72,996 | | Provision for income taxes | | 50,705 | | 44,724 | | 26,894 | | 14,156 | | 5,346 | | 5,545 | | 6,293 | | 6,070 | | Net income | | 152,661 | | 121,473 | | 72,696 | | 46,135 | | 52,960 | | 56,152 | | 68,405 | | 66,926 | | Less: Net income attributable to noncontrolling interest | | — | | — | | — | | — | | 14,211 | | 41,663 | | 50,568 | | 50,307 | | Net income attributable to PennyMac Financial Services, Inc. common stockholders | $ | 152,661 | $ | 121,473 | $ | 72,696 | $ | 46,135 | $ | 38,749 | $ | 14,489 | $ | 17,837 | $ | 16,619 | | Earnings per share of common stock: | | | | | | | | | | | | | | | | | | Basic | $ | 1.95 | $ | 1.55 | $ | 0.93 | $ | 0.59 | $ | 0.65 | $ | 0.58 | $ | 0.71 | $ | 0.70 | | Diluted | $ | 1.88 | $ | 1.51 | $ | 0.92 | $ | 0.58 | $ | 0.63 | $ | 0.57 | $ | 0.70 | $ | 0.67 | | At quarter end: | | | | | | | | | | | | | | | | | | Loans held for sale | $ | 4,912,953 | $ | 4,522,971 | $ | 3,506,406 | $ | 2,668,929 | $ | 2,521,647 | $ | 2,416,955 | $ | 2,527,231 | $ | 2,584,236 | | Mortgage servicing rights | | 2,926,790 | | 2,556,253 | | 2,720,335 | | 2,905,090 | | 2,820,612 | | 2,785,964 | | 2,486,157 | | 2,354,489 | | Servicing advances, net | | 331,169 | | 271,501 | | 271,534 | | 284,230 | | 313,197 | | 259,609 | | 258,900 | | 284,145 | | Loans eligible for repurchase | | 1,046,527 | | 892,631 | | 1,007,435 | | 1,094,702 | | 1,102,840 | | 889,335 | | 879,621 | | 1,018,488 | | Other assets | | 986,578 | | 1,059,843 | | 892,666 | | 866,049 | | 720,277 | | 640,667 | | 689,797 | | 661,533 | | Total assets | $ | 10,204,017 | $ | 9,303,199 | $ | 8,398,376 | $ | 7,819,000 | $ | 7,478,573 | $ | 6,992,530 | $ | 6,841,706 | $ | 6,902,891 | | Short-term debt | $ | 4,639,001 | $ | 4,053,514 | $ | 3,270,261 | $ | 2,449,908 | $ | 2,332,143 | $ | 2,222,385 | $ | 2,264,041 | $ | 2,336,826 | | Long-term debt | | 1,493,466 | | 1,500,647 | | 1,515,631 | | 1,752,817 | | 1,648,973 | | 1,566,672 | | 1,473,188 | | 1,380,358 | | Liability for mortgage loans eligible for repurchase | | 1,046,527 | | 892,631 | | 1,007,435 | | 1,094,702 | | 1,102,840 | | 889,335 | | 879,621 | | 1,018,488 | | Income taxes payable | | 504,569 | | 480,559 | | 441,336 | | 414,636 | | 400,546 | | 74,158 | | 67,357 | | 58,956 | | Other liabilities | | 458,947 | | 464,235 | | 384,716 | | 405,745 | | 340,280 | | 323,270 | | 295,555 | | 314,064 | | Total liabilities | | 8,142,510 | | 7,391,586 | | 6,619,379 | | 6,117,808 | | 5,824,782 | | 5,075,820 | | 4,979,762 | | 5,108,692 | | Total equity | | 2,061,507 | | 1,911,613 | | 1,778,997 | | 1,701,192 | | 1,653,791 | | 1,916,710 | | 1,861,944 | | 1,794,199 | | Total liabilities and equity | $ | 10,204,017 | $ | 9,303,199 | $ | 8,398,376 | $ | 7,819,000 | $ | 7,478,573 | $ | 6,992,530 | $ | 6,841,706 | $ | 6,902,891 |

F-77

Table of Contents

Note 27—Parent Company Information

The Company’s debt financing agreements require PLS, the Company’s indirect controlled subsidiary, to comply with financial covenants that include a minimum tangible net worth of $500 million. PLS is limited from transferring funds to the Parent by this minimum tangible net worth requirement.

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED BALANCE SHEETS

|  | December 31, |  |  |  |

| --- | --- | --- | --- | --- | | | 2019 | | 2018 | | | | (in thousands) | | | | | ASSETS | | | | | | Cash | $ | 2,250 | $ | — | | Investments in subsidiaries | | 2,443,407 | | 1,975,231 | | Due from subsidiaries | | 100 | | 582 | | Total assets | $ | 2,445,757 | $ | 1,975,813 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | Payable to subsidiaries | $ | 4,194 | $ | 575 | | Income taxes payable | | 380,056 | | 321,447 | | Total liabilities | | 384,250 | | 322,022 | | Stockholders' equity | | 2,061,507 | | 1,653,791 | | Total liabilities and stockholders' equity | $ | 2,445,757 | $ | 1,975,813 |

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENTS OF INCOME

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Revenues | | | | | | | | Dividends from subsidiary | $ | 36,376 | $ | 10,054 | $ | — | | Repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | — | | — | | 32,940 | | Total revenue | | 36,376 | | 10,054 | | 32,940 | | Expenses | | | | | | | | Interest | | 153 | | 32 | | — | | Total expenses | | 153 | | 32 | | — | | Income before provision for income taxes and equity in undistributed earnings in subsidiaries | | 36,223 | | 10,022 | | 32,940 | | Provision for income taxes | | 91,291 | | 20,897 | | 24,387 | | Income (loss) before equity in undistributed earnings of subsidiaries | | (55,068) | | (10,875) | | 8,553 | | Equity in undistributed earnings of subsidiaries | | 448,033 | | 98,569 | | 92,204 | | Net income | $ | 392,965 | $ | 87,694 | $ | 100,757 |

F-78

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

|  | Year ended December 31, |  |  |  |  |  |

| --- | --- | --- | --- | --- | --- | --- | | | 2019 | | 2018 | | 2017 | | | | (in thousands) | | | | | | | Cash flows from operating activities | | | | | | | | Net income | $ | 392,965 | $ | 87,694 | $ | 100,757 | | Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | Equity in undistributed earnings of subsidiaries | | (448,033) | | (98,569) | | (92,204) | | Repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | — | | — | | (32,940) | | Decrease (increase) in intercompany receivable | | 8,962 | | (3,737) | | 5,646 | | Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | — | | — | | (6,726) | | Increase in income taxes payable | | 58,609 | | 22,889 | | 29,912 | | Net cash provided by operating activities | | 12,503 | | 8,277 | | 4,445 | | Cash flows from investing activities | | | | | | | | Increase in investments in subsidiaries | | — | | (77) | | — | | Net cash used by investing activities | | — | | (77) | | — | | Cash flows from financing activities | | | | | | | | Payment of dividend to common stock and Class A common stockholders | | (9,708) | | (10,054) | | — | | Issuance of common stock pursuant to exercise of stock options | | 5,145 | | 803 | | 1,254 | | Repurchase of common stock and Class A common stock | | (1,056) | | (1,554) | | (8,599) | | Payment of withholding taxes relating to stock-based compensation | | (4,634) | | — | | — | | Net cash used in financing activities | | (10,253) | | (10,805) | | (7,345) | | Net change in cash and restricted cash | | 2,250 | | (2,605) | | (2,900) | | Cash and restricted cash at beginning of year | | — | | 2,605 | | 5,505 | | Cash and restricted cash at end of year | $ | 2,250 | $ | — | $ | 2,605 |

F-79

Table of Contents

Note 28—Subsequent Events

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

| · | During February 2020, the Company acquired from a non-affiliate seller approximately $2.3 billion in UPB of Ginnie Mae MSRs. |

| --- | --- |

| · | During February 2020, the Company entered into an agreement with a non-affiliate seller to acquire approximately $292 million in UPB of MSRs related to defaulted government loans. The MSR acquisition by the Company is subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions. There can be no assurance that the committed amounts will ultimately be acquired or that the transaction will be completed at all. |

| --- | --- |

F-80

Table of Contents

SIGNATURES

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

| PENNYMAC FINANCIAL SERVICES, INC. |  |

| --- | --- | | (Registrant) | | | By: | /s/ David A. Spector | | | David A. Spector | | | President and | | | Chief Executive Officer | | | (Principal Executive Officer) |

Dated: February 28, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

| Signatures | Title | Date |

| --- | --- | --- | | /s/ David A. Spector | President and Chief Executive Officer, and Director | February 28, 2020 | | David A. Spector | (Principal Executive Officer) | | | /s/ Andrew S. Chang | Senior Managing Director and Chief Financial Officer | February 28, 2020 | | Andrew S. Chang | (Principal Financial Officer) | | | /s/ Gregory L. Hendry | Chief Accounting Officer | February 28, 2020 | | Gregory L. Hendry | (Principal Accounting Officer) | | | /s/ Stanford L. Kurland | Chairman of the Board, and Director | February 28, 2020 | | Stanford L. Kurland | | | | /s/ Matthew Botein | Director | February 28, 2020 | | Matthew Botein | | | | /s/ James Hunt | Director | February 28, 2020 | | James Hunt | | | | /s/ Patrick Kinsella | Director | February 28, 2020 | | Patrick Kinsella | | | | /s/ Anne D. McCallion | Director | February 28, 2020 | | Anne D. McCallion | | | | /s/ Joseph Mazzella | Director | February 28, 2020 | | Joseph Mazzella | | | | /s/ Farhad Nanji | Director | February 28, 2020 | | Farhad Nanji | | | | /s/ Jeffrey Perlowitz | Director | February 28, 2020 | | Jeffrey Perlowitz | | | | /s/ Theodore Tozer | Director | February 28, 2020 | | Theodore Tozer | | |

Table of Contents

/s/ Emily Youssouf	Director	February 28, 2020
Emily Youssouf

		pfsi\_Ex4\_1

Exhibit 4.1

DESCRIPTION OF THE REGISTRANT’S SECURITIES

REGISTERED PURSUANT TO SECTION 12 OF THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

As of December 31, 2019, PennyMac Financial Services, Inc. (the “Company”) had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our common stock.

Throughout this exhibit, references to the “we,” “our,” and the “Company” herein are, unless the context otherwise indicates, only to PennyMac Financial Services, Inc. and not to any of its subsidiaries.

General

Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. Unless our board of directors determines otherwise, we will issue all shares of our capital stock in uncertificated form. The following description of our capital stock is a summary and is qualified in its entirety by reference to our amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) and amended and restated bylaws, as amended (the “Bylaws”) which are filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2019.

Common Stock

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends when and if declared by our board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.

Upon any dissolution or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of common stock will be entitled to receive pro rata the remaining assets available for distribution.

Holders of our common stock do not have preemptive, subscription, redemption or conversion rights.

Preferred Stock

Our Certificate of Incorporation authorizes our board of directors to establish one or more series of preferred stock (including convertible preferred stock). Unless required by law or by any stock exchange, the authorized shares of preferred stock will be available for issuance without further action by our stockholders. Our board of directors is able to determine, with respect to any series of preferred stock, the terms and rights of that series, including:

the designation of the series;

the number of shares of the series, which our board may, except where otherwise provided in the preferred stock designation, increase or decrease, but not below the number of shares then outstanding;

the voting rights, if any, of the holders of the series;

whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;

the dates at which dividends, if any, will be payable;

the rights of priority and amounts payable, if any, on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of our company;

the redemption rights and price or prices, if any, for shares of the series;

the terms of any purchase, retirement or sinking fund, if any, provided for shares of the series;

the terms, if any, upon which the shares of the series will be convertible into or exchangeable for shares of any other class, classes or series or other securities, whether or not issued by our company or any other entity;

restrictions, if any, upon issuance of indebtedness by us so long as any shares of the series are outstanding; and

restrictions, if any, on the issuance of shares of the same series or of any other class or series.

We could issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which our stockholders might receive a premium for their shares of common stock over the market price of the shares of common stock.

Authorized but Unissued Capital Stock

The Delaware General Corporation Law (the “DGCL”) does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of the New York Stock Exchange (“NYSE”), which would apply so long as our common stock remains listed on the NYSE, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock. These additional shares may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.

One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

Anti-Takeover Effects of Provisions of Delaware Law and Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

Undesignated Preferred Stock

Pursuant to our Certificate of Incorporation, our board of directors has the authority to issue preferred stock with super voting, special approval, dividend or other rights or preferences on a discriminatory basis that could impede the success of any attempt to acquire us or otherwise effect a change in control of us. These and other provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of our company.

Requirements for Advance Notification of Stockholder Meetings, Nominations and Proposals

Our Certificate of Incorporation provides that, subject to the rights of the holders of any series of preferred stock, special meetings of the stockholders may be called only by, or at the direction of, our board of directors, two or more of our directors, the chairman of our board, our chief executive officer or one or more holders of at least a minimum percentage of the voting power of the outstanding shares of our capital stock. This minimum will initially be 25% and will automatically increase to 51% on the first date on which the holders of outstanding shares of our common stock (other than any holder that was, or whose affiliate was, a member of Private National Mortgage Acceptance Company, LLC (“PNMAC”) immediately prior to the initial public offering of our predecessor organization) hold more than 51% of the voting power of all outstanding shares of our capital stock. Our Bylaws prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of our company.

Our Bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made pursuant to our stockholder agreements with BlackRock Mortgage Ventures, LLC (“BMV”) and HC Partners, LLC, (“HCP”) or by or at the direction of the board of directors or a committee of the board of directors. In order for any matter to be “properly brought” before a meeting, a stockholder will have to comply with the advance notice requirements and provide us with certain information. These provisions may also defer, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

Filling of Vacancies and Newly Created Directorships; Conduct of Stockholder Meetings

Additionally, vacancies and newly created directorships may be filled only by a vote of a majority of the directors then in office, even though such directors may constitute less than a quorum of the board required for such action, and not by the stockholders. Our Bylaws allow the presiding officer at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also defer, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

No Cumulative Voting

The DGCL provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless our Certificate of Incorporation provides otherwise. Our Certificate of Incorporation does not expressly provide for cumulative voting.

Amendments to Certificate of Incorporation and Bylaws

The DGCL provides that, unless a corporation’s certificate of incorporation provides for a greater vote, the affirmative vote of holders of shares constituting a majority in voting power of the outstanding shares entitled to vote thereon is required to approve amendments to the certificate of incorporation. In addition to the stockholder approval required by the DGCL, our separate stockholder agreements with BMV and HCP provide that our Certificate of Incorporation may not be amended in any manner that is adverse to BMV or HCP without the consent of BMV or HCP, as applicable, as long as such stockholder, together with its affiliates, holds more than 5% of the voting power of all of our outstanding shares of capital stock.

Our Certificate of Incorporation authorizes our board of directors to amend or repeal our Bylaws, provided that, pursuant to our separate stockholder agreements with BMV and HCP, if that action by our board of directors amends the Bylaws in a manner adverse to BMV or HCP when that entity, together with its affiliates, holds at least 5% of the voting power of our outstanding shares of capital stock, such action must be approved by that entity.

Stockholder Action by Written Consent

Pursuant to Section 228 of the DGCL, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our capital stock entitled to vote thereon were present and voted, unless our Certificate of Incorporation provides otherwise. Our Certificate of Incorporation prohibits the taking of any action of our stockholders by written consent without a meeting unless that action is taken with regard to a matter that has been approved by our board of directors or requires the approval only of certain series of our preferred stock pursuant to the terms thereof.

Delaware Anti-Takeover Statute

We have not opted out of, and therefore are subject to, Section 203 of the DGCL. Section 203 provides that, subject to certain exceptions specified in the law, a publicly-held Delaware corporation shall not engage in certain “business combinations” with any “interested stockholder” for a three-year period after the date of the transaction in which the person became an interested stockholder. These provisions generally prohibit or delay the accomplishment of, among other things, mergers, assets or stock sales or other takeover or change-in-control attempts that are not approved by a company’s board of directors.

In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder unless:

prior to the time the person became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

at, or subsequent to, the time that the person became an interested stockholder, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder.

Generally, a business combination includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, if such person is an affiliate or associate of the corporation, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect that Section 203 will have an anti-takeover effect with respect to transactions the board of directors does not approve in advance. In such event, we would also anticipate that Section 203 could discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Under certain circumstances, Section 203 makes it more difficult for a person who would be an “interested stockholder” to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may encourage companies interested in acquiring our company to negotiate in advance with our board of directors because the stockholder approval requirement would be avoided if our board of directors approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder. These provisions also may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

Corporate Opportunity

Our Certificate of Incorporation provides that neither BMV nor HCP, or their respective affiliates, has any duty (fiduciary or otherwise) to refrain from engaging, directly or indirectly, in a corporate opportunity in the same or similar lines of business in which we now engage or propose to engage. In addition, in the event that either BMV or HCP, or either of their respective affiliates, acquires knowledge of a potential transaction or other matter which may be a corporate opportunity for themselves and for us, then (i) neither we nor our stockholders will have any expectancy in such opportunity and (ii) none of BMV, HCP or any of their respective affiliates will have any duty to communicate or offer such corporate opportunity to us or our stockholders and may pursue or acquire such corporate opportunity for itself or direct such corporate opportunity to another person or entity, unless such corporate opportunity is expressly offered to such affiliate in his or her capacity as our director or officer.

Registration Rights

Pursuant to an amended and restated registration rights agreement dated as of November 1, 2018 (the “Registration Rights Agreement”), BMV, HCP and certain of their permitted transferees have the right, under certain circumstances and subject to certain restrictions, to require us to file a prospectus supplement to register for resale the shares of common stock held by them.

Demand Registration Rights. BMV and HCP and certain permitted transferees each have the right to demand that we register their shares of common stock for resale, subject to the conditions set forth in the Registration Rights Agreement, no more than three times in any twelve month period. Such registration demand must reasonably be expected to result in aggregate gross cash proceeds to such demanding stockholder in excess of $25 million. We will not be obligated to effect a demand registration within 120 days of the effective date of a registration statement filed

by us. We may postpone the filing of a registration statement for up to 60 days once in any 12-month period if our board of directors determines in good faith that the filing would reasonably be expected to materially and adversely affect any material financing or acquisition of us or require premature disclosure of information that would reasonably be expected to be materially adverse to us. The underwriters of any underwritten offering have the right to limit the number of shares of common stock to be included in a registration statement filed in response to the exercise of these demand registration rights. We must pay all expenses, except for underwriters’ discounts and commissions, incurred in connection with these demand registration rights.

Piggyback Registration Rights. BMV, HCP, certain of their permitted transferees and the minority stockholders which are parties to the Registration Rights Agreement will each have the right to “piggyback” on any registration statements that we file on an unlimited basis, subject to the conditions set forth in the Registration Rights Agreement.

S-3 Registration Rights. If we are eligible to file a registration statement on Form S-3, the stockholders with Form S-3 registration rights under the Registration Rights Agreement and certain permitted transferees can request that we register their common stock for resale. Any registration must be reasonably expected by the demanding stockholder to result in aggregate gross cash proceeds to such demanding stockholder in excess of $10 million, and no more than three demands for a Form S-3 registration may be made in any 12-month period. If we are eligible as a Well-Known Seasoned Issuer (“WKSI”) the requesting stockholders may request that the shelf registration statement utilize the automatic shelf registration process. If we are not eligible as a WKSI or otherwise ineligible to utilize the automatic shelf registration process, then we are required to use our reasonable efforts to have the shelf registration statement declared effective.

Limitations of Liability and Indemnification

Section 145 of the DGCL authorizes a corporation’s board of directors to grant indemnification and advancement rights to current or former officers, directors, employees and other corporate agents.

As permitted by Delaware law, our Certificate of Incorporation provides that, no director will have any personal liability to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or is thereafter amended. Pursuant to Delaware law, such protection would be not available for liability:

for any breach of a duty of loyalty to us or our stockholders;

for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

for any transaction from which the director derived an improper benefit; or

for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL.

Our Bylaws further provide that we must indemnify our current or former directors and officers to the fullest extent permitted by Delaware law. Our Bylaws permit us to secure insurance on behalf of any of our current or former officers or directors for any liability arising out of his or her action in that capacity, whether or not Delaware law would otherwise permit indemnification.

In addition, our Bylaws also provide that we are required to advance expenses to our current or former directors and officers as incurred in connection with legal proceedings against them for which they may be indemnified and that the rights conferred in our Bylaws are not exclusive.

Our Bylaws provide that, except for proceedings to enforce rights to indemnification or advancement, we are not required to indemnify or advance expenses to our current or former director or officer in connection with any action, suit or proceeding (or part thereof) commenced by such person unless such action, suit or proceeding (or part thereof) was authorized by our board of directors.

The fifth amended and restated limited liability company agreement of PNMAC provides that PNMAC will indemnify its officers, members, managers and other affiliates to the fullest extent permitted by Delaware law, and

advance expenses to its officers, members, managers and other affiliates as incurred in connection with legal proceedings against them for which they may be indemnified. The rights conferred in the fifth amended and restated limited liability company agreement of PNMAC are not exclusive.

The indemnification agreements provide, among other things, that we are required to indemnify each director and officer to the fullest extent permitted by Delaware law, our Certificate of Incorporation and our Bylaws for expenses such as, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by the director or officer in any action or proceeding, including any action by or in our right, arising out of that person’s services as our director or officer or as the director or officer of our subsidiary or any other company or enterprise to which the person provides services at our request. In addition, the indemnification agreements also provide that we are required to advance expenses to our directors and officers as incurred in connection with legal proceedings against them for which they may be indemnified and that the rights conferred in the indemnification agreements are not exclusive. We maintain directors’ and officers’ liability insurance.

The Securities and Exchange Commission has taken the position that personal liability of directors for violation of the federal securities laws cannot be limited and that indemnification by us for any such violation is unenforceable.

The limitation of liability and indemnification provisions in our Certificate of Incorporation and our Bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, may benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.

Market Listing

Our common stock is listed on the NYSE under the symbol “PFSI.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

		pfsi\_Ex10\_56

Exhibit 10.56

EXECUTION VERSION

AMENDMENT NO. 3 TO AMENDED AND RESTATED CREDIT AGREEMENT

This AMENDMENT NO. 3 TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of October 31, 2019 (this “Amendment”), is entered into by and among PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC, a Delaware limited liability company (the “Borrower”), the Lenders party hereto, and CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as administrative agent (in such capacity, including any successor thereto, the “Administrative Agent”).

W I T N E S S E T H :

WHEREAS, the Borrower has entered into that certain Amended and Restated Credit Agreement, dated as of November 18, 2016 (as amended by that certain Amendment No. 1 to Amended and Restated Credit Agreement, dated as of November 17, 2017 and that certain Amendment No. 2 to Amended and Restated Credit Agreement and Amendment No. 1 to Amended and Restated Collateral and Guaranty Agreement, dated as of November 1, 2018, and as may be further amended, amended and restated, supplemented and otherwise modified prior to the date hereof, the “Credit Agreement”; the Credit Agreement as amended by this Amendment is hereinafter referred to as the “Amended Credit Agreement”), among the Borrower, the Lenders party thereto, the Administrative Agent and the other parties party thereto from time to time;

WHEREAS, pursuant to the Credit Agreement, the Lenders have extended credit to the Borrower on the terms and conditions set forth therein;

WHEREAS, the Borrower has requested certain amendments to the Credit Agreement as set forth below; and

WHEREAS, the Borrower and the Lenders party hereto have agreed to amend certain provisions of the Credit Agreement on the terms and conditions contained herein.

NOW, THEREFORE, it is agreed as follows:

ARTICLE 1

Definitions

Section 1.1 Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings assigned to such terms in the Credit Agreement, unless otherwise defined herein or the context otherwise requires.

ARTICLE 2

Amendments

Section 2.1 Amendments to Credit Agreement. The Credit Agreement is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined text) as set forth in the pages of the Credit Agreement attached as Annex A hereto.

Section 2.2 Amendments to Schedules to Credit Agreement. Schedules 1.01(c), 1.01(e), and 6.04(ii) of the Credit Agreement are hereby amended and restated in their entirety by replacing such Schedules with the corresponding Schedules attached hereto as Annex C.

ARTICLE 3

Miscellaneous

Section 3.1 Conditions to Effectiveness. This Amendment shall become effective as of the later of (the “Amendment Effective Date”) (x) October 31, 2019 and (y) the date on which:

(a) Amendment. The Administrative Agent shall have received duly executed and delivered counterparts of this Amendment that, when taken together, bear the signatures of the Borrower and the Lenders party to the Credit Agreement as of such date;

(b) Secretary Certificate. The Administrative Agent shall have received a certificate of the Secretary or Assistant Secretary of each Credit Party dated the Amendment Effective Date and certifying (i) that attached thereto is a copy of the certificate or articles of incorporation or other equivalent formation document, including all amendments thereto, of each Credit Party, certified as of a recent date by the Secretary of State (or other similar official) of the state of its organization (or certifying that that there has been no change to such formation document since the Amendment No. 2 Effective Date), (ii) that attached thereto is a true and complete copy of the by-laws, partnership agreement, limited liability company agreement, memorandum and articles of association or other equivalent governing document of such Credit Party as in effect on the Amendment Effective Date and at all times since a date prior to the date of the resolutions described in clause (iii) below (or certifying that that there has been no change to such formation document since the Amendment No. 2 Effective Date), (iii) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors (or equivalent governing body) of such Credit Party authorizing the execution, delivery and performance of this Amendment, the Acknowledgment and any other Credit Document or other document required to be executed and delivered on behalf of the Borrower or such Credit Party under this Amendment, and that such resolutions have not been modified, rescinded or amended and are in full force and effect on the Amendment Effective Date, (iv) that the certificate or articles of incorporation or other equivalent formation document of such Credit Party has not been amended since the date of the last amendment thereto furnished pursuant to clause (i) above, and (v) as to the incumbency and specimen signature of each officer executing this Amendment, the Acknowledgment or any other document delivered in connection herewith on behalf of such Credit Party; and the certificate referred to in this clause (b) shall contain a certification by an Authorized Officer of such Credit Party as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing such certificate pursuant to this clause (b);

(c) Good Standing Certificate of the Borrower. The Administrative Agent shall have received a certificate as to the good standing of each Credit Party as of a recent date, from the Secretary of State (or other similar official) of the state of its organization;

(d) Closing Certificate. The Administrative Agent shall have received a certificate, dated the Amendment Effective Date and signed by an Authorized Officer of the Borrower, confirming compliance with the conditions precedent set forth in (b) and (c) of Section 4.01 of the Credit Agreement;

(e) Opinions of Counsel. The Administrative Agent shall have received, on behalf of itself and the Lenders, a favorable written opinion of (i) Morgan, Lewis & Bockius LLP, counsel to the Borrower, and (ii) in-house counsel of the Borrower, each such opinion to be in form and substance reasonably satisfactory to the Administrative Agent, in each case (A) dated the Amendment Effective Date,

(B) addressed to the Administrative Agent and the Lenders, and (C) covering such matters relating to this Amendment and the transactions contemplated hereby as the Administrative Agent shall reasonably request, and the Borrower hereby requests such counsel to deliver such opinions;

(f) No Default. On the date hereof and on the Amendment Effective Date (both before and after giving effect to this Amendment), no Default or Event of Default shall have occurred and be continuing;

(g) Accuracy of Representations and Warranties. Each of the representations and warranties set forth in Section 3.2 of this Amendment shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date, except to the extent that any such representations and warranties are stated to relate solely to an earlier date, in which case such representations and warranties shall be correct in all respects as of such earlier date; provided that any representation and warranty that is qualified as to “materiality”, “Material Adverse Effect” or similar language shall be true and correct (after giving effect to any qualification therein) in all respects on such respective dates;

(h) Acknowledgment and Confirmation. The Administrative Agent shall have received the Acknowledgment and Confirmation, substantially in the form of Annex B hereto (the “Acknowledgement”), dated as of the Amendment Effective Date, executed and delivered by an authorized officer or other authorized signatory of each Guarantor;

(i) Effectiveness Fee and Expenses. The Borrower shall have paid to the Administrative Agent on or before the Amendment Effective Date (i) for the account of each Lender, a consent fee equal to 0.50% of the Commitment of such Lender as in effect on the Amendment Effective Date after giving effect to this Amendment, (ii) all Fees and other amounts due and payable on or prior to the Amendment Effective Date and (iii) all reasonable and documented fees, out-of-pocket costs and expenses of the Administrative Agent incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees, charges and disbursements of Davis Polk & Wardwell LLP, counsel for the Administrative Agent; to the extent invoiced in reasonable detail at least two (2) Business Days prior to the Amendment Effective Date; and

(j) Documentation. The Administrative Agent shall have received, at least five Business Days prior to the Amendment Effective Date, to the extent requested, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations including the USA PATRIOT Act.

Section 3.2 Representations and Warranties. To induce the other parties hereto to enter into this Amendment, the Borrower represents and warrants to each of the Administrative Agent and the Lenders that:

(a) Each of the representations and warranties set forth in Article 3 of the Credit Agreement and in each other Credit Document are true and correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date, except to the extent that any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty is true and correct in all material respects as of such earlier date, provided that in each case, any representation or warranty that is qualified as to “materiality” or “material adverse effect” is true and correct (after giving effect to any qualification therein) in all respects;

(b) As of the date hereof, the Borrower has the limited liability company power and authority, and the legal right, to enter into and perform this Amendment. The execution, delivery and performance of this Amendment have been duly authorized by all necessary limited liability company action on the part of such party. The execution and delivery by such party of this Amendment, and performance by such party of the Amended Credit Agreement, will not (i) contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or Governmental Authority, (ii) (x) violate or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or give rise to any right to accelerate or to require the prepayment, repurchase of redemption of any obligation under, or (y) result in the creation or imposition of (or the obligation to directly or indirectly create or impose) any Lien (except pursuant to the Security Documents) upon any of the property or assets of any Credit Party or any Restricted Subsidiary pursuant to the terms of, any indenture, mortgage, deed of trust, credit agreement or loan agreement, or any other agreement, contract or instrument, in each case to which any Credit Party or any Restricted Subsidiary is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) violate any provision of the certificate or articles of incorporation, certificate of formation, limited liability company agreement or by-laws (or equivalent organizational documents), as applicable, of any Credit Party or any Restricted Subsidiary, except to the extent all violations or contraventions with respect to the foregoing clauses (i) and (ii)(x) could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. This Amendment constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors’ rights generally;

(c) The Acknowledgement, when executed and delivered by each Guarantor party thereto, will constitute a legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors’ rights generally; and

(d) On the date hereof and on the Amendment Effective Date (both before and after giving effect to this Amendment), no Default or Event of Default has occurred and is continuing.

Section 3.3 Severability. In the event any one or more of the provisions contained in this Amendment should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

Section 3.4 Continuing Effect; No Other Waivers or Amendments.

(a) This Amendment shall not constitute an amendment to or waiver of any provision of the Credit Agreement and the other Credit Documents except as expressly stated herein and shall not be construed as a consent to any action on the part of the Borrower or any other Credit Party that would require an amendment, waiver or consent of the Administrative Agent or the Lenders except as expressly stated herein. Except as expressly amended or waived hereby, the provisions of the Credit Agreement and the other Credit Documents are and shall remain in full force and effect in accordance with their terms.

(b) The parties hereto acknowledge and agree that (i) this Amendment, the Acknowledgment and any other Credit Documents executed and delivered in connection herewith do not constitute a novation, or termination of the “Obligations” (as defined in the Credit Documents) under the

Credit Agreement as in effect prior to the Amendment Effective Date; (ii) such “Obligations” are in all respects continuing (as amended hereby) with only the terms thereof being modified to the extent expressly provided in this Amendment; and (iii) the Liens and security interests as granted under the Credit Documents securing payment of such “Obligations” are in all such respects continuing in full force and effect and secure the payment of the “Obligations.”

(c) On and after the Amendment Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import, shall mean and be a reference to the Amended Credit Agreement, and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. This Amendment and the Acknowledgment shall be a Credit Document for all purposes under the Credit Agreement.

Section 3.5 Counterparts. This Amendment may be executed in any number of counterparts and by the different parties to this Amendment in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Amendment. Delivery of an executed counterpart of a signature page to this Amendment by facsimile or other electronic image shall be effective as delivery of a manually executed counterpart of this Amendment.

Section 3.6 GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

* * *

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written.

| PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC, as the Borrower |  |

| --- | --- | | By: | /s/ Pamela Marsh | | | Name: Pamela Marsh | | | Title: Senior Managing Director and Treasurer |

[Signature Page to Amendment No. 3 to Amended and Restated Credit Agrement (PennyMac)]

LENDER:
Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and a Lender
By:	/s/ Doreen Barr
Name:	Doreen Barr
Title:	Authorized Signatory
By:	/s/ Komal Shah
Name:	Komal Shah
Title:	Authorized Signatory

[Signature Page to Amendment No. 3 to Amended and Restated Credit Agrement (PennyMac)]

LENDER:
BARCLAYS BANK PLC, as a Lender
By:	/s/ Ronnie Glenn
Name:	Ronnie Glenn
Title:	Director

[Signature Page to Amendment No. 3 to Amended and Restated Credit Agrement (PennyMac)]

LENDER:
GOLDMAN SACHS BANK USA, as a Lender
By:	/s/ Ryan Durkin
Name:	Ryan Durkin
Title:	Authorized Signatory
LENDER:
---	---
JPMorgan Chase Bank, N.A., as a Lender
By:	/s/ Andrew W. Kristiansen
Name:	Andrew W. Kristiansen
Title:	Vice President
	J. P. Morgan
LENDER:
---	---
Citibank, N.A., as a Lender
By:	/s/ Patrick Marsh
Name:	Patrick Marsh
Title:	Managing Director
LENDER:
---	---
MORGAN STANLEY BANK, N.A., as a Lender
By:	/s/ Michael King
Name:	Michael King
Title:	Authorized Signatory

ANNEX A

TO AMENDMENT

Amendments to Credit Agreement

[attached]

management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and for purposes of this definition, the terms “controlling,” “controlled by” and “under common control with” have meanings correlative of the foregoing.

“Affiliate Transaction” shall have the meaning assigned to such term in Section 6.06. “Agents” shall have the meaning assigned to such term in Article 8.

“Aggregate Revolving Credit Exposure” shall mean the aggregate amount of the Lenders’ Revolving Credit Exposures.

“Agreement” shall mean this Credit Agreement, as modified, supplemented, amended, restated (including any amendment and restatement hereof), extended or renewed from time to time.

“Alternate Base Rate” shall mean, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% and (c) the Adjusted LIBO Rate on such day (or if such day is not a Business Day, the immediately preceding Business Day) for a Eurodollar Borrowing with an Interest Period of one month plus 1.00%; provided that, for the avoidance of doubt, the Adjusted LIBO Rate for any day shall (i) be based on the rate determined on such day at approximately 11 a.m. (London time) by reference to the ICE Benchmark Administration Interest Settlement Rates (as set forth by any service selected by the Administrative Agent that has been nominated by the ICE Benchmark Administration Limited (or any Person which takes over the administration of that rate) as an authorized information vendor for the purpose of displaying such rates) (the “ICE LIBOR”) as published by Reuters (or such other commercially available source providing quotations of ICE LIBOR as may be designated by the Administrative Agent from time to time) and (ii) in no event be less than 0.00% per annum. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be effective on the effective date of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate, as the case may be.

“Amendment No. 1 Effective Date” shall have the meaning assigned to the term “Amendment Effective Date” in that certain Amendment No. 1 to Amended and Restated Credit Agreement, dated as of November 17, 2017, among the Borrower, the Lenders party thereto and the Administrative Agent.

“Amendment No. 2 Effective Date” shall have the meaning assigned to the term “Amendment Effective Date” in that certain Amendment No. 2 to Amended and Restated Credit Agreement and Amendment No. 1 to Amended and Restated Collateral and Guaranty

Agreement, dated as of November 1, 2018, among the Borrower, the Lenders party thereto and the Administrative Agent.

“Amendment No. 3 Effective Date” shall have the meaning assigned to the term “Amendment Effective Date” in that certain Amendment No. 3 to Amended and Restated Credit Agreement, dated as of October 31, 2019, among the Borrower, the Lenders party thereto and the Administrative Agent.

“Anti-Corruption Laws” shall have the meaning assigned to such term in Section 3.22.

“Anti-Money Laundering Laws” shall have the meaning assigned to such term in Section 3.22.

“Applicable Margin” shall mean (a) with respect to any Eurodollar Loan, 3.75% per annum and (b) with respect to any ABR Loan, 2.75% per annum.

“Approvals” shall mean, with respect to the Borrower or any of its applicable Restricted Subsidiaries, any approvals obtained from Ginnie Mae, Fannie Mae, Freddie Mac or HUD in designation of the Borrower or such Restricted Subsidiary as a Ginnie Mae-approved issuer, a Ginnie Mae-approved servicer, an FHA-approved mortgagee, a VA-approved lender, a Fannie Mae-approved seller or servicer or a Freddie Mac-approved seller or servicer, as applicable, in good standing.

“Arranger” shall mean Credit Suisse Loan Funding LLC in its capacity as sole bookrunner and sole lead arranger of the Credit Facility.

“Asset Coverage Ratio Default” shall have the meaning assigned to such term in Section 7.02.

“Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, substantially in the form of Exhibit C or such other form as shall be approved by the Administrative Agent.

“Attributable Debt” shall mean, in respect of a sale-leaseback transaction, as of the time of determination, the present value (discounted at the interest rate per annum implicit in the lease involved in such sale-leaseback transaction, as determined in good faith by the Borrower) of the obligation of the lessee thereunder for rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales or similar contingent amounts) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended); provided, however, that if such sale and leaseback transaction results in a Capitalized Lease Obligation, the amount of Indebtedness represented thereby will be determined in accordance with the definition of Capitalized Lease Obligation. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such rental payments shall also include the amount

of such penalty, but no rental payments shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated.

“Authorized Officer” shall mean the chief executive officer, president, secretary, treasurer, or other “chief” officer of the Borrower.

“Bail-In Action” shall mean the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

“Bail-In Legislation” shall mean, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.

“Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter in effect, or any successor thereto.

“Basket” shall mean any amount, threshold or other value permitted or prescribed with respect to any Lien, Indebtedness, Investment, Dividend, transaction value, judgment, or other amount under any provision in Articles 3, 5, 6, or 7 and the definitions related thereto.

“Beneficial Ownership Certification” shall mean a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.

“Beneficial Ownership Regulation” shall mean 31 C.F.R. § 1010.230.

“Benefit Plan” shall mean any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in and subject to Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.

“BHC Act Affiliate” of a party shall mean an “affiliate” (as such term is defined under, and interpreted in accordance with, 12 U.S.C. 1841(k)) of such party.

“Borrower” shall have the meaning assigned to such term in the introductory statement to this Agreement.

“Borrower Materials” shall have the meaning assigned to such term in Section 9.01.

“Borrowing” shall mean Loans of the same Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or any customary carve-out matters for which such Person acts as a guarantor, such as fraud, misappropriation, breach of representation and warranty and misapplication, unless and until a claim for payment or performance has been made in respect thereof (which has not been satisfied). The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith.

“Contribution Agreement and Plan of Merger” shall mean that certain Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among Holdings, New Holdings, New PennyMac Merger Sub, LLC, a Delaware limited liability company, the contributors listed on Exhibit A thereto, and the Borrower.

“Corporate Indebtedness” shall mean, with respect to any Person, the aggregate consolidated amount of Indebtedness of such Person and its Restricted Subsidiaries then outstanding that would be shown on a consolidated balance sheet of such Person and its Restricted Subsidiaries (excluding, for the purpose of this definition, Indebtedness incurred under Section 6.04(ii), Section 6.04(iii), Section 6.04(vi) (solely in respect of guaranties or Contingent Obligations of the types of Indebtedness excluded pursuant to the other subclauses referenced in this parenthetical), Section 6.04(xii), Section 6.04(xiii) and Section 6.04(xv)); provided that MSR Indebtedness of any Person or its Restricted Subsidiaries shall constitute Corporate Indebtedness with respect to such Person.

“Corporate Indebtedness to EBITDA Ratio” shall mean, for any period, the ratio of (a) Corporate Indebtedness as of the end of such period to (b) Consolidated EBITDA for such period; provided that for purposes of any calculation of the Corporate Indebtedness to EBITDA Ratio, Corporate Indebtedness and Consolidated EBITDA of the Borrower and the Restricted Subsidiaries shall be determined on a Pro Forma Basis in accordance with the requirements of the definition of “Pro Forma Basis” contained herein.

“Covered Entity” shall mean any of the following:

(a) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);

(b) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or

of a Bail-In Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.22(b)) upon delivery of written notice of such determination to the Borrower and each Lender.

“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.

“Designated Non-Cash Consideration” shall mean any non-cash consideration received by the Borrower or any Restricted Subsidiary in connection with an asset sale that is so designated as “Designated Non-Cash Consideration” pursuant to an officer’s certificate delivered to the Administrative Agent, which certificate shall set forth the Fair Market Value of such non-cash consideration and the basis for determining such Fair Market Value, less the amount of Cash Equivalents received in connection with a subsequent sale of or collection on such Designated Non-Cash Consideration.

“Disqualified Equity Interests” shall mean that portion of any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event (other than an event which would constitute a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof (except, in each case, upon the occurrence of a Change of Control), or requires the payment of dividends or distributions that would otherwise be prohibited by the terms of this Agreement, in each case on or prior to the Maturity Date.

“Dividend” shall mean, with respect to any Person, that such Person has, directly or indirectly, declared or paid a dividend, distribution or returned any other amount with respect to any Equity Interests to its stockholders, shareholders, partners or members or authorized or made any other distribution, payment or delivery of property or cash to its stockholders, shareholders, partners or members in their capacity as such, or redeemed, retired, purchased or otherwise acquired or terminated or cancelled, directly or indirectly, for a consideration (whether in cash, securities or other property) any shares of any class of its capital stock or any other Equity Interests outstanding on or after the Closing Date (or any options or warrants issued by such Person with respect to its capital stock or other Equity Interests).

“Dollars” and the sign “$” shall each mean freely transferable lawful money of the United States.

amount of any Indebtedness or other liabilities associated with or secured by such Encumbered Asset at such time.

“Engagement Letter” shall mean the Engagement Letter dated October 3128, 20182019 among Holdings, the Borrower, Credit Suisse Loan Funding LLC and Credit Suisse AG, Cayman Islands Branch.

“Environmental Claims” shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, orders, claims, liens, notices of noncompliance, violation, or liability investigations or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (hereafter, “Claims”), including, without limitation, (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with alleged injury or threat of injury to health, safety or the environment due to the presence of Hazardous Materials.

“Environmental Law” shall mean any federal, state, foreign or local statute, law, rule, regulation, ordinance, code and rule of common law now or hereafter in effect and in each case as amended, including any judicial or administrative order, consent decree or judgment, relating to the environment, natural resources or Hazardous Materials, including, without limitation, CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. § 300f et seq.; the Oil Pollution Act of 1990, 33 U.S.C. § 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 U.S.C. § 11001 et seq.; the Hazardous Material Transportation Act, 49 U.S.C. § 5101 et seq.; and any state and local or foreign counterparts or equivalents, in each case as amended from time to time.

“Equity Interests” of any Person shall mean any and all shares, interests, rights to purchase, warrants, options, participation or other equivalents of or interest in (however designated) equity of such Person, including any common stock, preferred stock, any limited or general partnership interest and any limited liability company membership interest; provided that, for the avoidance of doubt and without limitation, “Equity Interests” shall exclude any Indebtedness convertible into or exchangeable for Equity Interests.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the Closing Date and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.

“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that, together with the Borrower or a Restricted Subsidiary of Borrower, is treated as a “single employer” within the meaning of Section 414(b), (c), (m) or (o) of the Code.

Agreement or under any other material Credit Document or (iii) the ability of New Holdings, Holdings, the Borrower or the other Credit Parties, taken as a whole, to perform its or their obligations to the Lenders, the Administrative Agent or the Collateral Agent hereunder, under the Collateral and Guaranty Agreement or under any other material Credit Document.

“Maturity Date” shall mean October 3130, 20192020.

“Maximum Rate” shall have the meaning assigned to such term in Section 9.09.

“Moody’s” shall mean Moody’s Investors Service, Inc., a subsidiary of Moody’s Corporation, and its successors, provided, that in the event Moody’s is no longer in existence, references to Moody’s shall instead refer to a nationally recognized statistical rating organization (as defined in Section 3(a)(62) of the Exchange Act) designated by the Borrower, notice of which shall be given to the Administrative Agent.

“MSR” of any Person shall mean any and all of the following: (a) all rights of such Person to service mortgage loans, (b) all rights of such Person as “Servicer” (or similar designation) in such Person’s capacity as servicing rights owner with respect to such mortgage loans under the related Servicing Agreement, including, without limitation (but subject to the restrictions set forth therein) directing who may service such mortgage loans, (c) any and all rights of such Person to servicing fees and other compensation for servicing such mortgage loans, (d) any late fees, penalties or similar payments with respect to such mortgage loans, (e) all accounts and rights to payment related to any of the property described in this definition and (f) the right to possess and use any and all servicing files, servicing records, data tapes, computer records, or other information pertaining to such mortgage loans to the extent relating to the past, present or prospective servicing of such mortgage loans.

“MSR Call Option” shall mean the right of an MSR Lender which is a Government Sponsored Entity to repurchase MSR from the Borrower or any Restricted Subsidiary the purchase of which was initially financed by such MSR Lender with proceeds of Permitted MSR Indebtedness so long as the purchase price in respect thereof is at Fair Market Value and for cash.

“MSR Facility” shall mean any financing arrangement of any kind, including, but not limited to, financing arrangements in the form of repurchase facilities, loan agreements, note issuance facilities and commercial paper facilities (excluding in all cases, Securitizations), with a financial institution or other lender or purchaser exclusively to finance or refinance the purchase, origination, pooling or funding by the Borrower or a Restricted Subsidiary of MSRs originated, purchased, or owned by the Borrower or any Restricted Subsidiary in the ordinary course of business.

“MSR Facility Trust” shall mean any Person (whether or not a Restricted Subsidiary) established for the purpose of issuing notes or other securities in connection with an MSR Facility, which (i) notes and securities are backed by specified MSRs purchased by such Person from the Borrower or any Restricted Subsidiary, or (ii) notes and securities are backed by

specified mortgage loans purchased by such Person from the Borrower or any Restricted Subsidiary.

“MSR Indebtedness” shall mean Indebtedness in connection with an MSR Facility; the amount of any particular MSR Indebtedness as of any date of determination shall be calculated in accordance with GAAP.

“MSR Lender” shall mean a third party financing source (including, without limitation, Fannie Mae) which provides financing to the Borrower or a Restricted Subsidiary the proceeds of which are used exclusively to purchase MSR relating to Residential Mortgage Loans.

“Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA and subject to Title IV of ERISA to which the Borrower or any ERISA Affiliate currently makes or is obligated to make contributions or to which the Borrower or any ERISA Affiliate has made or was obligated, within the preceding six years, to make contributions.

“NAIC” shall mean the National Association of Insurance Commissioners.

“Net Cash Proceeds” shall mean, for any event requiring a prepayment of Loans and/or reduction in Commitments pursuant to Section 2.13(b), the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or

otherwise, but only as and when received) received from such event, net of reasonable transaction costs (including, as applicable, any underwriting, brokerage or other customary commissions and reasonable legal, advisory and other fees and expenses associated therewith) received from any such event.

“New Holdings” shall mean PennyMac Financial Services, Inc., a Delaware corporation (formerly known as New PennyMac Financial Services, Inc.).

“Non-Credit Party Investment Amount” shall mean, at any time, an amount equal to $5,000,000 minus the aggregate amount of all Investments made after the Closing during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date in reliance on Section 6.05(iii), Section 6.05(ix)(C) or the second proviso of Section 6.05(xii).

“Non-Defaulting Lender” shall mean, at any time, each Lender that is not a Defaulting Lender at such time.

“Non-Recourse Entities” shall mean, collectively, each Non-Recourse Servicer Advance Debt Entity, each Non-Recourse Warehouse Debt Entity and each Securitization Entity.

“Non-Recourse Indebtedness” shall mean, with respect to any specified Person or any of its Subsidiaries, Indebtedness that is:

(i) specifically advanced to finance the acquisition of investment assets and secured

only by the assets to which such Indebtedness relates without recourse to such Person or any of its Restricted Subsidiaries (other than subject to such customary carve-out matters for which

such Permitted Servicing Advance Facility Indebtedness shall not be Permitted Servicing Advance Facility Indebtedness (but shall not be deemed to be a new incurrence of Indebtedness subject to Section 6.04 except with respect to, and solely to the extent of, any such excess that exists upon the initial incurrence of such Indebtedness under a Servicing Advance Facility which excess shall be entitled to be incurred pursuant to any other provision of Section 6.04).

“Permitted Tax Distribution” shall mean any distribution permitted by Section 5.10(b) of the PNMAC Limited Liability Company Agreement.

“Permitted Warehouse Indebtedness” shall mean Warehouse Indebtedness; provided that solely as of the date of the incurrence of such Warehouse Indebtedness, the amount of any excess (determined as of the most recent date for which internal financial statements are available) of (x) the amount of any such Warehouse Indebtedness for which the holder thereof has contractual recourse to the Borrower or any Restricted Subsidiary to satisfy claims with respect to such Warehouse Indebtedness (other than subject to such customary carve-out matters for which such Person or its Restricted Subsidiaries acts as a guarantor in connection with such Indebtedness, such as fraud, misappropriation, breaches of representations or warranties and misapplication, unless, until and for so long as a claim for payment or performance has been made thereunder (which has not been satisfied) at which time the obligations with respect to any such customary carve-out shall not be considered Permitted Warehouse Indebtedness, to the extent that such claim is a liability of such Person for GAAP purposes) over (y) the aggregate (without duplication of amounts) Realizable Value of the assets that secure such Warehouse Indebtedness shall not be Permitted Warehouse Indebtedness (but shall not be deemed to be a new incurrence of Indebtedness subject to Section 6.04 except with respect to, and solely to the extent of, any such excess that exists upon the initial incurrence of such Indebtedness which excess shall be entitled to be incurred pursuant to any other provision of Section 6.04). The amount of any particular Permitted Warehouse Indebtedness as of any date of determination shall be calculated in accordance with GAAP.

“Person” shall mean any individual, partnership, joint venture, firm, corporation, association, limited liability company, trust or other enterprise or any Governmental Authority.

“Plan” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Platform” shall have the meaning assigned to such term in Section 9.01.

“PNMAC Limited Liability Company Agreement” shall mean the Fifth Amended and Restated Limited Liability Company Agreement of Private National Mortgage Acceptance Company, LLC, among the Borrower and the members party thereto, dated as of November 1, 2018, as in effect on the Amendment No. 2 Effective Date and any amendment, modification or replacement of such agreement that is permitted hereunder.

have expired or been terminated, the Pro Rata Percentages shall be determined on the basis of the Commitments most recently in effect, giving effect to any subsequent assignments.

“Property” shall mean the Real Property, including the improvements thereon, or the personal property (tangible and intangible), in either case which are encumbered pursuant to a Securitization.

“PTE” shall mean a prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.

“QFC” has the meaning assigned to the term “qualified financial contract” in, and shall be interpreted in accordance with, 12 U.S.C. 5390(c)(8)(D).

“QFC Credit Support” shall have the meaning assigned to such term in Section 9.22.

“Qualified Equity Interest” shall mean any Equity Interest that is not a Disqualified Equity Interest.

“RC Asset” shall mean, at any time, any asset of any Credit Party that satisfies each of the following requirements at such time: (a) such asset shall be of a class set forth as an “Eligible Asset Class” on Schedule 1.01(d), (b) such asset shall be owned exclusively by a Credit Party, (c) such asset shall be subject to a perfected first-priority security interest in favor of the Collateral Agent (other than Permitted RC Asset Liens) pursuant to the Security Documents, (d) such asset shall be free and clear of all other Liens and (e) such asset shall be denominated in Dollars and any real property securing such asset shall be located in the United States. For the avoidance of doubt any cash and Cash Equivalents shall be deemed not to be subject to a perfected first-priority security interest in favor of the Collateral Agent unless such cash and Cash Equivalents are held in a deposit account or a securities account subject to an account control agreement in favor of the Collateral Agent and such account control agreement is satisfactory to the Collateral Agent.

“RC Asset Amount” shall mean, at any time, an amount equal to the aggregate RC Asset Contributions for all RC Assets at such time.

“RC Asset Contribution” shall mean, for any RC Asset at any time, an amount equal to (a) the carrying value of such RC Asset under GAAP as at such time multiplied by (b) the percentage set forth opposite the applicable asset class to which such RC Asset belongs on Schedule 1.01(d).

“RC Asset Coverage Ratio” shall mean, at any time of determination, the ratio of (x) the RC Asset Amount at such time to (y) the Aggregate Revolving Credit Exposure at such time (after giving effect to any contemporaneous Borrowing at or about such time).

“RC Asset Coverage Ratio Deficiency” shall mean the RC Asset Coverage Ratio is less than 1.00:1.00 at any time.

shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“Subject Transaction” shall have the meaning specified in the definition of “Pro Forma Basis”.

“Subsidiary” shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

“Subsidiary Guarantor” shall mean each Wholly-Owned Domestic Restricted

Subsidiary (other than the Excluded Subsidiaries) (in each case, whether existing on the Closing Date or established, created or acquired after the Closing Date), unless and until such time as the respective Wholly-Owned Domestic Restricted Subsidiary is released from all of its obligations under the Collateral and Guaranty Agreement in accordance with the terms and provisions thereof.

“Supported QFC” shall have the meaning assigned to such term in Section 9.22.

“Taxes” shall mean all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Test Period” shall mean each period of four consecutive fiscal quarters of the Borrower then last ended, in each case taken as one accounting period; provided that in the case of determinations of the Corporate Indebtedness to EBITDA Ratio and the Interest Expense Coverage Ratio pursuant to this Agreement, such further adjustments (if any) as described in the provisos to such definitions contained herein shall be made to the extent applicable.

“Total Asset Amount” shall mean, at any time, the sum without duplication of (x) the aggregate RC Asset Contributions for all RC Assets at such time plus (y) the Encumbered Asset Amount minus (z) Total Operating Liabilities, in each case at such time.

“Total Asset Coverage Ratio” shall mean, at any time, the ratio of (x) the Total Asset Amount at such time to (y) the Total Commitment at such time.

“Total Asset Coverage Ratio Deficiency” shall mean the Total Asset Coverage Ratio is less than 2.50:1.00 at any time.

“Total Commitment” shall mean, at any time, the aggregate amount of the Commitments as in effect at such time. The initial Total Commitment is $150,000,000.

“Total Operating Liabilities” shall mean, at any time, the sum of (a) accounts payable and accrued expenses (net of prepaid expenses), plus (b) liability for losses under representations and warranties plus (c) any other liabilities (other than the Revolving Credit Exposure of the Lenders and any liabilities deducted in calculating the Encumbered Asset Contribution at such time), in each case of the Borrower and the Restricted Subsidiaries as at such time.

“Transactions” shall mean, collectively, (a) the execution, delivery and performance by

the Credit Parties of the Credit Documents to which they are a party and the making of the Borrowings hereunder and (b) the payment of related fees and expenses.

“Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “Rate” shall mean the Adjusted LIBO Rate and the Alternate Base Rate.

“UCC” shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction.

“United States” and “U.S.” shall each mean the United States of America.

“Unrestricted Subsidiary” shall mean (a) each Subsidiary of the Borrower listed on Schedule 1.01(e), (b) a Subsidiary of the Borrower designated by the Borrower as an Unrestricted Subsidiary pursuant to Section 5.15 subsequent to the Amendment No. 23 Effective Date and (c) a Subsidiary of an Unrestricted Subsidiary.

“U.S. Person” shall mean any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.

“U.S. Special Resolution Regimes” shall have the meaning assigned to such term in Section 9.22.

“USA PATRIOT Act” shall mean The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. No. 107-56 (signed into law October 26, 2001)).

“VA” shall mean the United States Department of Veterans Affairs or any successor thereto.

“Warehouse Facility” shall mean any financing arrangement of any kind, including, but not limited to, financing arrangements in the form of repurchase facilities, loan agreements, note issuance facilities and commercial paper facilities (excluding in all cases, Securitizations), with a financial institution or other lender or purchaser exclusively to (i) finance or refinance the purchase, origination or funding by the Borrower or a Restricted Subsidiary of, or provide funding to the Borrower or a Restricted Subsidiary through the transfer of, loans, mortgage

provision contained in this Agreement or any of the other Credit Documents shall also be permitted if such merger, wind-up, liquidation, dissolution, transfer, consolidation, amalgamation, assignment, sale, lease or other disposition is accomplished as a result of a division of or by a limited liability company, or an allocation of assets to a series of a limited liability company (or the unwinding of such a division or allocation).

Section 1.03. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar Loan”). Borrowings also may be classified and referred to by Type (e.g., a “Eurodollar Borrowing”).

Section 1.04. Limited Condition Acquisitions. (a) Notwithstanding any other provision of this Agreement, in connection with any action being taken in connection with and reasonably necessary to permit a Limited Condition Acquisition, for purposes of determining compliance with any provision of this Agreement constituting a condition which requires (1) compliance with any Financial Covenant on a Pro Forma Basis after giving effect to such Limited Condition Acquisition, (2) that no Default or Event of Default, as applicable, has occurred, is continuing or would result from any such action, as applicable or (3) any representations or warranties be true and correct as of the date of such action, as applicable, such condition shall, at the option of the Borrower (the Borrower’s election to exercise such option in connection with any Limited Condition Acquisition, an “LCA Election”), be deemed satisfied, so long as (x) no Default or Event of Default, as applicable, exists, such representations and warranties are true and correct and each such Financial Covenant is satisfied, as applicable, on a Pro Forma Basis, in each case, on the date the definitive agreements for such Limited Condition Acquisition are entered into (the “LCA Test Date”) after giving effect to such Limited Condition Acquisition and the actions to be taken in connection therewith (including any incurrence of Indebtedness and the use of proceeds thereof) as if such Limited Condition Acquisition and other actions had occurred on such date and (y) on the closing date of such Limited Condition Acquisition and on the date of the incurrence of any Indebtedness the proceeds of which are to be used to consummate such Limited Condition Acquisition, (i) no Event of Default under Section 7.01(a) or (e) shall have occurred and be continuing and (ii) the representations and warranties (x) that would constitute “specified representations” and (y) contained in any related acquisition agreement, purchase agreement or merger agreement to the extent that the Borrower or any affiliate of the Borrower would have the right to terminate its obligations under such agreement or decline to consummate the Limited Condition Acquisition as a result of a breach of such representation and warranty, shall be true and correct. For the avoidance of doubt, if the Borrower has made an LCA Election in connection with a Limited Condition Acquisition, and any Default or Event of Default (other than any Event of Default under Section 7.01(a) or (e)) occurs following the date the definitive agreements for the applicable Limited Condition Acquisition were entered into and prior to the consummation of such Limited Condition Acquisition, any such Default or Event of Default shall be deemed to not have occurred or be continuing solely for purposes of determining whether the consummation of such Limited Condition Acquisition or the incurrence of any Indebtedness to finance such Limited Condition Acquisition is permitted hereunder.

LIBO Rate shall no longer be made available, or used for determining the interest rate of loans (such specific date, the “Scheduled Unavailability Date”), then the Administrative Agent and the Borrower shall endeavor to establish an alternate rate of interest to the LIBO Rate that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time, and shall enter into an amendment to this Agreement to reflect such alternate rate of interest and such other related changes to this Agreement as may be applicable; provided that, if such alternate rate of interest shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement; provided, further, that (i) any such successor rate shall be applied by the Administrative Agent in a manner consistent with market practice and (ii) to the extent such market practice is not administratively feasible for the Administrative Agent, such successor rate shall be applied in a manner as otherwise reasonably determined by the Administrative Agent and the Borrower. Notwithstanding anything to the contrary in Section 13.1, such amendment shall become effective without any further action or consent of any other party to this Agreement so long as the Administrative Agent shall not have received, within five (5) Business Days of the date notice of such alternate rate of interest is provided to the Lenders, written notice from the Required Lenders stating that such Required Lenders object to such amendment. If no such alternate rate has been determined and the circumstances under clause (i) above exist or the Scheduled Unavailability Date has occurred (as applicable), the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, (x) the obligation of the Lenders to make or maintain loans at the Adjusted LIBO Rate shall be suspended, (to the extent of the affected Adjusted LIBOR Rate Loans or Interest Periods), and (y) the Adjusted LIBOR Rate component shall no longer be utilized in determining ABR. Upon receipt of such notice, the Borrower may revoke any pending request for a Loan of, conversion to or continuation of Adjusted LIBOR Rate Loans (to the extent of the affected loans at the Adjusted LIBOR Rate or Interest Periods) or, failing that, will be deemed to have converted such request into a request for loans at the Alternate Base Rate (subject to the foregoing clause (y)) in the amount specified therein.

ARTICLE 2

THE CREDITS

Section 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Loans to the Borrower, at any time and from time to time on and after the Closing Date, and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Lender’s Revolving Credit Exposure exceeding such Lender’s Commitment; provided that the aggregate principal amount of Loans borrowed on the Closing Date shall not exceed 50% of the Total Commitment. Within the limits set forth in the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay and reborrow Loans.

Section 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their applicable Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other

or prior to the Closing Date and which remain in full force and effect on the Closing Date and (y) filings which are necessary to perfect the security interests or liens created under the Security Documents), or exemption or other action by, any Governmental Authority is required to be obtained or made by, or on behalf of, any Credit Party to authorize, or is required to be obtained or made by, or on behalf of, any Credit Party in connection with, the execution, delivery and performance of any Credit Document or the legality, validity, binding effect or enforceability of any such Credit Document.

Section 3.05. Financial Statements; Financial Condition; Undisclosed Liabilities. (a) (i) The audited consolidated balance sheets of New Holdings and its Subsidiaries at December 31, 2018 and of Holdings and its Subsidiaries at December 31, 2017, and December 31, 2016 and December 31, 2015 and the related consolidated statements of income and cash flows and changes in stockholder’s equity of New Holdings and its Subsidiaries at December 31, 2018, and of Holdings and its Subsidiaries for each of the fiscal years of Holdings ended on such dates December 31, 2017 and December 31, 2016, in each case furnished to the Administrative Agent for delivery to the Lenders prior to the Amendment No. 23 Effective Date (it being understood that such financial information shall be deemed to have been delivered to the Administrative Agent by New Holdings’ or Holdings’ posting of such information on the SEC website on the Internet at sec.gov/edgar/searches.htm), present fairly in all material respects the consolidated financial position of New Holdings and its Subsidiaries at the dates of said financial statements December 31, 2018, and Holdings and its Subsidiaries at December 31, 2017 and December 31, 2016 and the results of operations for the respective periods covered thereby and (ii) the unaudited consolidated balance sheet of New Holdings and its Subsidiaries as at June 30, 20182019 and the related consolidated statements of income and cash flows and changes in stockholders’ equity of New Holdings and its Subsidiaries for the six-month period ended on such date, in each case furnished to the Administrative Agent for delivery to the Lenders prior to the Amendment No. 23 Effective Date (it being understood that such financial information shall be deemed to have been delivered to the Administrative Agent by New Holdings’ posting of such information on the SEC website on the Internet at sec.gov/edgar/searches.htm), present fairly in all material respects the consolidated financial condition of New Holdings and its Subsidiaries at the date of said financial statements and the results of operations for the respective periods covered thereby, subject to normal year-end adjustments and the absence of footnotes. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements and subject, in the case of the unaudited financial statements, to normal year-end audit adjustments and the absence of footnotes.

(b) [Reserved].

(c) On and as of the Closing Date, and after giving effect to the Transactions and to all Indebtedness (including the Loans) being incurred or assumed and Liens created by the Credit Parties in connection therewith and on and as of the date of any subsequent Borrowing (after giving effect to such Borrowing), (i) the sum of the fair value of the assets, at a fair valuation, of the Credit Parties (taken as a whole) will exceed their debts, (ii) the sum of the present fair salable value of the assets of the Credit Parties (taken as a whole) will exceed the amount that will be required to pay their debts as such debts become absolute and matured, (iii) the Credit

Parties (taken as a whole) have not incurred and do not intend to incur debts beyond their ability to pay such debts as such debts mature, and (iv) the Credit Parties (taken as a whole) will have sufficient capital with which to conduct their businesses. For purposes of this Section 3.05(c), “debt” means any liability on a claim, and “claim” means (a) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured or (b) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.

(d) Except as reflected in the financial statements described in Section 3.05(a), and except for the Indebtedness incurred under this Agreement or otherwise incurred in the ordinary course of business, there were as of the Closing Date no liabilities or obligations that would be required to be reflected in the consolidated financial statements of Holdings and its Subsidiaries by GAAP with respect to Holdings, the Borrower or any of the Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(e) Since December 31, 20172018, there has been no change in the business, operations, property, assets or financial condition of Holdings, the Borrower or any Restricted Subsidiary that either, individually or in the aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect.

Section 3.06. Litigation. Except as set forth on Schedule 3.06, there are no actions, investigations by a Governmental Authority, suits or proceedings at law or in equity pending or, to the Knowledge of the Borrower, threatened in writing (i) with respect to any Credit Document or (ii) that has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.

Section 3.07. True and Complete Disclosure. All written information (taken as a whole) (including, without limitation, all information contained in the Credit Documents) for purposes of or in connection with this Agreement, the other Credit Documents or any transaction contemplated herein or therein furnished by or on behalf of the Borrower in writing to the Administrative Agent, the Arranger or any Lender is complete and correct in all material respects on the date as of which such information is dated or certified and does not contain any untrue statement of a material fact or omit a material fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided (giving effect to all supplements and updates provided thereto prior to the Closing Date); provided that (a) no representation is made with respect to information of a general economic or general industry nature and (b) with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time of delivery of such projected financial information to the Administrative Agent and the Lenders.

Liens other than Permitted Liens. Each asset classified by the Borrower as an RC Asset satisfies the requirements set forth in the definition of “RC Asset” and each asset classified by the Borrower as an Encumbered Asset satisfies the requirements set forth in the definition of “Encumbered Asset”.

Section 3.12. Properties. No Credit Party owns any Real Property (other than REO Assets and Capitalized Lease Obligations) with a book value as of June 30, 20182019 of at least $1,000,000. The Borrower and each of the Restricted Subsidiaries has valid title to all material properties (and to all buildings, fixtures and improvements located thereon) owned by it, and a valid leasehold interest in the material properties leased by it, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and in each case free and clear of all Liens other than Permitted Liens.

Section 3.13. Capitalization. The authorized Equity Interests of the Borrower consists solely of Qualified Equity Interests. All outstanding Equity Interests of the Borrower have been duly and validly issued, are fully paid and have been issued free of preemptive rights.

Section 3.14. Subsidiaries. On and as of the Closing Date, (a) the Borrower has no Subsidiaries other than those Subsidiaries listed on Schedule 3.14 and (b) Schedule 3.14 sets forth the percentage ownership (direct and indirect) of the Borrower in each class of Equity Interests of each of its Subsidiaries and also identifies the direct owner thereof. All outstanding Equity Interests of each Subsidiary of the Borrower have been duly and validly issued and are fully paid (except as such rights may arise under mandatory provisions of applicable statutory law that may not be waived or otherwise agreed) and have been issued free of preemptive rights, and no Subsidiary of the Borrower has outstanding any securities convertible into or exchangeable for its Equity Interests or outstanding any right to subscribe for or to purchase, or any options or warrants for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of or any calls, commitments or claims of any character relating to, its Equity Interests or any stock appreciation or similar rights except as set forth on Schedule 3.14.

Section 3.15. Compliance with Statutes, Etc. The Borrower and each of the Restricted Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all Governmental Authorities in respect of the conduct of its business and the ownership of its property (including, without limitation, applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such non-compliances as could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

Section 3.16. Investment Company Act. Neither New Holdings, Holdings, the Borrower nor any Restricted Subsidiary is required to register as an “investment company”, or is subject to regulation, under the Investment Company Act of 1940, as amended.

Section 3.17. Insurance. Schedule 3.17 sets forth a listing of all material insurance maintained by the Borrower and the Restricted Subsidiaries as of the Closing Date, with the amounts insured (and any deductibles) set forth therein. As of the Closing Date, such insurance is in full force and effect and all premiums have been duly paid. The Borrower and the

of designation of any Investment, Indebtedness or Liens of such Subsidiary existing at such time. Any such designation shall be notified by the Borrower to the Administrative Agent by promptly delivering to the Administrative Agent a certificate of an Authorized Officer certifying that such designation complied with the foregoing provisions.

Section 5.16. Servicing Agreements.

(a) The Borrower will comply with, and the Borrower will cause any Restricted Subsidiary acting as servicer to comply with, (i) all obligations as the servicer under each of the Servicing Agreements and (ii) all generally accepted servicing customs and practices of the mortgage servicing industry, except in the case of each of clauses (i) and (ii) where failure to comply would not reasonably be expected to have a Material Adverse Effect.

(b) The Borrower shall promptly, and in no event later than five (5) Business Days after knowledge thereof, notify the Administrative Agent of any servicer termination event or event of default (excluding any such events resulting solely due to the breach of one or more collateral performance tests) under any Servicing Agreement or its receipt of a notice of actual termination of the Borrower’s or its Subsidiary’s right to service under any Servicing Agreement which evidences an intent to transfer such servicing to a third party.

ARTICLE 6

NEGATIVE COVENANTS

The Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Credit Document have been paid in full in cash (other than contingent indemnification and cost reimbursement obligations for which no claim has been made), unless the Required Lenders shall otherwise consent in writing:

Section 6.01. Liens. The Borrower will not, and the Borrower will not permit any of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets (real or personal, tangible or intangible, including Intellectual Property, and including Equity Interests or other securities of any Person, including any Restricted Subsidiary) of the Borrower or any Restricted Subsidiary, whether now owned or hereafter acquired, or on any income or revenues or rights in respect of any thereof; provided that the provisions of this Section 6.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as “Permitted Liens”):

(i) Liens for taxes, assessments or governmental charges or levies not delinquent for a period of more than 30 days or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate

merger or consolidation, or convey, sell, lease, transfer or otherwise dispose of all or any part of its property or assets, including the abandonment or other disposition of Intellectual Property (other than sales of inventory in the ordinary course of business), or consummate any sale-leaseback transactions with any Person, except that:

(i) Capital Expenditures shall be permitted;

(ii) the Borrower and the Restricted Subsidiaries may liquidate or otherwise dispose of obsolete or worn-out property in the ordinary course of business;

(iii) Investments may be made to the extent permitted by Section 6.05;

(iv) the Borrower and the Restricted Subsidiaries may sell assets (provided that any sale of less than all the capital stock or other Equity Interests of any Restricted Subsidiary in accordance with this clause (iv) shall be deemed to be an Investment by the Borrower or the applicable Restricted Subsidiary in the capital stock or other Equity Interests not so sold in an amount equal to the Fair Market Value of such capital stock or other Equity Interests and upon such sale the Borrower or such Restricted Subsidiary shall be deemed to have made an Investment in the applicable Subsidiary pursuant to Section 6.05(ix)(C) in an amount equal to all Investments in such Subsidiary outstanding at such time), so long as (v) no Event of Default then exists or would result therefrom (including as a result of any such deemed investment), (w) the Borrower or the respective Restricted Subsidiary receives at least Fair Market Value, (x) the consideration received by the Borrower or such Restricted Subsidiary consists of at least 75% cash or Cash Equivalents and is paid at the time of the closing of such sale; provided that, solely for the purposes of this clause (x), up to $25,000,000 in the aggregate of Designated Non-Cash Consideration for all asset sales received by the Borrower or such Restricted Subsidiary after the Closing during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date and not disposed of (and without giving effect to any subsequent change in value thereof), shall be deemed to be cash, (y) the aggregate amount of the cash and non-cash proceeds received from all assets sold pursuant to this clause (iv) shall not, during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date, exceed $50,000,000 (for this purpose, using the Fair Market Value of property other than cash) and (z) after giving effect to such sale, the Borrower shall be in compliance on a Pro Forma Basis with the Financial Covenants;

(v) the Borrower and each of the Restricted Subsidiaries may lease (as lessee) or license (as licensee) real or personal property in the ordinary course of business (so long as any such lease or license does not create a Capitalized Lease Obligation except to the extent permitted by Section 6.04(iv));

(vi) the Borrower and each of the Restricted Subsidiaries may sell or discount, in each case without recourse and in the ordinary course of business, accounts receivable

is not a Credit Party may pay Dividends to the Borrower or to any Wholly-Owned Restricted Subsidiary;

(ii) any Non-Wholly-Owned Subsidiary may pay Dividends to its shareholders, members or partners generally so long as the Borrower or a Restricted Subsidiary which owns the Equity Interests in the Restricted Subsidiary paying such Dividends receives at least its proportionate share thereof (based upon its relative holding of the Equity Interests in the Restricted Subsidiary paying such Dividends and taking into account the relative preferences, if any, of the various classes of Equity Interests of such Restricted Subsidiary);

(iii) so long as no Default or Event of Default shall have occurred and be continuing, the Borrower may repurchase, retire or otherwise acquire or retire for value common Equity Interests (or options, warrants or other rights to acquire common Equity Interests) of the Borrower (or make payments to New Holdings, Holdings or any Person of which the Borrower constitutes a Subsidiary to permit distributions to repurchase common Equity Interests (or options, warrants or other rights to acquire common Equity Interests thereof) of any such Person) from any future, current or former officer, director, manager or employee (or any spouses, successors, executors, administrators, heirs or legatees of any of the foregoing) of the Borrower, any of its Subsidiaries, New Holdings, Holdings or any Person of which the Borrower constitutes a Subsidiary, in an aggregate amount for all such payments, together with all payments made pursuant to Section 6.04(xxii), not to exceed, during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date, $10,000,000 plus the proceeds of “key-man” life insurance policies that are used to make such redemptions or repurchases;

(iv) the Borrower or any of its Restricted Subsidiaries may pay Dividends on its Qualified Equity Interests solely through the issuance of additional shares of Qualified Equity Interests of the Borrower or such Restricted Subsidiary (but not in cash), provided that in lieu of issuing additional shares of Qualified Equity Interests as Dividends, the Borrower or such Restricted Subsidiary may increase the liquidation preference of the shares of Qualified Equity Interests in respect of which such Dividends have accrued;

(v) the Borrower may pay cash Dividends so long as (A) the aggregate amount of Dividends paid pursuant to this clause (v), plus the aggregate amount of payments made pursuant to clause (x) of Section 6.15, does not exceed $25,000,000, during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date, exceed $75,000,000, (B) no Default or Event of Default then exists or would result therefrom, (C) after giving effect to the payment of such Dividend, the Total Asset Coverage Ratio shall not be less than 3.00:1.00 and the RC Asset Coverage Ratio shall not be less than 1.00:1.00, in each case, calculated on a Pro Forma Basis, and (D) prior to the payment of such Dividend, the Borrower shall have delivered to the Administrative Agent a certificate of an Authorized Officer of the Borrower certifying compliance with the

preceding sub-clauses (A), (B) and (C) and containing the calculations (in reasonable detail) required to establish compliance with preceding sub-clause (C);

(vi) Borrower may pay Permitted Tax Distributions;

(vii) the Borrower may pay Dividends or consummate any irrevocable redemption within 60 days after the date of declaration of such Dividend or notice of such redemption if the Dividend or payment of the redemption price, as the case may be, would have been permitted on the date of declaration or notice hereunder;

(viii) the Borrower may pay Dividends, either (i) through the application of net cash proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Borrower) of shares of Qualified Equity Interests of the Borrower or (ii) through the application of a substantially concurrent cash capital contribution (other than by a Subsidiary of the Borrower) received by the Borrower from its equityholders in respect of Qualified Equity Interests; provided that (x) no Event of Default then exists or would result therefrom or (y) the aggregate amount of Dividends paid pursuant to this clause (viii) shall not, during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date, exceed $1,000,000;

(ix) the Borrower may pay Dividends on its Qualified Equity Interests by exchanging such Qualified Equity Interests for shares of Qualified Equity Interests of New Holdings or Holdings (but not, for the avoidance of doubt, in cash) in accordance with the PNMAC Limited Liability Company Agreement;

(x) the Borrower may (A) repurchase Equity Interests in connection with the exercise of stock options or warrants to the extent such Equity Interests represent a portion of the exercise price of those stock options or warrants and (B) repurchase Equity Interests or options to purchase Equity Interests in connection with the exercise of stock options to the extent necessary to pay applicable withholding taxes; and

(xi) the Borrower may declare and pay Dividends to, or make loans or other cash transfers to, New Holdings, Holdings, or any Person of which the Borrower constitutes a Subsidiary to pay, without duplication as to amounts of:

(A) franchise taxes and other similar fees, taxes and expenses required to maintain the existence of the Borrower, New Holdings, Holdings, and any Person of which the Borrower constitutes a Subsidiary;

(B) customary salary, bonus and other benefits payable to officers and employees of New Holdings, Holdings, or any Person of which the Borrower constitutes a Subsidiary to the extent such salaries, bonuses and other benefits are attributable to the ownership or operations of New Holdings, Holdings, the Borrower and its Restricted Subsidiaries; and

(C) general corporate overhead expenses and other expenses incidental to being a public company (including, without limitation, audit, listing and legal expense) of New Holdings, Holdings or any Person of which the Person constitutes a Subsidiary to the extent such expenses are attributable to the ownership or operation of the Person and its Restricted Subsidiaries;

provided that the sum of (x) the aggregate amount of Dividends paid and loans pursuant to this clause (xi), (y) the aggregate amount of cash transfers not providing for repayment or reimbursement made pursuant to this clause (xi) shall not and (z) the total amount of loans and other cash transfers providing for repayment or reimbursement made pursuant to this clause (xi) then outstanding shall not, at any time, exceed $250,000 3,000,000.

Section 6.04. Indebtedness. The Borrower will not, and the Borrower will not permit any of the Restricted Subsidiaries to, directly or indirectly, contract, create, incur, assume or suffer to exist any Indebtedness, except:

(i) Indebtedness incurred pursuant to this Agreement and the other Credit Documents;

(ii) Indebtedness outstanding on the Amendment No. 23 Effective Date and listed on Schedule 6.04(ii) (as reduced by any permanent repayments of principal thereof) and, in each case, any subsequent extension, renewal or refinancing thereof, provided that the aggregate principal amount of the Indebtedness to be extended, renewed or refinanced does not increase from that amount outstanding (or, in the case of a revolving line of credit or a line of credit with unutilized amounts thereunder, the amount committed or otherwise available on the Amendment No. 23 Effective Date (as reduced by any permanent commitment reductions thereunder)) at the time of any such extension, renewal or refinancing, and neither the final maturity nor the weighted average life to maturity of such Indebtedness is decreased, such Indebtedness, if subordinated to the Obligations, remains so subordinated on terms no less favorable to the Lenders, and the original obligors in respect of such Indebtedness remain the only obligors thereon;

(iii) Indebtedness of the Borrower and the Restricted Subsidiaries under Interest Rate Protection Agreements or Other Hedging Agreements, so long as the entering into of such Interest Rate Protection Agreements or Other Hedging Agreements are bona fide hedging activities and are not for speculative purposes (as determined in good faith by the board of directors of the Borrower or senior management of the Borrower or such Restricted Subsidiary);

(iv) Indebtedness of the Borrower and the Restricted Subsidiaries evidenced by Capitalized Lease Obligations and purchase money Indebtedness secured by Liens of the type described in Section 6.01(vii), and, in each case, any subsequent extension, renewal or refinancing thereof, provided that the aggregate principal amount of the Indebtedness to be extended, renewed or refinanced does not increase from that amount outstanding, provided that in no event shall (x) the sum of the aggregate principal amount of all Capitalized Lease Obligations and purchase money Indebtedness permitted by this clause

not to exceed, at any time, the greater of (x) $50,000,000 and (y) 5% of Consolidated Tangible Net Worth as at such time;

(xxii) Investments by the Borrower or any Restricted Subsidiary in the form of loans extended to non-Affiliate borrowers in connection with any loan origination business of the Borrower or such Restricted Subsidiary in the ordinary course of business;

(xxiii) purchases of mortgage backed securities or similar debt instruments in the ordinary course of business;

(xxiv) Investments by the Borrower or any Restricted Subsidiary existing on the Amendment No. 23 Effective Date or made pursuant to binding commitments in effect on the Amendment No. 23 Effective Date and, in each case, set forth on Schedule 6.05, and Investments consisting of any extension, modification or renewal of any such Investment; provided that the amount of any such Investment may only be increased pursuant to this clause (xxiv) to the extent required by the terms of such Investment as in existence on the Amendment No. 23 Effective Date;

(xxv) endorsements for collection or deposit in the ordinary course of business;

(xxvi) to the extent constituting Investments, Dividends, loans and other cash transfers permitted pursuant to Section 6.03.

The amount, as of any date of determination, of (i) any Investment in the form of a loan, advance or extension of credit shall be the principal amount thereof outstanding on such date, minus any cash payments actually received by the applicable investor representing a payment or prepayment of in respect of principal of such Investment, but without any adjustment for writedowns or write-offs (including as a result of forgiveness of any portion thereof) with respect to such loan, advance or extension after the date of such loan, advance or extension, (ii) any Investment in the form of a guarantee shall be equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof, as determined in good faith by the Borrower, (iii) any Investment in the form of a transfer of Equity Interests or other non-cash property by the investor to the investee, including any such transfer in the form of a capital contribution, shall be the Fair Market Value of such Equity Interests or other property as of the time of the transfer or capital contribution, minus any payments actually received by such investor representing a return of capital of such Investment, but without any other adjustment for increases or decreases in value of, or write-ups, write-downs or write-offs with respect to, such Investment after the date of such Investment, and (iv) any Investment (other than any Investment referred to in clause (i), (ii) or (iii) above) by the specified Person in the form of a purchase or other acquisition of any Equity Interests, bonds, notes, debentures, evidences of Indebtedness or other securities of any other Person shall be the original cost of such Investment (including any Indebtedness assumed in connection therewith), minus the amount of any portion of such Investment that has been repaid to the investor in cash as a repayment of principal or a return of capital, but without any other adjustment for increases or

decreases in value of, or write-ups, write-downs or write-offs with respect to, such Investment after the date of such Investment.

Notwithstanding the foregoing, in no event shall any Credit Party make any Investment which results in or facilitates in any manner any Dividend not otherwise permitted under the terms of Section 6.03.

Section 6.06. Transactions with Affiliates. The Borrower will not, and the Borrower will not permit any of the Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including the purchase, sale, lease or exchange of any property, the rendering of any service or the payment of any management, advisory or similar fees) with any Affiliate (each, an “Affiliate Transaction”), other than on terms that taken as a whole are no less favorable to the Borrower or such Restricted Subsidiary as would reasonably be obtained by the Borrower or such Restricted Subsidiary at that time in a comparable arm’s-length transaction with a Person other than an Affiliate.

All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a Fair Market Value in excess of $10,000,000 shall be approved by the board of directors of the Borrower.

The restrictions set forth in the first and second paragraphs of this Section 6.06 shall not apply to:

(i) any employment or consulting agreement, employee benefit plan, officer or director indemnification agreement or any similar arrangement entered into by the Borrower or any Restricted Subsidiary in the ordinary course of business or approved in good faith by the board of directors of the Borrower and payments pursuant thereto and the issuance of Equity Interests (other than Disqualified Equity Interests) of the Borrower to directors and employees pursuant to stock option, equity incentive or stock ownership plans;

(ii) transactions between or among the Borrower and any of its Restricted Subsidiaries or between or among such Restricted Subsidiaries, in each case to the extent not prohibited under this Agreement;

(iii) any agreement or arrangement as in effect as of the Amendment No. 23 Effective Date and set forth on Schedule 6.06 or any transactions or payments contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Administrative Agent or the Lenders in any material respect than the original agreement as in effect on the Amendment No. 23 Effective Date;

(iv) Dividends permitted pursuant to Section 6.03;

(v) sales of Qualified Equity Interests and capital contributions to the Borrower from one or more holders of its Equity Interests;

(vi) the existence of, or the performance by the Borrower or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders’ agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Amendment No. 23 Effective Date and set forth on Schedule 6.06 and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by the Borrower or any of its Restricted Subsidiaries of obligations under any future amendment to any such existing agreement or under any similar agreement entered into after the Amendment No. 23 Effective Date shall be permitted by this clause (vi) only to the extent that the terms of any such amendment or new agreement, taken as a whole, are not disadvantageous to the Administrative Agent or the Lenders in any material respect;

(vii) transactions in which the Borrower or any Restricted Subsidiary, as the case may be, receives an opinion from a nationally recognized investment banking, appraisal or accounting firm that such Affiliate Transaction is fair, from a financial standpoint, to the Borrower or such Restricted Subsidiary;

(viii) in each case in the ordinary course of business and otherwise in compliance with the terms of this Agreement and on terms that, in the reasonable determination of the board of directors of the Borrower or the senior management of the Borrower, are fair to the Borrower and its Restricted Subsidiaries and consistent with prevailing market transactions, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party, (A) the provision of investment management, mortgage servicing, and mortgage banking services, including but not limited to mortgage loan fulfillment, mortgage loan warehouse services, mortgage loan origination, mortgage loan acquisition and similar services to Affiliates, (B) the purchase, sale or financing of assets between the Borrower and Affiliates, (C) sales of accounts receivable, or participations therein, or Securitization Assets or related assets in connection with any Permitted Securitization Indebtedness or Permitted Funding Indebtedness and (D) transactions with customers, clients, suppliers, contractors, joint venture partners or purchasers or sellers of goods or services that are Affiliates;

(ix) guarantees by a Sponsor, Holdings, New Holdings or any Person of which the Borrower constitutes a Subsidiary for obligations of the Borrower and its Restricted Subsidiaries, including the Guaranty provided by New Holdings and Holdings pursuant to Collateral and Guaranty Agreement;

(x) investments by a Sponsor, Holdings and New Holdings in securities of the Borrower or any Restricted Subsidiary so long as the investment is being offered generally to other investors on the same or more favorable terms or the securities are acquired in market transactions; and

Section 6.15. Prepayments of Other Indebtedness. The Borrower will not, and the Borrower will not permit any of the Restricted Subsidiaries to, directly or indirectly, voluntarily or optionally prepay, repurchase, redeem or otherwise optionally or voluntarily satisfy or defease, or make any payment in violation of any subordination terms of, whether in cash, property, securities or a combination thereof, or otherwise acquire for consideration (including as a result of any asset sale, change of control or similar event), or set apart any sum for the aforesaid purposes any Indebtedness incurred pursuant to Section 6.04(xvi) or (xxi), except (v) pursuant to a Permitted Refinancing thereof, (w) the conversion or exchange of any such Indebtedness to or for Qualified Equity Interests of New Holdings, Holdings or the Borrower, (x) additional payments so long as (A) the aggregate amount of payments made pursuant to this clause (x), plus

the aggregate amount of Dividends paid pursuant to Section 6.03(v), does not exceed $25,000,000, during any period of twelve (12) consecutive months commencing on the Amendment No. 3 Effective Date or any anniversary of the Amendment No. 3 Effective Date, exceed $75,000,000, (B) no Default or Event of Default then exists or would result therefrom, (C) after giving effect to such payment, the Total Asset Coverage Ratio shall not be less than 3.00:1.00 and the RC Asset Coverage Ratio shall not be less than 1.00:1.00, in each case, calculated on a Pro Forma Basis, and (D) prior to the making of such payment, the Borrower shall have delivered to the Administrative Agent a certificate of an Authorized Officer of the Borrower certifying compliance with the preceding sub-clauses (A), (B) and (C) and containing the calculations (in reasonable detail) required to establish compliance with preceding sub-clause (C).

Section 6.16. Use of Proceeds. The Borrower will not directly or indirectly use the proceeds of the Loans, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person, (i) to fund any activities or business of or with any Person, or in any country or territory, that, at the time of such funding, is, or whose government is, the subject of Sanctions, or (ii) in any other manner that would reasonably be expected to result in a violation of Sanctions by any Person (including any Person participating in the Loans, whether as lender, underwriter, advisor, investor, or otherwise).

No part of the proceeds of the Loans will be used, directly or indirectly, in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Law.

ARTICLE 7

EVENTS OF DEFAULT

Section 7.01. Events of Default. Upon the occurrence of any of the following specified events (each, an “Event of Default”):

(a) Payments. (i) Default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise or (ii) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in clause (i)) due under any Credit Document, when and as the same shall become due

Section 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Credit Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Credit Document is outstanding and unpaid and so long as the Commitments have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Credit Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent or any Lender.

Section 9.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower, the Agents and the Lenders and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

Section 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Administrative Agent, the Collateral Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

(b) Each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it), with the prior consent of the Borrower (which consent shall not be unreasonably withheld or delayed) and with the prior written consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed); provided, however, that (i) (A) the consent of the Borrower (1) shall not be required to any such assignment made (x) to another Lender, an Affiliate of a Lender or a Related Fund of a Lender or (y) after the occurrence and during the continuance of any Event of Default and (2) shall be deemed to have been given if the Borrower has not responded with within five Business Days of a request for such consent, and (B) the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall be in an integral multiple of $500,000 and not less than $2,500,000 (or, if less, the entire remaining amount of such Lender’s Commitment or Loans); provided that simultaneous assignments by two or more Related Funds shall be combined for purposes of determining whether the minimum assignment requirement is met, (ii) the parties to each assignment shall (A) execute and deliver to the Administrative Agent an Assignment and Acceptance via an electronic settlement system acceptable to the Administrative Agent or (B) if previously agreed with the Administrative Agent, manually execute and deliver to the Administrative Agent an Assignment and Acceptance, and, in each case, shall pay to the Administrative Agent a processing and

Predecessor Credit Agreement, as amended and restated hereby, continues in full force and effect

as so amended and restated by this Agreement. Nothing contained in this Agreement or any other Credit Document shall constitute or be construed as a novation of any of the Obligations.

Section 9.22. Certain ERISA Matters. (a) Each Lender (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and not, for the avoidance of doubt, to or for the benefit of the Borrower or any other Credit Party, that at least one of the following is and will be true:

(i) such Lender is not using “plan assets” (within the meaning of Section 3(42) of ERISA or otherwise) of one or more Benefit Plans with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments or this Agreement,

(ii) the transaction exemption set forth in one or more PTEs, such as PTE 8414 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement,

(iii) (A) such Lender is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Lender to enter into, participate in, administer and perform the Loans, the Commitments and this Agreement, (C) the entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Lender, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement, or

(iv) such other representation, warranty and covenant as may be agreed in writing between the Administrative Agent, in its sole discretion, and such Lender.

(a) In addition, unless either (1) sub-clause (i) in the immediately preceding clause (a) is true with respect to a Lender or (2) a Lender has provided another representation, warranty and covenant in accordance with sub-clause (iv) in the immediately preceding clause (a), such Lender further (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and

not, for the avoidance of doubt, to or for the benefit of the Borrower or any other Credit Party, that the Administrative Agent is not a fiduciary with respect to the assets of such Lender involved in such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement (including in connection with the reservation or exercise of any rights by the Administrative Agent under this Agreement, any Loan Document or any documents related hereto or thereto).

Section 9.23. Acknowledgement Regarding Any Supported QFC's. To the extent that the Loan Documents provide support, through a guarantee or otherwise, for Interest Rate Protection Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support” and each such QFC a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported QFC and QFC Credit Support (with the provision below applicable notwithstanding that the Loan Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States):

(a) In the event a Covered Entity that is party to a Supported QFC (each, a “Covered Party”) becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate of a Covered Party becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under the Loan Documents that might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported QFC and the Loan Documents were governed by the laws of the United States or a state of the United States. Without limitation of the foregoing, it is understood and agreed that rights and remedies of the parties with respect to a Defaulting Lender shall in no event affect the rights of any Covered Party with respect to a Supported QFC or any QFC Credit Support.

[Signature pages follow]

ANNEX B

TO AMENDMENT

[FORM OF] ACKNOWLEDGMENT AND CONFIRMATION

1. Reference is made to the Amendment No. 3 to Amended and Restated Credit Agreement, dated as of October 31, 2019 (the “Amendment”), by and among the Borrower, the Administrative Agent and the Lenders party thereto. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Amendment or the Amended Credit Agreement, as the case may be.

2. Each of the undersigned hereby (a) acknowledges receipt of a copy of the Amendment and (b) consents to and approves the execution, delivery and performance of the Amendment and the performance of the Amended Credit Agreement.

3. After giving effect to the Amendment and the amendments and modifications to the Credit Documents effectuated by the Amendment (collectively, the “Modifications”), each of the undersigned ratifies, reaffirms and agrees (i) that the Amendment and any other Credit Documents executed and delivered in connection therewith do not constitute a novation, or termination of the “Obligations” under and as defined in the Credit Agreement as in effect prior to the Amendment Effective Date, (ii) that such “Obligations” are in all respects continuing (as amended thereby) with only the terms thereof being modified to the extent provided in the Amendment, (iii) to perform all of its obligations under each Credit Document to which it is a party (whether as original signatory thereto, by supplement thereto, by operation of law or otherwise), and (iv) that all such obligations remain in full force and effect.

4. After giving effect to the Amendment and the Modifications effectuated thereby, each of the undersigned, with respect to each Credit Document to which it is a party (a) reaffirms and ratifies its unconditional guarantee of the full and punctual payment and performance of the Obligations as further set forth in the Guaranty, (b) reaffirms and ratifies the Liens and security interests granted by the undersigned under such Credit Document and (c) confirms and acknowledges that the Liens and security interests granted by the undersigned under such Credit Document remain in full force and effect and secure the payments of the “Obligations.”

5. After giving effect to the Amendment and the Modifications effectuated thereby, each of the undersigned agrees that, from and after the Amendment Effective Date, each reference to “the Credit Agreement” in the Credit Documents shall be deemed to be a reference to the Amended Credit Agreement.

6. THIS ACKNOWLEDGMENT AND CONFIRMATION SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

7. This Acknowledgment and Confirmation may be executed in any number of counterparts and by the different parties to this Acknowledgement and Confirmation in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Acknowledgement and Confirmation. Delivery of an executed counterpart of a signature page to this Acknowledgement and Confirmation by facsimile or other electronic image shall be effective as delivery of a manually executed counterpart of this Acknowledgement and Confirmation.

IN WITNESS WHEREOF, the parties hereto have caused this Acknowledgment and Confirmation to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

| PNMAC HOLDINGS, INC., |

| --- | | as a Guarantor | | By: | | Name: | | Title: | | PNMAC CAPITAL MANAGEMENT, LLC, | | as a Guarantor | | By: | | Name: | | Title: | | PENNYMAC FINANCIAL SERVICES, INC., | | as a Guarantor | | By: | | Name: | | Title: | | PENNYMAC LOAN SERVICES, LLC, | | as a Guarantor | | By: | | Name: | | Title: |

ANNEX C

TO AMENDMENT

Amended Schedules to Credit Agreement

[attached]

Schedule 1.01(c)

Encumbered Assets

Eligible Asset Classes	Percentage
Cash	100%
Short-term investments	100%
Mortgage-backed securities	95%
Mortgage loans held for sale	95%
Mortgage servicing rights	75%
Servicing advances, net	95%
Receivables from PennyMac Mortgage Investment Trust	95%
Receivables from PennyMac Financial Services, Inc.	100%
Derivative assets	75%
Servicer receivables	100%
Principal & interest receivables	95%
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors	100%
Deposits	100%
Investment in PennyMac Mortgage Investment Trust	100%
Furniture, fixtures, equipment and building improvements	100%
Capitalized software, net	100%
Mortgage loans eligible for repurchase	100%
Operating lease right-of-use assets	100%

Schedule 1.01(e)

Unrestricted Subsidiaries

PennyMac Loan Services, Inc.

Schedule 6.04(ii)

Existing Scheduled Indebtedness

1. Master Lease Agreement No. 30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Bank of America Leasing & Capital, LLC, as amended, with an aggregate outstanding principal amount of $23,881,463 (and an aggregate availability thereunder of $25,000,000) as of September 30, 2019

		pfsi\_Ex10\_89

Exhibit 10.89

EXECUTION VERSION

AMENDMENT NUMBER ONE

to the

LOAN AND SECURITY AGREEMENT

(Freddie Mac MSRs)

dated as of February 1, 2018

among

CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH

and

PENNYMAC LOAN SERVICES, LLC

and

PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC

This AMENDMENT NUMBER ONE (this “Amendment”) is made as of this 29th day of January, 2020, by and among Credit Suisse AG, Cayman Islands Branch (the “Lender”), Private National Mortgage Acceptance Company, LLC (the “Guarantor”) and PennyMac Loan Services, LLC (the “Borrower” and the “Servicer”)), and amends that certain Loan and Security Agreement, dated as of February 1, 2018 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), by and among the Lender, the Guarantor and the Borrower.

WHEREAS, the Lender, the Guarantor and the Borrower have agreed to amend the Loan Agreement as more particularly set forth herein.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the mutual covenants herein contained, the parties hereto hereby agree as follows:

SECTION 1. Amendment. Effective as of the date hereof:

(a) Section 1.1 of Schedule I of the Loan Agreement is hereby amended by deleting the defined term “Maturity Date” in its entirety and replacing such term with the following:

“Maturity Date” means April 24, 2020.

SECTION 2. Fees and Expenses. Borrower agrees to pay to Lender all fees and out of pocket expenses incurred by Lender in connection with this Amendment, including all reasonable fees and out of pocket costs and expenses of the legal counsel to Lender incurred in connection with this Amendment, in accordance with Section 3.03 of the Loan Agreement.

SECTION 3. Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Loan Agreement.

SECTION 4. Limited Effect. Except as amended hereby, the Loan Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment need not be made in the Loan Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Loan Agreement, any reference in any of such items to the Loan Agreement being sufficient to refer to the Loan Agreement as amended hereby.

SECTION 5. Representations. In order to induce Lender to execute and deliver this Amendment, each of the Borrower and the Guarantor hereby represents to Lender that as of the date hereof, (i) each of the Borrower and the Guarantor is in full compliance with all of the terms and conditions of the Facility Documents and remains bound by the terms thereof, and (ii) no default or event

of default has occurred and is continuing under the Facility Documents.

SECTION 6. Governing Law. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of New York, without regard to principles of conflicts of laws (other than Sections 5-1401 and 5‑1402 of the New York General Obligations Law which shall be applicable).

SECTION 7. Counterparts. For the purpose of facilitating the execution of this Amendment, and for other purposes, this Amendment may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. The parties intend that faxed signatures and electronically imaged signatures such as .pdf files shall constitute original signatures and are binding on all parties. The original documents shall be promptly delivered, if requested.

SECTION 8. Miscellaneous.

(a) This Amendment shall be binding upon the parties hereto and their respective successors and assigns.

(b) The various headings and sub-headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or the Loan Agreement or any provision hereof or thereof.

[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]

IN WITNESS WHEREOF, the Lender, the Guarantor and the Borrower have each caused their names to be duly signed to this Amendment by their respective officers thereunto duly authorized, all as of the date first above written.

CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH,
as Lender
By:	/s/ Dominic Obaditch
	Name:	Dominic Obaditch
	Title:	Authorized Signatory
By:	/s/ Kwaw de Graft-Johnson
	Name:	Kwaw de Graft-Johnson
	Title:	Authorized Signatory
PENNYMAC LOAN SERVICES, LLC,
as Borrower
By:	/s/ Pamela Marsh
	Name:	Pamela Marsh
	Title:	Senior Managing Director and Treasurer
PRIVATE NATIONAL MORTGAGE ACCEPTANCE COMPANY, LLC,
as Guarantor
By:	/s/ Pamela Marsh
	Name:	Pamela Marsh
	Title:	Senior Managing Director and Treasurer

[Signature Page to Amendment Number One to Loan and Security Agreement (CS – PLS)]

		pfsi\_EX\_21-1

Exhibit 21.1

LIST OF PENNYMAC FINANCIAL SERVICES, INC. SUBSIDIARIES

as of December 31, 2019

| Entity | Entity Type | State or Other<br>Jurisdiction <br>of Incorporation <br>or Organization |

| --- | --- | --- | | Private National Mortgage Acceptance Company, LLC | Limited Liability Company | Delaware | | PNMAC Capital Management, LLC | Limited Liability Company | Delaware | | PennyMac Loan Services, LLC | Limited Liability Company | Delaware | | PNMAC GMSR Issuer Trust | Statutory Trust | Delaware | | PNMAC Holdings, Inc. | Corporation | Delaware | | PennyMac Loan Services, Inc. | Corporation | California |

		pfsi\_EX\_23-1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-188929, 333-213602, 333-218388, 333-225582 and 333-232081 on Form S-8 and Registration Statement No. 333-191522 on Form S-3 of our reports dated February 28, 2020 relating to the consolidated financial statements of PennyMac Financial Services, Inc., and subsidiaries (the “Company”) which report expresses an unqualified opinion and includes explanatory paragraphs regarding (a) the Company’s election in 2018 to prospectively change its method of accounting for the classes of mortgage servicing rights it had accounted for using the amortization method, and (b) the Company’s change in 2019 of its method of accounting for leases using the modified retrospective approach, and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2019.

/s/ Deloitte & Touche LLP

Los Angeles, California

February 28, 2020

		pfsi\_Ex31\_1

Exhibit 31.1

CERTIFICATION

I, David A. Spector, certify that:

| 1. | I have reviewed this Annual Report on Form 10-K of PennyMac Financial Services, Inc.; |

| --- | --- |

| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |

| --- | --- |

| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |

| --- | --- |

| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures \(as defined in Exchange Act Rules 13\(a\)-15\(e\) and 15\(d\)-15\(e\)\) and internal control over financial reporting \(as defined in Exchange Act Rules 13a-15\(f\) and 15d-15\(f\)\) for the registrant and have: |

| --- | --- |

| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |

| --- | --- |

| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |

| --- | --- |

| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |

| --- | --- |

| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter \(the registrant's fourth fiscal quarter in the case of an annual report\) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |

| --- | --- |

| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors \(or persons performing the equivalent functions\): |

| --- | --- |

| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |

| --- | --- |

| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |

| --- | --- |

Date: February 28, 2020

| /s/ David A. Spector |

| --- | | David A. Spector | | President and Chief Executive Officer |

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

		pfsi\_Ex31\_2

Exhibit 31.2

CERTIFICATION

I, Andrew S. Chang, certify that:

| 1. | I have reviewed this Annual Report on Form 10-K of PennyMac Financial Services, Inc.; |

| --- | --- |

| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |

| --- | --- |

| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |

| --- | --- |

| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures \(as defined in Exchange Act Rules 13\(a\)-15\(e\) and 15\(d\)-15\(e\)\) and internal control over financial reporting \(as defined in Exchange Act Rules 13a-15\(f\) and 15d-15\(f\)\) for the registrant and have: |

| --- | --- |

| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |

| --- | --- |

| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |

| --- | --- |

| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |

| --- | --- |

| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter \(the registrant's fourth fiscal quarter in the case of an annual report\) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |

| --- | --- |

| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors \(or persons performing the equivalent functions\): |

| --- | --- |

| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |

| --- | --- |

| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |

| --- | --- |

Date: February 28, 2020

| /s/ Andrew S. Chang |

| --- | | Andrew S. Chang Senior Managing Director and | | Chief Financial Officer |

		pfsi\_Ex32\_1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of PennyMac Financial Services, Inc. (the “Company”) for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Spector, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

| 1. | The Report fully complies with the requirements of section 13\(a\) or 15\(d\) of the Securities Exchange Act of 1934; and |

| --- | --- |

| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |

| --- | --- |

Date: February 28, 2020

| /s/ David A. Spector |

| --- | | David A. Spector | | President and Chief Executive Officer |

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PennyMac Financial Services, Inc. and will be retained by PennyMac Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

		pfsi\_Ex32\_2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of PennyMac Financial Services, Inc. (the “Company”) for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew S. Chang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

| 1. | The Report fully complies with the requirements of section 13\(a\) or 15\(d\) of the Securities Exchange Act of 1934; and |

| --- | --- |

| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |

| --- | --- |

Date: February 28, 2020

| /s/ Andrew S. Chang |

| --- | | Andrew S. Chang Senior Managing Director and | | Chief Financial Officer |