UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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: 001-35916

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)

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

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

(818) 224-7442

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Class	Outstanding at May 5, 2017
Class A Common Stock, $0.0001 par value	23,391,416
Class B Common Stock, $0.0001 par value	49

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

March 31, 2017

TABLE OF CONTENTS

		Page
	Special Note Regarding Forward-Looking Statements	3
PART I. FINANCIAL INFORMATION		5
Item 1.		5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	74
PART II. OTHER INFORMATION		75
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	76

2

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

· changes to government mortgage modification programs;

· certain banking regulations that may limit our business activities;

· foreclosure delays and changes in foreclosure practices;

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

· our dependence on the multi-family and commercial real estate sectors for future originations and investments in commercial mortgage loans and other commercial real estate related loans;

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

· difficulties inherent in growing loan production volume;

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

3

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

· changes in prevailing interest rates;

· increases in loan delinquencies and defaults;

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

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

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

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

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

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

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

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

· the effect of public opinion on our reputation;

· our recent growth;

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

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

· our ability to detect misconduct and fraud; and

· our ability to mitigate cybersecurity risks and cyber incidents.

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

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

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31,		December 31,
	2017		2016
	(in thousands, except share amounts)
ASSETS
Cash (includes $60,835 and $91,788 pledged to creditors)	$	72,767	$	99,367
Short-term investments at fair value		116,334		85,964
Mortgage loans held for sale at fair value (includes $2,252,717 and $2,125,174 pledged to creditors)		2,277,751		2,172,815
Derivative assets		82,001		82,905
Servicing advances, net (includes valuation allowance of $46,804 and $45,425; $66,130 and $81,306 pledged to creditors)		317,513		348,306
Carried Interest due from Investment Funds pledged to creditors		70,778		70,906
Investment in PennyMac Mortgage Investment Trust at fair value		1,331		1,228
Mortgage servicing rights (includes $506,916 and $515,925 at fair value; $1,720,117 and $1,617,671 pledged to creditors)		1,725,061		1,627,672
Real estate acquired in settlement of loans		1,014		1,418
Furniture, fixtures, equipment and building improvements, net (includes $29,665 and $25,134 pledged to creditors)		31,568		31,321
Capitalized software, net (includes $1,919 and $515 pledged to creditors)		15,453		11,205
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		150,000		150,000
Receivable from PennyMac Mortgage Investment Trust		20,756		16,416
Receivable from Investment Funds		998		1,219
Mortgage loans eligible for repurchase		318,378		382,268
Other		49,674		50,892
Total assets	$	5,251,377	$	5,133,902
LIABILITIES
Assets sold under agreements to repurchase	$	2,034,808	$	1,735,114
Mortgage loan participation and sale agreements		241,638		671,426
Notes payable		436,725		150,942
Obligations under capital lease		31,178		23,424
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		277,484		288,669
Derivative liabilities		15,873		22,362
Accounts payable and accrued expenses		108,489		134,611
Mortgage servicing liabilities at fair value		15,994		15,192
Payable to Investment Funds		18,356		20,393
Payable to PennyMac Mortgage Investment Trust		164,743		170,036
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		78,712		75,954
Income taxes payable		31,968		25,088
Liability for mortgage loans eligible for repurchase		318,378		382,268
Liability for losses under representations and warranties		19,436		19,067
Total liabilities		3,793,782		3,734,546
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,917,545  and 22,426,779 shares, respectively		2		2
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49 shares		—		—
Additional paid-in capital		191,514		182,772
Retained earnings		175,428		164,549
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders		366,944		347,323
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC		1,090,651		1,052,033
Total stockholders' equity		1,457,595		1,399,356
Total liabilities and stockholders’ equity	$	5,251,377	$	5,133,902

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

5

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Quarter ended March 31,
	2017		2016
	(in thousands, except earnings per share)
Revenues
Net gains on mortgage loans held for sale at fair value:
From non-affiliates	$	88,651	$	93,476
Recapture payable to PennyMac Mortgage Investment Trust		(1,695)		(1,952)
		86,956		91,524
Mortgage loan origination fees:
From non-affiliates		24,195		21,427
From PennyMac Mortgage Investment Trust		1,379		1,007
		25,574		22,434
Fulfillment fees from PennyMac Mortgage Investment Trust		16,570		12,935
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates		106,467		91,327
From PennyMac Mortgage Investment Trust		10,486		11,453
From Investment Funds		496		701
Ancillary and other fees		11,866		11,452
		129,315		114,933
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities		(57,925)		(116,863)
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust		2,773		19,449
		(55,152)		(97,414)
Net mortgage loan servicing fees		74,163		17,519
Management fees:
From PennyMac Mortgage Investment Trust		5,008		5,352
From Investment Funds		366		560
		5,374		5,912
Carried Interest from Investment Funds		(128)		593
Net interest expense:
Interest income:
From non-affiliates		22,054		11,927
From PennyMac Mortgage Investment Trust		1,805		1,602
		23,859		13,529
Interest expense:
To non-affiliates		24,827		13,972
To PennyMac Mortgage Investment Trust		4,647		7,015
		29,474		20,987
Net interest expense		(5,615)		(7,458)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		139		(86)
Results of real estate acquired in settlement of loans		(25)		(435)
Other		1,465		463
Total net revenues		204,473		143,401
Expenses
Compensation		85,240		68,298
Servicing		26,843		20,887
Technology		11,356		6,847
Loan origination		4,133		4,186
Professional services		3,818		3,733
Other		11,051		9,311
Total expenses		142,441		113,262
Income before provision for income taxes		62,032		30,139
Provision for income taxes		7,646		3,596
Net income		54,386		26,543
Less: Net income attributable to noncontrolling interest		43,507		21,368
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,879	$	5,175
Earnings per common share
Basic	$	0.48	$	0.24
Diluted	$	0.47	$	0.23
Weighted average common shares outstanding
Basic		22,619		22,006
Diluted		77,143		76,194

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

6

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

	Class A Common Stock							Noncontrolling
								interest in Private
				Additional				National Mortgage		Total
	Number of	Par		paid-in		Retained		Acceptance		stockholders'
	shares	value		capital		earnings		Company, LLC		equity
	(in thousands)
Balance at December 31, 2015	21,991	$	2	$	172,354	$	98,470	$	791,524	$	1,062,350
Net income	—		—		—		5,175		21,368		26,543
Stock and unit-based compensation	47		—		1,107		—		3,270		4,377
Issuance of common stock in settlement of directors' fees	6		—		74		—		—		74
Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.	3		—		601		—		(601)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—		(131)		—		—		(131)
Balance at March 31, 2016	22,047	$	2	$	174,005	$	103,645	$	815,561	$	1,093,213
Balance at December 31, 2016	22,427	$	2	$	182,772	$	164,549	$	1,052,033	$	1,399,356
Net income	—		—		—		10,879		43,507		54,386
Stock and unit-based compensation	157		—		1,903		—		3,874		5,777
Issuance of common stock in settlement of directors' fees	5		—		84		—		—		84
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	329		—		8,763		—		(8,763)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—		(2,008)		—		—		(2,008)
Balance at March 31, 2017	22,918	$	2	$	191,514	$	175,428	$	1,090,651	$	1,457,595

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

7

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Quarter ended March 31,
	2017		2016
	(in thousands)
Cash flow from operating activities
Net income	$	54,386	$	26,543
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on mortgage loans held for sale at fair value		(86,956)		(91,524)
Accrual of servicing rebate payable to Investment Funds		45		75
Amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		55,152		97,414
Carried Interest from Investment Funds		128		(593)
Capitalization of interest on mortgage loans held for sale at fair value		(8,900)		(5,827)
Accrual of interest on excess servicing spread financing		4,647		7,015
Amortization of debt issuance costs		3,269		2,537
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(103)		122
Results of real estate acquired in settlement in loans		25		435
Stock and unit-based compensation expense		5,525		4,377
Provision for servicing advance losses		9,921		10,562
Depreciation and amortization		1,952		1,076
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(10,016,788)		(6,854,876)
Originations of mortgage loans held for sale		(1,061,212)		(1,218,163)
Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(936,948)		(424,813)
Sale and principal payments of mortgage loans held for sale		11,860,133		7,942,200
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		21,530		4,715
Repurchase of mortgage loans subject to representations and warranties		(5,303)		(6,913)
Decrease in servicing advances		21,251		1,897
Decrease in receivable from Investment Funds		176		122
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust		(4,206)		1,843
Decrease in deferred tax asset		—		3,570
Increase in other assets		(1,019)		(3,692)
Decrease in accounts payable and accrued expenses		(28,163)		(3,680)
Decrease in payable to Investment Funds		(2,037)		(1,586)
Decrease in payable to PennyMac Mortgage Investment Trust		(5,480)		(9,698)
Increase in income taxes payable		7,630		—
Net cash used in operating activities		(111,345)		(516,862)
Cash flow from investing activities
(Increase) decrease in short-term investments		(30,370)		18,055
Net settlement of derivative financial instruments used for hedging		(20,492)		38,579
Purchase of mortgage servicing rights		(203)		(11)
Purchase of furniture, fixtures, equipment and leasehold improvements		(2,329)		(8,939)
Acquisition of capitalized software		(4,526)		(1,378)
Increase in margin deposits and restricted cash		(2,434)		(4,551)
Net cash (used in) provided by investing activities		(60,354)		41,755
Cash flow from financing activities
Sale of assets under agreements to repurchase		5,815,923		7,614,302
Repurchase of assets sold under agreements to repurchase		(5,516,480)		(7,122,979)
Issuance of mortgage loan participation certificates		5,302,595		4,838,963
Repayment of mortgage loan participation certificates		(5,732,434)		(4,827,226)
Advances on notes payable		400,000		68,000
Repayment of notes payable		(110,633)		(1,828)
Advances of obligations under capital lease		10,298		—
Repayment of obligations under capital lease		(2,544)		(1,509)
Repayment of excess servicing spread financing		(14,632)		(20,881)
Settlement of excess servicing spread financing		—		(59,045)
Payment of debt issuance costs		(7,246)		(1,602)
Proceeds from common stock options exercised		252		—
Net cash provided by financing activities		145,099		486,195
Net (decrease) increase in cash		(26,600)		11,088
Cash at beginning of period		99,367		105,472
Cash at end of period	$	72,767	$	116,560

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

8

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

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

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

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

Presently, PCM has management agreements with, PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., (the “Master Fund”), both registered under the Investment Company Act of 1940, as amended, an affiliate of these registered funds, PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”) and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

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

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

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

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

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

9

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

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

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 fulfillment fees, mortgage loan servicing fees, management fees, Carried Interest, servicing recapture fees and net interest charged to these entities) totaled 16% and 30% of total net revenue for the quarters ended March 31, 2017 and 2016, respectively.

Note 3—Transactions with Affiliates

Transactions with PMT

Operating Activities

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

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

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

In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under the Company’s early purchase program, the Company is entitled to fees accruing (i) at a rate equal to $1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $35 for each mortgage loan that PMT acquires thereunder.

Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if the Company refinances through its consumer direct lending business mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to one of PMT’s wholly‑owned subsidiaries, without cost to PMT, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate UPB that is not less than 30% of the aggregate UPB of all the mortgage loans so originated.

10

Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, the Company may, at its option, pay cash to PMT in an amount equal to such fair value instead of transferring such MSRs. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Mortgage servicing rights and excess servicing spread recapture incurred included in Net gains on mortgage loans held for sale at fair value	$	1,695	$	1,952
Fulfillment fee revenue	$	16,570	$	12,935
Unpaid principal balance of mortgage loans fulfilled for PMT	$	4,631,906	$	3,259,363
Sourcing fees paid to PMT	$	2,871	$	1,950
Unpaid principal balance of mortgage loans purchased from PMT	$	9,574,717	$	6,495,722
Proceeds from sale of mortgage loans held for sale to PMT	$	21,530	$	4,715
Tax service fees received from PMT included in Mortgage loan origination fees	$	1,379	$	1,007
Early purchase program fees earned from PMT included in Mortgage loan servicing fees	$	5	$	1

Mortgage Loan Servicing

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

· The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $100 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month. To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

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

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

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

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

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

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

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

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

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

Investment Management Activities

The Company has a management agreement with PMT. 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%

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

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

“Net income” is defined as net income or loss 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.

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

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

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

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, from and after September 12, 2016, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

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

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

The Company received reimbursements from PMT for expenses as follows:

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

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

Conditional Reimbursement of Underwriting Fees

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

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

Investing Activities

Master Repurchase Agreement with the Issuer Trust

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

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

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

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

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

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

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell:
Interest income	$	1,805	$	—
Note receivable from PennyMac Mortgage Investment Trust:
Interest income	$	—	$	1,602
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received from PennyMac Mortgage Investment Trust	$	36	$	35
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		103		(121)
	$	139	$	(86)

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

Financing Activities

Spread Acquisition and MSR Servicing Agreements

Effective February 1, 2013, the Company entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which it sold to PMT or one of its wholly-owned subsidiaries the rights to receive certain ESS from MSRs acquired by the Company from banks and other third party financial institutions. The Company was generally required to service or subservice the related mortgage loans for the applicable Agency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement were

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

To the extent the Company refinanced any of the mortgage loans relating to the ESS sold to PMT, the 2/1/13 Spread Acquisition Agreement contained recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month was less than $200,000, the Company was, at its option, permitted to pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.

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

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

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

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

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

To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the 12/19/16 Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 12/19/16 Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the

16

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

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

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

Amounts Due from and Payable to PMT

Amounts due from and payable to PMT are summarized below:

	March 31,		December 31,
	2017		2016
	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	10,211	$	1,046
Management fees		5,008		5,081
Servicing fees		4,149		5,465
Conditional Reimbursement		900		900
Fulfillment fees		345		1,300
Interest on assets purchased under agreements to resell		106		253
Correspondent production fees		37		2,371
	$	20,756	$	16,416
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	153,827	$	162,945
Mortgage servicing rights recapture payable		536		707
Other		10,380		6,384
	$	164,743	$	170,036

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Investment Funds

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

The Carried Interest that the Company recognizes from the Investment Funds is determined by the Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the funds’ investors. The Company recognizes Carried Interest as a participation in the profits in the Investment Funds after the investors in the Investment Funds have achieved a preferred return as defined in the fund agreements. After the investors have achieved the preferred returns specified in the respective fund agreements, a “catch up” return accrues to the Company until it receives a specified percentage of the preferred return. Thereafter, the Company participates in future returns in excess of the preferred return at the rates specified in the fund agreements.

The amount of the Carried Interest that the Company receives depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company at period end is subject to adjustment based on future results of the Investment Funds and may be reduced as a result of subsequent performance. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of Carried Interest will only be reversed to the extent of amounts previously recognized.

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

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

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

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

	March 31,		December 31,
	2017		2016
	(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	42,365	$	42,427
PNMAC Mortgage Opportunity Fund Investors, LLC		28,413		28,479
	$	70,778	$	70,906
Receivable from Investment Funds:
Mortgage loan servicing fees	$	299	$	231
Mortgage loan servicing fee rebate deposit		255		250
Management fees		232		500
Expense reimbursements		212		238
	$	998	$	1,219
Payable to Investment Funds:
Deposits received to fund servicing advances	$	18,208	$	20,221
Other		148		172
	$	18,356	$	20,393

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company entered into a tax receivable agreement with owners of PennyMac other than the Company on the date of the IPO that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from such unitholders’ exchanges and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Based on the PennyMac unitholder exchanges to date, the Company has recorded a $78.7 million and $76.0 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2017 and December 31, 2016, respectively. The Company made no payments during the quarters ended March 31, 2017 and 2016.

Note 4—Earnings Per Share of Common Stock

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

Potentially dilutive shares of common stock include non-vested unit and stock-based compensation awards and PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding represented by the non-vested unit and stock-based compensation awards. The diluted earnings per share calculation assumes the exchange of PennyMac Class A units for shares of common stock. Accordingly, earnings attributable to the Company’s common stockholders is also adjusted to include the earnings allocated to the PennyMac Class A units after taking into account the income taxes that would be applicable to such earnings.

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

	Quarter ended March 31,
	2017		2016
	(in thousands, except per share amounts)
Basic earnings per share of common stock:
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,879	$	5,175
Weighted average shares of common stock outstanding		22,619		22,006
Basic earnings per share of common stock	$	0.48	$	0.24
Diluted earnings per share of common stock:
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,879	$	5,175
Effect of net income attributable to PennyMac Class A units exchangeable to common stock, net of income taxes		25,550		12,671
Diluted net income attributable to common stockholders	$	36,429	$	17,846
Weighted average shares of common stock outstanding		22,619		22,006
Dilutive shares:
PennyMac Class A units exchangeable to common stock		53,589		54,043
Common shares issuable under stock-based compensation plan		935		145
Diluted weighted average shares of common stock outstanding		77,143		76,194
Diluted earnings per share of common stock	$	0.47	$	0.23

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

	Quarter ended March 31,
	2017		2016
	(in thousands except for weighted-average exercise price)
Stock options (1)		1,562		2,106
Performance-based RSUs (2)		1,763		2,567
Total anti-dilutive stock-based compensation units		3,325		4,673
Weighted-average exercise price of anti-dilutive stock options (1)	$	18.15	$	15.80

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

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

Note 5—Loan Sales and Servicing Activities

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

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

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

(1) Net of guarantee fees paid to the Agencies.

	March 31,		December 31,
	2017		2016
	(in thousands)
Unpaid principal balance of mortgage loans outstanding	$	97,505,384	$	89,516,155
Delinquencies:
30-89 days	$	2,136,516	$	2,545,970
90 days or more:
Not in foreclosure	$	544,717	$	735,263
In foreclosure	$	200,047	$	137,856
Foreclosed	$	2,456	$	2,552
Bankruptcy	$	288,728	$	256,471

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

	March 31, 2017
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities	$	137,249,780	$	—	$	137,249,780
Affiliated entities		—		63,452,796		63,452,796
Mortgage loans held for sale		2,180,760		—		2,180,760
	$	139,430,540	$	63,452,796	$	202,883,336
Commercial real estate loans subserviced for the Company	$	—	$	42,870	$	42,870
Delinquent mortgage loans:
30 days	$	2,655,089	$	321,926	$	2,977,015
60 days		817,780		114,676		932,456
90 days or more:
Not in foreclosure		2,112,358		566,055		2,678,413
In foreclosure		922,343		573,943		1,496,286
Foreclosed		36,383		391,160		427,543
	$	6,543,953	$	1,967,760	$	8,511,713
Bankruptcy	$	842,519	$	264,962	$	1,107,481
Custodial funds managed by the Company (1)	$	2,732,225	$	779,880	$	3,512,105

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

21

	December 31, 2016
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities	$	131,252,002	$	—	$	131,252,002
Affiliated entities		—		60,886,717		60,886,717
Mortgage loans held for sale		2,101,283		—		2,101,283
	$	133,353,285	$	60,886,717	$	194,240,002
Commercial real estate loans subserviced for the Company	$	—	$	22,338	$	22,338
Delinquent mortgage loans:
30 days	$	3,240,640	$	407,177	$	3,647,817
60 days		1,035,871		145,720		1,181,591
90 days or more:
Not in foreclosure		2,203,895		566,496		2,770,391
In foreclosure		937,204		685,001		1,622,205
Foreclosed		28,943		448,017		476,960
	$	7,446,553	$	2,252,411	$	9,698,964
Bankruptcy	$	793,517	$	280,459	$	1,073,976
Custodial funds managed by the Company (1)	$	3,097,365	$	736,398	$	3,833,763

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

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

	March 31,		December 31,
State	2017		2016
	(in thousands)
California	$	43,053,075	$	42,303,952
Texas		16,717,643		16,037,426
Virginia		13,873,143		13,143,510
Florida		13,623,881		12,817,627
Maryland		9,155,970		8,564,923
All other states		106,459,624		101,372,564
	$	202,883,336	$	194,240,002

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk for the interest rate lock commitments (“IRLCs”) it makes to purchase or originate mortgage loans at specified interest rates, its inventory of mortgage loans held for sale and MSRs. The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.

22

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts.

	March 31, 2017						December 31, 2016
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements - IRLCs	$	68,618	$	—	$	68,618	$	65,848	$	—	$	65,848
Derivatives subject to a master netting arrangements:
Forward purchase contracts		69,321		—		69,321		77,905		—		77,905
Forward sale contracts		1,173		—		1,173		28,324		—		28,324
MBS put options		1,541		—		1,541		3,934		—		3,934
MBS call options		—				—		217				217
Put options on interest rate futures purchase contracts		1,630		—		1,630		3,109		—		3,109
Call options on interest rate futures purchase contracts		1,012		—		1,012		203		—		203
Netting		—		(61,294)		(61,294)		—		(96,635)		(96,635)
		74,677		(61,294)		13,383		113,692		(96,635)		17,057
	$	143,295	$	(61,294)	$	82,001	$	179,540	$	(96,635)	$	82,905

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

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

	March 31, 2017								December 31, 2016
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
			balance sheet								balance sheet
	Net amount								Net amount
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
IRLCs	$	68,618	$	—	$	—	$	68,618	$	65,848	$	—	$	—	$	65,848
Federal National Mortgage Association		4,624		—		—		4,624		—		—		—		—
Barclays Capital		4,181		—		—		4,181		12,002		—		—		12,002
RJ O'Brien		2,642		—		—		2,642		2,750		—		—		2,750
Others		1,936		—		—		1,936		2,305		—		—		2,305
	$	82,001	$	—	$	—	$	82,001	$	82,905	$	—	$	—	$	82,905

23

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. The assets sold under agreements to repurchase do not qualify for netting.

	March 31, 2017						December 31, 2016
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements - IRLCs	$	2,611	$	—	$	2,611	$	6,457	$	—	$	6,457
Derivatives subject to a master netting arrangement:
Forward purchase contracts		1,225		—		1,225		16,914		—		16,914
Forward sale contracts		65,843		—		65,843		85,035		—		85,035
Netting		—		(53,806)		(53,806)		—		(86,044)		(86,044)
		67,068		(53,806)		13,262		101,949		(86,044)		15,905
Total derivatives		69,679		(53,806)		15,873		108,406		(86,044)		22,362
Mortgage loans sold under agreements to repurchase:
Amount outstanding		2,036,366		—		2,036,366		1,736,922		—		1,736,922
Unamortized debt issuance costs		(1,558)		—		(1,558)		(1,808)		—		(1,808)
		2,034,808		—		2,034,808		1,735,114		—		1,735,114
	$	2,104,487	$	(53,806)	$	2,050,681	$	1,843,520	$	(86,044)	$	1,757,476

24

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

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

	March 31, 2017								December 31, 2016
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount
	(in thousands)
IRLCs	$	2,611	$	—	$	—	$	2,611	$	6,457	$	—	$	—	$	6,457
Credit Suisse First Boston Mortgage Capital LLC		882,443		(882,127)		—		316		961,533		(960,988)		—		545
Bank of America, N.A.		452,827		(444,148)		—		8,679		349,638		(342,769)		—		6,869
Morgan Stanley Bank, N.A.		280,735		(280,735)		—		—		189,756		(188,851)		—		905
JP Morgan Chase Bank, N.A.		198,331		(197,692)		—		639		135,322		(135,322)		—		—
Citibank, N.A.		129,814		(127,980)		—		1,834		81,555		(80,525)		—		1,030
Barclays Capital		54,203		(54,203)		—		—		28,467		(28,467)		—		—
Royal Bank of Canada		49,481		(49,481)		—		—		2,937		—		—		2,937
Goldman Sachs		443		—		—		443		823		—		—		823
BNP Paribas		—		—		—		—		1,151		—		—		1,151
Federal National Mortgage Association		—		—		—		—		1,033		—		—		1,033
Others		1,351		—		—		1,351		612		—		—		612
	$	2,052,239	$	(2,036,366)	$	—	$	15,873	$	1,759,284	$	(1,736,922)	$	—	$	22,362

Note 7—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their fair values. The application of fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its fair value as discussed in the following paragraphs.

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

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

· Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

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

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

25

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

Fair Value Accounting Elections

Management identified all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trustunder agreements to resell, as well as its originated MSRs relating to loans with initial interest rates of more than 4.5%, its purchased MSRs and its MSLs to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Management has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	116,334	$	—	$	—	$	116,334
Mortgage loans held for sale at fair value		—		1,950,069		327,682		2,277,751
Derivative assets:
Interest rate lock commitments		—		—		68,618		68,618
Forward purchase contracts		—		69,321		—		69,321
Forward sales contracts		—		1,173		—		1,173
MBS put options		—		1,541		—		1,541
Put options on interest rate futures purchase contracts		1,630		—		—		1,630
Call options on interest rate futures purchase contracts		1,012		—		—		1,012
Total derivative assets before netting		2,642		72,035		68,618		143,295
Netting		—		—		—		(61,294)
Total derivative assets		2,642		72,035		68,618		82,001
Investment in PennyMac Mortgage Investment Trust		1,331		—		—		1,331
Mortgage servicing rights at fair value		—		—		506,916		506,916
	$	120,307	$	2,022,104	$	903,216	$	2,984,333
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	277,484	$	277,484
Derivative liabilities:
Interest rate lock commitments		—		—		2,611		2,611
Forward purchase contracts		—		1,225		—		1,225
Forward sales contracts		—		65,843		—		65,843
Total derivative liabilities before netting		—		67,068		2,611		69,679
Netting		—		—		—		(53,806)
Total derivative liabilities		—		67,068		2,611		15,873
Mortgage servicing liabilities at fair value		—		—		15,994		15,994
	$	—	$	67,068	$	296,089	$	309,351

26

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	85,964	$	—	$	—	$	85,964
Mortgage loans held for sale at fair value		—		2,125,544		47,271		2,172,815
Derivative assets:
Interest rate lock commitments		—		—		65,848		65,848
Forward purchase contracts		—		77,905		—		77,905
Forward sales contracts		—		28,324		—		28,324
MBS put options		—		3,934		—		3,934
MBS call options		—		217		—		217
Put options on interest rate futures purchase contracts		3,109		—		—		3,109
Call options on interest rate futures purchase contracts		203		—		—		203
Total derivative assets before netting		3,312		110,380		65,848		179,540
Netting		—		—		—		(96,635)
Total derivative assets		3,312		110,380		65,848		82,905
Investment in PennyMac Mortgage Investment Trust		1,228		—		—		1,228
Mortgage servicing rights at fair value		—		—		515,925		515,925
	$	90,504	$	2,235,924	$	629,044	$	2,858,837
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	288,669	$	288,669
Derivative liabilities:
Interest rate lock commitments		—		—		6,457		6,457
Forward purchase contracts		—		16,914		—		16,914
Forward sales contracts		—		85,035		—		85,035
Total derivative liabilities before netting		—		101,949		6,457		108,406
Netting		—		—		—		(86,044)
Total derivative liabilities		—		101,949		6,457		22,362
Mortgage servicing liabilities at fair value		—		—		15,192		15,192
	$	—	$	101,949	$	310,318	$	326,223

27

As shown above, all or a portion of the Company’s mortgage loans held for sale, IRLCs, MSRs at fair value, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for the quarters ended March 31, 2017 and 2016:

	Quarter ended March 31, 2017
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2016	$	47,271	$	59,391	$	515,925	$	622,587
Purchases		690,472		—		203		690,675
Sales and repayments		(274,302)		—		—		(274,302)
Interest rate lock commitments issued, net		—		71,757		—		71,757
Mortgage servicing rights resulting from mortgage loan sales		—		—		5,984		5,984
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(1,928)		—		—		(1,928)
Other factors		—		25,119		(15,196)		9,923
		(1,928)		25,119		(15,196)		7,995
Transfers from Level 3 to Level 2		(133,831)		—		—		(133,831)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(90,260)		—		(90,260)
Balance, March 31, 2017	$	327,682	$	66,007	$	506,916	$	900,605
Changes in fair value recognized during the period relating to assets still held at March 31, 2017	$	(4,042)	$	25,119	$	(15,196)	$	5,881

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

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

28

	Quarter ended March 31, 2016
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Purchases		345,886		—		11		345,897
Sales and repayments		(283,732)		—		—		(283,732)
Interest rate lock commitments issued, net		—		78,463		—		78,463
Mortgage servicing rights resulting from mortgage loan sales		—		—		4,468		4,468
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		1,769		—		(48,876)		(47,107)
Other factors		—		71,670		(21,447)		50,223
		1,769		71,670		(70,323)		3,116
Transfers from Level 3 to Level 2		(79,424)		—		—		(79,424)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(122,021)		—		(122,021)
Balance, March 31, 2016	$	33,030	$	71,885	$	594,403	$	699,318
Changes in fair value recognized during the period relating to assets still held at March 31, 2016	$	501	$	71,885	$	(21,447)	$	50,939

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

	Quarter ended March 31, 2016
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,911		—		1,911
Mortgage servicing liabilities resulting from mortgage loan sales		—		5,409		5,409
Accrual of interest		7,015		—		7,015
Repayments		(20,881)		—		(20,881)
Settlement		(59,045)		—		(59,045)
Changes in fair value included in income		(19,449)		(61)		(19,510)
Balance, March 31, 2016	$	321,976	$	6,747	$	328,723
Changes in fair value recognized during the period relating to liabilities still outstanding at March 31, 2016	$	(12,239)	$	(61)	$	(12,300)

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

29

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

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

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

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

	March 31, 2017
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,013,417	$	1,912,907	$	100,510
90 days or more delinquent:
Not in foreclosure		239,165		242,444		(3,279)
In foreclosure		25,169		25,409		(240)
	$	2,277,751	$	2,180,760	$	96,991

	December 31, 2016
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,148,947	$	2,077,034	$	71,913
90 days or more delinquent:
Not in foreclosure		19,227		19,399		(172)
In foreclosure		4,641		4,850		(209)
	$	2,172,815	$	2,101,283	$	71,532

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Assets Measured at Fair Value on a Nonrecurring Basis

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

	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,198,651	$	1,198,651
Real estate acquired in settlement of loans		—		—		888		888
	$	—	$	—	$	1,199,539	$	1,199,539

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

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

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

Fair Value of Financial Instruments Carried at Amortized Cost

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

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

The Company’s borrowings carried at amortized cost do not have observable inputs and the fair value is measured using management’s estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” fair value liabilities due to the lack of observable inputs to estimate their fair values.

Valuation Techniques and Inputs

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

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

31

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

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s executive chairman and chief executive, chief financial, chief risk, chief enterprise operations and deputy chief financial officers.

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

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

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

Mortgage Loans Held for Sale

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

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

The Company’s right to purchase delinquent government guaranteed or insured mortgage loans arises as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased mortgage loans may be resold to third-party investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility for resale generally occurs when the repurchased mortgage loans held by the Company that are not saleable into active markets become current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms.

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

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

Key inputs	March 31, 2017	December 31, 2016
Discount rate:
Range	2.8% – 8.9%	2.6% – 8.8%
Weighted average	2.8%	3.0%
Twelve-month projected housing price index change:
Range	3.0% – 4.0%	2.0% – 4.5%
Weighted average	3.6%	3.7%
Voluntary prepayment / resale speed (1):
Range	0.1% – 21.4%	0.1% – 24.4%
Weighted average	19.8%	20.9%
Total prepayment speed (2):
Range	0.1% – 40.9%	0.1% – 39.8%
Weighted average	38.9%	34.3%

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

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

Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective mortgage loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

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

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

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

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

Hedging Derivatives

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

Mortgage Servicing Rights

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

.

34

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

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

(1) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”) curve for purposes of discounting cash flows relating to MSRs.

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

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

	March 31, 2017				December 31, 2016
	Fair		Amortized		Fair		Amortized
	value		cost		value		cost
	(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$	506,916	$	1,218,145	$	515,925	$	1,111,747
Unpaid principal balance of underlying mortgage loans	$	42,138,932	$	93,210,356	$	43,667,165	$	85,509,941
Weighted average note interest rate		4.1%		3.7%		4.1%		3.7%
Weighted average servicing fee rate (in basis points)		32		31		32		31
Key inputs:
Pricing spread (1):
Range		7.6% – 14.9%		7.6% – 14.9%		7.6% – 14.9%		7.6% – 14.9%
Weighted average		10.1%		10.7%		10.1%		10.7%
Effect on fair value of (2):
5% adverse change	$	(8,913)	$	(24,695)	$	(9,097)	$	(22,382)
10% adverse change	$	(17,510)	$	(48,422)	$	(17,872)	$	(43,889)
20% adverse change	$	(33,818)	$	(93,179)	$	(34,516)	$	(84,464)
Average life (in years):
Range		1.1 – 8.6		1.9 – 9.4		1.3 – 8.6		1.6 – 9.4
Weighted average		6.8		8.1		6.7		8.1
Prepayment speed (3):
Range		7.0% – 53.4%		6.5% – 40.3%		7.0% – 46.7%		6.6% – 43.9%
Weighted average		10.2%		8.5%		10.3%		8.7%
Effect on fair value of (2):
5% adverse change	$	(8,496)	$	(18,158)	$	(8,818)	$	(16,636)
10% adverse change	$	(16,706)	$	(35,753)	$	(17,336)	$	(32,750)
20% adverse change	$	(32,321)	$	(69,359)	$	(33,533)	$	(63,513)
Annual per-loan cost of servicing:
Range		$78 – $99		$79 – $99		$78 – $101		$79 – $101
Weighted average		$90		$89		$92		$92
Effect on fair value of (2):
5% adverse change	$	(5,370)	$	(9,461)	$	(5,612)	$	(8,890)
10% adverse change	$	(10,740)	$	(18,923)	$	(11,225)	$	(17,781)
20% adverse change	$	(21,479)	$	(37,845)	$	(22,450)	$	(35,562)

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

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

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

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

36

Excess Servicing Spread Financing at Fair Value

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

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

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

	March 31,	December 31,
	2017	2016
Carrying value (in thousands)	$277,484	$288,669
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$31,154,796	$32,376,359
Average servicing fee rate (in basis points)	34	34
Average excess servicing spread (in basis points)	19	19
Key inputs:
Pricing spread (1):
Range	3.8% – 4.8%	3.8% – 4.8%
Weighted average	4.4%	4.4%
Average life (in years):
Range	1.3 – 8.6	1.4 – 8.6
Weighted average	6.8	6.8
Annualized prepayment speed (2):
Range	7.0% – 46.6%	7.0% – 41.3%
Weighted average	10.3%	10.5%

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

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

Mortgage Servicing Liabilities

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

37

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

	March 31,		December 31,
	2017		2016
MSL and pool characteristics:
Carrying value (in thousands)	$	15,994	$	15,192
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,900,493	$	2,074,896
Weighted average servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		8.0%		8.0%
Average life (in years)		3.7		3.7
Prepayment speed (2)		31.5%		31.7%
Annual per-loan cost of servicing	$	427	$	497

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

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

Note 8—Mortgage Loans Held for Sale at Fair Value

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

	March 31,		December 31,
	2017		2016
	(in thousands)
Government-insured or guaranteed	$	1,857,429	$	1,984,020
Conventional conforming		92,640		141,524
Purchased from Ginnie Mae pools serviced by the Company		321,711		40,437
Repurchased pursuant to representations and warranties		5,971		6,834
	$	2,277,751	$	2,172,815
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,000,112	$	1,422,255
Mortgage loan participation and sale agreements		252,605		702,919
	$	2,252,717	$	2,125,174

Note 9—Derivative Financial Instruments

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

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

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

38

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

	March 31, 2017					December 31, 2016
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Interest rate lock commitments	3,727,441	$	68,618	$	2,611	4,279,611	$	65,848	$	6,457
Forward purchase contracts	9,292,052		69,321		1,225	12,746,191		77,905		16,914
Forward sales contracts	11,383,749		1,173		65,843	16,577,942		28,324		85,035
MBS put options	2,950,000		1,541		—	1,175,000		3,934		—
MBS call options	—		—		—	1,600,000		217		—
Put options on interest rate futures purchase contracts	1,160,000		1,630		—	1,125,000		3,109		—
Call options on interest rate futures purchase contracts	482,300		1,012		—	900,000		203		—
Call options on interest rate futures sale contracts	57,300		—		—	—		—		—
Interest rate swap futures purchase contracts	200,000		—		—	200,000		—		—
Total derivatives before netting			143,295		69,679			179,540		108,406
Netting			(61,294)		(53,806)			(96,635)		(86,044)
		$	82,001	$	15,873		$	82,905	$	22,362
Deposits placed with derivative counterparties included in Other assets, net		$	7,488				$	10,591

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

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

39

	Quarter ended March 31, 2016
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	period	Additions	expirations	period
	(in thousands)
Forward purchase contracts	5,254,293	30,812,375	(26,602,198)	9,464,470
Forward sale contracts	6,230,811	39,396,426	(35,208,331)	10,418,906
MBS put options	1,275,000	2,700,000	(2,600,000)	1,375,000
Put options on interest rate futures purchase contracts	1,650,000	3,025,000	(2,925,000)	1,750,000
Call options on interest rate futures purchase contracts	600,000	3,637,500	(300,000)	3,937,500

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

		Quarter ended March 31,
Hedged item	Income statement line	2017		2016
		(in thousands)
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale	$	1,708	$	(69,177)
Mortgage servicing rights	Net mortgage loan servicing fees - Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(22,166)	$	58,720

Note 10—Mortgage Servicing Rights

Carried at Fair Value

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Balance at beginning of period	$	515,925	$	660,247
Additions:
Purchases		203		11
Mortgage servicing rights resulting from mortgage loan sales		5,984		4,468
		6,187		4,479
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		1,992		(48,876)
Other changes in fair value (2)		(17,188)		(21,447)
Total change in fair value		(15,196)		(70,323)
Balance at end of period	$	506,916	$	594,403
	March 31,		December 31,
	2017		2016
	(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable	$	506,860	$	509,847

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

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

40

Carried at Lower of Amortized Cost or Fair Value

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Amortized cost:
Balance at beginning of period	$	1,206,694	$	798,925
Mortgage servicing rights resulting from mortgage loan sales		130,218		96,314
Amortization		(37,819)		(28,250)
Balance at end of period		1,299,093		866,989
Valuation allowance:
Balance at beginning of period		(94,947)		(47,237)
Reductions (additions)		13,999		(77,073)
Balance at end of period		(80,948)		(124,310)
Mortgage servicing rights, net at end of period	$	1,218,145	$	742,679
Fair value of mortgage servicing rights at beginning of period	$	1,112,302	$	766,345
Fair value of mortgage servicing rights at end of period	$	1,227,077	$	743,062
	March 31,		December 31,
	2017		2016
	(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable	$	1,213,257	$	1,107,824

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This estimate was developed with the inputs applicable to the March 31, 2017 valuation of MSRs. The inputs underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time.

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

41

Mortgage Servicing Liabilities Carried at Fair Value

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Balance at beginning of period	$	15,192	$	1,399
Mortgage servicing liabilities resulting from mortgage loan sales		4,059		5,409
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		3,290		2,960
Other changes in fair value (2)		(6,547)		(3,021)
Total change in fair value		(3,257)		(61)
Balance at end of period	$	15,994	$	6,747

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

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

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Contractual servicing fees	$	106,467	$	91,327
Ancillary and other fees:
Late charges		6,684		1,620
Other		925		395
	$	114,076	$	93,342

Note 11—Carried Interest Due from Investment Funds

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Balance at beginning of period	$	70,906	$	69,926
Carried Interest recognized during the period		(128)		593
Balance at end of period	$	70,778	$	70,519

The amount of the Carried Interest that will be received by the Company depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company is based on the cash flows that would be produced assuming termination of the Investment Funds at period end and may be reduced in future periods based on the performance of the Investment Funds in those periods. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of any reduction to Carried Interest will be limited to the amounts previously recognized.

Management expects the Carried Interest to be collected by the Company when the Investment Funds liquidate. The Investment Funds will continue in existence through December 31, 2017, as a result of PCM’s election to exercise the first of three one-year extensions provided in their limited liability company and limited partnership agreements.

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Note 12—Borrowings

The borrowing facilities described throughout this Note 12 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2017.

Assets Sold Under Agreement to Repurchase

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

Assets sold under agreements to repurchase are summarized below:

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

		March 31,			December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	2,036,366		$	1,736,922
Unamortized debt issuance costs		(1,558)			(1,808)
	$	2,034,808		$	1,735,114
Weighted average interest rate		2.91	%		3.02	%
Available borrowing capacity (2):
Committed	$	97,539		$	347,487
Uncommitted		828,095			857,591
	$	925,634		$	1,205,078
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	2,000,112		$	1,422,255
Mortgage servicing rights	$	1,182,293		$	1,479,322
Servicing advances	$	66,130		$	81,306
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	150,000		$	150,000
Margin deposits placed with counterparties (3)	$	3,000		$	3,000

(1) Excludes the effect of amortization of commitment fees totaling $2.3 million and $1.8 million for the quarters ended March 31, 2017 and 2016, respectively.

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

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

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

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

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

			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	87,945	April 28, 2017	April 28, 2017
Credit Suisse First Boston Mortgage Capital LLC	$	303,009	December 19, 2017	December 19, 2017
Bank of America, N.A.	$	47,347	May 26, 2017	May 26, 2017
Morgan Stanley Bank, N.A.	$	22,255	May 20, 2017	August 25, 2017
JP Morgan Chase Bank, N.A.	$	17,060	May 22, 2017	August 18, 2017
Citibank, N.A.	$	12,329	June 17, 2017	March 2, 2018
Barclays Bank PLC	$	96,522	June 17, 2017	December 1, 2017
Royal Bank of Canada	$	4,011	June 12, 2017	September 18, 2017

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

Mortgage Loan Participation and Sale Agreements

Certain of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan participation and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to the lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

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

The mortgage loan participation and sale agreements are summarized below:

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

(1) Excludes the effect of amortization of facility fees totaling $129,000 and $78,000 for the quarters ended March 31, 2017 and 2016, respectively.

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	March 31,			December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	241,723		$	671,562
Unamortized debt issuance costs		(85)			(136)
	$	241,638		$	671,426
Weighted average interest rate		2.23	%		2.02	%
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreements	$	252,605		$	702,919

Notes Payable

On February 16, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $400 million in Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended.  The Term Notes bear interest at a rate equal to one-month LIBOR plus 4.75% per annum. The Term Notes will mature on February 25, 2020 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2021 (unless earlier redeemed in accordance with the terms of the Term Notes). The Term Notes rank pari passu with the VFN issued by Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.

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

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

Notes payable are summarized below:

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

(1) Excluding the effect of amortization of debt issuance costs totaling $865,000 and $654,000 during the quarters ended March 31, 2017 and 2016, respectively.

45

	March 31,			December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	441,302		$	151,935
Unamortized debt issuance costs		(4,577)			(993)
	$	436,725		$	150,942
Weighted average interest rate		4.86	%		4.67	%
Unused amount	$	188,698		$	98,065
Assets pledged to secure notes payable:
Cash	$	60,835		$	91,788
Carried Interest	$	70,778		$	70,906
Mortgage servicing rights	$	537,824		$	138,349

Obligations under Capital Lease

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

Obligations under capital lease are summarized below:

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

	March 31,			December 31,
	2017			2016
	(in thousands)
Unpaid principal balance	$	31,178		$	23,424
Weighted average interest rate		2.82	%		2.48	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	29,665		$	25,134
Capitalized software	$	1,919		$	515

Excess Servicing Spread Financing

In conjunction with the Company’s purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has entered into sale and assignment agreements with PMT. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained all ancillary income associated with servicing the loans and a fixed base servicing fee. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances. The agreements are treated as financings and are carried at fair value with changes in fair value recognized in current period income.

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Following is a summary of ESS:

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

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

Note 13—Liability for Losses Under Representations and Warranties

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

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

Note 14—Income Taxes

The Company’s effective tax rates were 12.3% and 11.9% for the quarters ended March 31, 2017 and 2016, respectively. The difference between the Company’s effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into the Company’s shares, the portion of the Company’s income that will be subject to corporate federal and state statutory tax rates will increase, which will in turn increase the Company’s effective income tax rate.

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Note 15—Noncontrolling Interest

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	10,879	$	5,175
Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	$	8,763	$	601
Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC		329		3

	March 31,			December 31,
	2017			2016
Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC		70.0	%		70.6	%

Note 16—Net Gains on Mortgage Loans Held for Sale

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Cash (loss) gain:
Mortgage loans	$	(58,681)	$	21,401
Hedging activities		1,107		(72,541)
		(57,574)		(51,140)
Non-cash gain:
From non-affiliates:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		132,143		95,373
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(1,402)		(2,082)
Reduction in liability due to change in estimate		872		—
Change in fair value relating to mortgage loans and hedging derivatives held at period end:
Interest rate lock commitments		6,615		28,112
Mortgage loans		7,396		19,848
Hedging derivatives		601		3,365
		88,651		93,476
Recapture payable to PennyMac Mortgage Investment Trust		(1,695)		(1,952)
	$	86,956	$	91,524

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Note 17—Net Interest Expense

Net interest expense is summarized below:

	Quarter ended March 31,
	2017		2016
	(in thousands)
Interest income:
From non-affiliates:
Short-term investments	$	337	$	172
Mortgage loans held for sale at fair value		16,615		10,481
Placement fees relating to custodial funds		5,102		1,274
		22,054		11,927
From PennyMac Mortgage Investment Trust—Financings receivable		1,805		1,602
		23,859		13,529
Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase		13,955		8,660
Mortgage loan participation and sale agreements		1,132		781
Notes payable		4,930		1,598
Obligations under capital lease		159		63
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		3,623		2,105
Interest on mortgage loan impound deposits		1,028		765
		24,827		13,972
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		4,647		7,015
		29,474		20,987
	$	(5,615)	$	(7,458)

Note 18—Stock-based Compensation

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Performance-based RSUs	$	3,304	$	2,788
Stock options		1,276		1,080
Time-based RSUs		945		708
Exchangeable PNMAC units		—		25
	$	5,525	$	4,601

Following is a summary of equity award activity:

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

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	Quarter ended March 31, 2016
	Performance-		Stock		Time-based		Exchangeable
	based RSUs		options		RSUs		PNMAC units
	(in thousands)
December 31, 2015		2,351		1,845		271		132
Granted		813		962		251		—
Vested units and exercised options		—		—		(66)		(132)
Forfeited or canceled		(478)		(8)		(2)		—
March 31, 2016		2,686		2,799		454		—

Note 19—Supplemental Cash Flow Information

	Quarter ended March 31,
	2017		2016
	(inthousands)
Cash paid for interest	$	34,050	$	21,781
Cash paid for income taxes	$	16	$	25
Non-cash investing activity:
Mortgage servicing rights resulting from mortgage loan sales	$	136,202	$	100,782
Mortgage servicing liabilities resulting from mortgage loan sales	$	4,059	$	5,409
Non-cash financing activity:
Transfer of excess servicing spread pursuant to a recapture agreement with PennyMac Mortgage Investment Trust	$	1,573	$	1,911
Issuance of common stock in settlement of director fees	$	84	$	74

Note 20—Regulatory Capital and Liquidity Requirements

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

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

	March 31, 2017						December 31, 2016
Agency–company subject to requirement	Actual (1)			Requirement			Actual (1)			Requirement
	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac - PLS	$	1,345,228		$	351,076		$	1,289,464		$	335,883
Ginnie Mae - PLS	$	1,137,321		$	523,879		$	1,085,549		$	455,542
Ginnie Mae - PennyMac	$	1,322,056		$	576,266		$	1,261,565		$	501,097
HUD - PLS	$	1,137,321		$	2,500		$	1,085,549		$	2,500
Liquidity
Fannie Mae & Freddie Mac - PLS	$	178,336		$	48,037		$	179,230		$	45,930
Ginnie Mae - PLS	$	178,336		$	121,561		$	179,230		$	115,304
Tangible net worth / Total assets ratio
Fannie Mae and Freddie Mac – PLS		26	%		6	%		26	%		6	%

(1) Calculated in compliance with the respective Agency’s requirements.

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

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Note 21—Commitments and Contingencies

Litigation

The business of the Company involves the collection of numerous accounts, as well as the validation of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of March 31, 2017, the Company was not involved in any legal proceedings, claims, or actions that in management’s view would be reasonably likely to have a material adverse effect on the Company.

Commitments to Purchase and Fund Mortgage Loans

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

Leases

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

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

Twelve months ended March 31:	Future minimum lease payments
	(in thousands)
2018	$	10,782
2019		13,296
2020		13,766
2021		13,210
2022		11,325
Thereafter		39,496
	$	101,875

Commitment to Make Distributions to PennyMac Owners

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

Note 22—Segments and Related Information

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

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

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The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions, managing correspondent production activities for PMT and managing the acquired assets for the Advised Entities.

Financial performance and results by segment are as follows:

	Quarter ended March 31, 2017
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	62,837	$	24,119	$	86,956	$	—	$	86,956
Mortgage loan origination fees		25,574		—		25,574		—		25,574
Fulfillment fees from PennyMac Mortgage Investment Trust		16,570		—		16,570		—		16,570
Net mortgage loan servicing fees		—		74,163		74,163		—		74,163
Management fees		—		—		—		5,374		5,374
Carried Interest from Investment Funds		—		—		—		(128)		(128)
Net interest income (expense):		—		—		—
Interest income		12,936		10,923		23,859		—		23,859
Interest expense		8,822		20,641		29,463		11		29,474
		4,114		(9,718)		(5,604)		(11)		(5,615)
Other		945		471		1,416		163		1,579
Total net revenue		110,040		89,035		199,075		5,398		204,473
Expenses		62,536		75,619		138,155		4,286		142,441
Income before provision for income taxes	$	47,504	$	13,416	$	60,920	$	1,112	$	62,032
Segment assets at period end (2)	$	2,054,302	$	3,096,709	$	5,151,011	$	91,316	$	5,242,327

(1) All revenues are from external customers.

(2) Excludes parent company assets, which consist primarily of working capital of $9.0 million.

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	Quarter ended March 31, 2016
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	78,214	$	13,310	$	91,524	$	—	$	91,524
Mortgage loan origination fees		22,434		—		22,434		—		22,434
Fulfillment fees from PennyMac Mortgage Investment Trust		12,935		—		12,935		—		12,935
Net mortgage loan servicing fees		—		17,519		17,519		—		17,519
Management fees		—		—		—		5,912		5,912
Carried Interest from Investment Funds		—		—		—		593		593
Net interest income (expense):
Interest income		8,377		5,151		13,528		1		13,529
Interest expense		4,883		16,144		21,027		10		21,037
		3,494		(10,993)		(7,499)		(9)		(7,508)
Other		239		(232)		7		(64)		(57)
Total net revenue		117,316		19,604		136,920		6,432		143,352
Expenses		48,908		59,066		107,974		5,288		113,262
Income (loss) before provision for income taxes		68,408		(39,462)		28,946		1,144		30,090
Non-segment activities (2)		—		—		—		—		49
Income (loss) before provision for income taxes	$	68,408	$	(39,462)	$	28,946	$	1,144	$	30,139
Segment assets at period end (3)	$	1,751,604	$	2,118,587	$	3,870,191	$	91,980	$	3,962,171

(1) All revenues are from external customers

(2) Relates to parent company interest expense eliminated in consolidation.

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

Note 23—Recently Issued Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ASU 2016-01 requires that:

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

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

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

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

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

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

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

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation(Topic 718):  Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:

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

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

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

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

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

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

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

Note 24—Subsequent Events

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

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

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

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

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

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

Overview

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.

Our Company

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

We operate and control all of the business and affairs of Private National Mortgage Acceptance Company, LLC (“PennyMac”) and are its sole managing member. PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates.

We conduct our business in three segments: loan production, loan servicing (together, these two activities comprise our mortgage banking activities) and investment management. Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity (“GSE”). It is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”), and a servicer for the Home Affordable Modification Program (“HAMP”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service 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, PNMAC Capital Management, LLC (“PCM”), is a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisors Act of 1940, as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust, listed on the New York Stock Exchange under the ticker symbol PMT, PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment

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

Results of Operations

Our results of operations are summarized below:

	Quarter ended March 31,
	2017		2016
	(in thousands)
Revenues:
Net gains on mortgage loans held for sale at fair value	$	86,956	$	91,524
Mortgage loan origination fees		25,574		22,434
Fulfillment fees from PennyMac Mortgage Investment Trust		16,570		12,935
Net mortgage loan servicing fees		74,163		17,519
Management fees & Carried Interest		5,246		6,505
Net interest expense		(5,615)		(7,458)
Other		1,579		(58)
Total net revenue		204,473		143,401
Expenses		142,441		113,262
Provision for income taxes		7,646		3,596
Net income	$	54,386	$	26,543
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	47,504	$	68,408
Servicing		13,416		(39,462)
Total mortgage banking		60,920		28,946
Investment management		1,112		1,144
Non-segment activities (1)		—		49
	$	62,032	$	30,139
During the period:
Interest rate lock commitments issued	$	11,105,899	$	8,740,418
Fair value of mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust	$	10,016,788	$	6,850,276
Mortgage loans originated through consumer direct channel		1,061,212		1,222,763
	$	11,078,000	$	8,073,039
Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust	$	4,631,906	$	3,259,363
Unpaid principal balance of mortgage loan servicing portfolio:
Owned:
Mortgage servicing rights	$	135,349,287	$	112,836,878
Mortgage servicing liabilities		1,900,493		926,756
Mortgage loans held for sale		2,180,760		1,561,006
		139,430,540		115,324,640
Subserviced for Advised Entities		63,452,796		49,581,955
	$	202,883,336	$	164,906,595
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,458,590	$	1,414,503
Investment Funds		97,551		207,706
	$	1,556,141	$	1,622,209

(1) Relates to parent Company interest expense eliminated in consolidation.

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

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Net Gains on Mortgage Loans Held for Sale at Fair Value

Most of our mortgage loan production is centered in government-insured or guaranteed mortgage loans. Over recent periods, the margins on correspondent government-insured or guaranteed mortgage loans have tended to be higher than those on conventional correspondent production. Government-insured or guaranteed mortgage lending is not as competitive as conventional conforming mortgage lending due to the added complexity involved in the origination and servicing of government-insured or guaranteed mortgage loans.

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

During the quarter ended March 31, 2017, we recognized Net gains on mortgage loans held for sale at fair value totaling $87.0 million, a decrease of $4.6 million from the same period in 2016. The decrease was primarily due to a decrease in our profit margin on mortgage loan production partially offset by growth in our mortgage loan production volume.

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

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

Provision for Losses on Representations and Warranties

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

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sell in our Net gains on sale of mortgage loans held for sale at fair value. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

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

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

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

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
During the period:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of period	$	5,599	$	3,470
New indemnifications		689		139
Indemnified mortgage loans repaid or refinanced		—		(69)
Mortgage loans indemnified by PFSI at end of period	$	6,288	$	3,540
Repurchase activity
Total mortgage loans repurchased by PFSI	$	5,303	$	6,913
Less:
Mortgage loans repurchased by correspondent lenders		2,583		3,265
Mortgage loans repaid by borrowers or resold with defects resolved		3,219		327
Net mortgage loans (repaid or resold) repurchased by PFSI with losses chargeable to liability for representations and warranties	$	(499)	$	3,321
Net losses charged to liability for representations and warranties	$	161	$	484
At period end:
Unpaid principal balance of mortgage loans subject to representations and warranties	$	98,569,346	$	63,806,614
Liability for representations and warranties	$	19,436	$	22,209

During the quarter ended March 31, 2017, we repurchased mortgage loans totaling $5.3 million in UPB. We recorded losses of $161,000 net of recoveries from correspondent sellers as a result of these repurchases. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases and the loans sold continue to season, we expect that the level of repurchase activity may increase.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors,

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purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying mortgage loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.

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

Other mortgage loan production-related revenues

Mortgage loan origination fees increased $3.1 million during the quarter ended March 31, 2017, compared to the same period in 2016 primarily due to growth in the volume of correspondent purchases in our loan production activities.

Fulfillment fees from PMT, which represent fees we collect for services we perform on behalf of PMT in connection with its acquisition, packaging and sale of mortgage loans, are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT. Fulfillment fees increased $3.6 million during the quarter ended March 31, 2017 compared to the same period in 2016.  The effect of the increase in volume of mortgage loans we fulfilled for PMT was partially offset by a reduction in the average fulfillment fee rate we charged during 2017 as compared to 2016.

Summarized below are our fulfillment fees:

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

Net mortgage loan servicing fees

Our net mortgage loan servicing fees are summarized below:

	Quarter ended March 31,
	2017		2016
	(in thousands)
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates	$	106,467	$	91,327
From PennyMac Mortgage Investment Trust		10,486		11,453
From Investment Funds		496		701
Ancillary and other fees		11,866		11,452
		129,315		114,933
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing		(55,152)		(97,414)
Net mortgage loan servicing fees	$	74,163	$	17,519
Average mortgage loan servicing portfolio	$	198,646,419	$	162,734,071

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Amortization and realization of cash flows	$	(48,460)	$	(46,675)
Other changes, in fair value of, and reversal of (provision for) impairment of mortgage servicing rights and mortgage servicing liabilities		12,701		(128,908)
Change in fair value of excess servicing spread		2,773		19,449
Hedging results		(22,166)		58,720
Total fair value adjustments, net of hedging results		(6,692)		(50,739)
Total amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread	$	(55,152)	$	(97,414)
Average mortgage servicing rights balances:
Carried at lower of amortized cost or fair value	$	891,887	$	741,686
Carried at fair value		556,658		618,992
	$	1,448,545	$	1,360,678
Average mortgage servicing liabilities	$	15,155	$	3,628
Mortgage servicing rights at period end:
Carried at lower of amortized cost or fair value	$	1,218,145	$	742,679
Carried at fair value		506,916		594,403
	$	1,725,061	$	1,337,082
Mortgage servicing liabilities at period end	$	15,994	$	6,747

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

	March 31,		December 31,
	2017		2016
	(in thousands)
Mortgage loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	97,505,384	$	89,516,155
Acquired		37,843,903		39,660,951
		135,349,287		129,177,106
Mortgage servicing liabilities		1,900,493		2,074,896
Mortgage loans held for sale		2,180,760		2,101,283
		139,430,540		133,353,285
Subserviced for Advised Entities		61,144,328		58,327,748
Total prime servicing		200,574,868		191,681,033
Subserviced– Special servicing for Advised Entities		2,308,468		2,558,969
Total mortgage loans serviced	$	202,883,336	$	194,240,002

Net mortgage loan servicing fees increased $56.6 million during the quarter ended March 31, 2017, compared to the same period in 2016. The increase was due to a decrease of $42.3 million in amortization, impairment and MSR, MSL and ESS valuation adjustments reflecting the effect of a less adverse change in interest rates during the quarter ended March 31, 2017, compared to the same period in 2016, and a $14.4 million increase in servicing fees resulting from growth in our mortgage loan servicing portfolio from the first quarter of 2016 to the first quarter of 2017. The decrease in amortization and valuation adjustments reflects the change in the interest rate environment from 2016 to 2017. During the first quarter of 2016, interest rates decreased significantly, whereas during the first quarter of 2017, remained fairly stable. Decreasing interest rates make mortgage refinancing more attractive, increasing expectations of prepayment activities which decrease MSR fair values, causing fair value losses and impairment.

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Management fees and Carried Interest

Management fees and Carried Interest are summarized below:

	Quarter ended March 31,
	2017		2016
	(in thousands)
PennyMac Mortgage Investment Trust:
Base management	$	5,008	$	5,352
Performance incentive		—		—
		5,008		5,352
Investment Funds		366		560
Total management fees		5,374		5,912
Carried Interest		(128)		593
Total management fees and Carried Interest	$	5,246	$	6,505
Net assets of Advised Entities at period end:
PennyMac Mortgage Investment Trust	$	1,458,590	$	1,414,503
Investment Funds		97,551		207,706
	$	1,556,141	$	1,622,209

Management fees from PMT decreased $344,000 during the quarter ended March 31, 2017, compared to the same period in 2016. The decrease was primarily due to a decrease in PMT’s average shareholders’ equity upon which its base management fee is based.

Management fees from the Investment Funds decreased $194,000 during the quarter ended March 31, 2017, compared to the same period in 2016. The decrease was due to a reduction in the Investment Funds’ net asset values as a result of continued distributions to the Investment Funds’ investors following the end of the Investment Funds’ commitment period. 

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

Other revenues

Net interest expense decreased $1.8 million during the quarter ended March 31, 2017, compared to the same period in 2016. The decrease is primarily due to an increase in interest income on mortgage loans held for sale as a result of an increase in average mortgage loan inventory and an increase in the placement fees we receive relating to the custodial funds that we manage, partially offset by an increase in interest expense incurred to fund the growth in our average inventory of mortgage loans held for sale and to finance our MSRs.

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

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Expenses

Compensation

Our compensation expense is summarized below:

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

Compensation expense increased $16.9 million during the quarter ended March 31, 2017 compared to the same period in 2016. The increase in compensation expense was primarily due to the growth in our mortgage banking activities. Incentive compensation increased primarily due to higher attainment of profitability targets during the quarter ended March 31, 2017 compared to 2016. 

Servicing

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

Technology

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

Expenses Allocated to PMT

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

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

	Quarter ended March 31,
	2017		2016
	(in thousands)
Technology	$	457	$	1,145
Depreciation and amortization		408		399
Occupancy		379		573
Other		190		444
Total expenses	$	1,434	$	2,561

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Provision for Income Taxes

Our effective tax rates were 12.3% during the quarter ended March 31, 2017, compared to 11.9% during the same period in 2016. The difference between our effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into our shares, we expect an increase in allocated earnings that will be subject to corporate federal and state statutory tax rates, which will in turn increase our effective income tax rate.

Balance Sheet Analysis

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

	March 31,		December 31,
	2017		2016
	(in thousands)
ASSETS
Cash and short-term investments	$	189,101	$	185,331
Mortgage loans held for sale at fair value		2,277,751		2,172,815
Servicing advances, net		317,513		348,306
Investments in and advances to affiliates		173,085		168,863
Carried Interest due from Investment Funds		70,778		70,906
Mortgage servicing rights		1,725,061		1,627,672
Mortgage loans eligible for repurchase		318,378		382,268
Other		179,710		177,741
Total assets	$	5,251,377	$	5,133,902
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings	$	2,744,349	$	2,580,906
Payable to affiliates		539,295		555,052
Liability for mortgage loans eligible for repurchase		318,378		382,268
Other		191,760		216,320
Total liabilities		3,793,782		3,734,546
Stockholders' equity		1,457,595		1,399,356
Total liabilities and stockholders' equity	$	5,251,377	$	5,133,902

Total assets increased $117.5 million from $5.1 billion at December 31, 2016 to $5.3 billion at March 31, 2017. The increase was primarily due to an increase of $104.9 million in mortgage loans held for sale at fair value, resulting from growth in our mortgage loan production and an increase of $97.4 million in our investment in MSRs reflecting continued additions from our mortgage loan production activities, partially offset by a $63.9 million decrease in mortgage loans eligible for repurchase, reflecting increased level of early buyout activities, and a $30.8 million decrease in servicing advances due to normal seasonal fluctuations.

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

Cash Flows

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

	Quarter ended March 31,
	2017		2016		Change
	(in thousands)
Operating	$	(111,345)	$	(516,862)	$	405,517
Investing		(60,354)		41,755		(102,109)
Financing		145,099		486,195		(341,096)
Net (decrease) increase in cash	$	(26,600)	$	11,088	$	(37,688)

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

Operating activities

Net cash used in operating activities totaled $111.3 million and $516.9 million during the quarters ended March 31, 2017 and 2016, respectively, primarily due to the growth of our inventory of mortgage loans held for sale at fair value.

Investing activities

Net cash used in investing activities during the quarter ended March 31, 2017 totaled $60.4 million primarily due to a $30.4 million increase in short-term investments and $20.5 million in net settlements of derivative financial instruments used in our hedging of MSRs. Net cash provided by investing activities during the quarter ended March 31, 2016 totaled $41.8 million primarily due to $38.6 million in net settlements of derivative financial instruments received in our hedging of MSRs and to an $18.1 million reduction in short-term investments.

Financing activities

Net cash provided by financing activities totaled $145.1 million and $486.2 million during the quarters ended March 31, 2017 and 2016, respectively, primarily to finance the growth in our inventory of mortgage loans held for sale at fair value and MSRs.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, margin calls relating to hedges, and tax distributions to noncontrolling interest holders), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from borrowings and/or additional equity offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

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

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

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

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

· positive net income during each calendar quarter;

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

· a minimum tangible net worth of $500 million;

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

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

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

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

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

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

· a minimum 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 and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:

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

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

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

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

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

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

We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

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

Contractual Obligations

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

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

Payment obligations under these agreements are summarized below:

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

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

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(2) Software licenses include both volume and activity based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $1.3 million per month. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately 1.0 million at March 31, 2017. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended March 31, 2017, software license fees totaled $5.0 million.

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

			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility Maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	87,945	April 28, 2017	April 28, 2017
Credit Suisse First Boston Mortgage Capital LLC	$	303,009	December 19, 2017	December 19, 2017
Bank of America, N.A.	$	47,347	May 26, 2017	May 26, 2017
Morgan Stanley Bank, N.A.	$	22,255	May 20, 2017	August 25, 2017
JP Morgan Chase Bank, N.A.	$	17,060	May 22, 2017	August 18, 2017
Citibank, N.A.	$	12,329	June 17, 2017	March 2, 2018
Barclays Bank PLC	$	96,522	June 17, 2017	December 1, 2017
Royal Bank of Canada	$	4,011	June 12, 2017	September 18, 2017

Debt Obligations

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

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of March 31, 2017, we were in compliance in all material respects with these covenants.

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

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

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The borrowings have maturities as follows:

	Outstanding		Total		Committed
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	$	650,127	$	1,093,000	$	293,000	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC (3)	$	232,000	$	407,000	$	407,000	December 19, 2017
Bank of America, N.A.	$	444,148	$	500,000	$	225,000	May 26, 2017
Morgan Stanley Bank, N.A.	$	280,735	$	300,000	$	175,000	August 25, 2017
JP Morgan Chase Bank, N.A.	$	197,692	$	200,000	$	50,000	August 18, 2017
Citibank, N.A.	$	127,980	$	400,000	$	200,000	March 2, 2018
Barclays Bank PLC (4)	$	54,203	$	220,000	$	—	December 1, 2017
Royal Bank of Canada	$	49,481	$	135,000	$	75,000	September 18, 2017
Mortgage loan participation and sale agreements
Bank of America, N.A.	$	241,723	$	250,000	$	—	May 26, 2017
JP Morgan Chase Bank, N.A.	$	—		500,000	$	—	October 31, 2017
Notes payable
GMSR 2017-GT Term Note	$	400,000	$	400,000	$	—	February 25, 2020
Barclays Bank PLC (4)	$	41,302	$	80,000	$	80,000	December 1, 2017
Credit Suisse AG	$	—	$	150,000	$	150,000	November 17, 2017
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	31,178	$	—	$	—	March 23, 2020

(1) Outstanding indebtedness as of March 31, 2017.

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

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

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

Quantitative and Qualitative Disclosures About Market Risk

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

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

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Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of March 31, 2017, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	1,336,728		$	1,279,601		$	1,252,797		$	1,202,382		$	1,178,655		$	1,133,899
Change in fair value:
$	$	109,651		$	52,524		$	25,719		$	(24,695)		$	(48,422)		$	(93,179)
%		8.9	%		4.3	%		2.1	%		(2.0)	%		(3.9)	%		(7.6)	%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	1,305,931		$	1,265,196		$	1,245,826		$	1,208,919		$	1,191,324		$	1,157,718
Change in fair value:
$	$	78,854		$	38,119		$	18,749		$	(18,158)		$	(35,753)		$	(69,359)
%		6.4	%		3.1	%		1.5	%		(1.5)	%		(2.9)	%		(5.7)	%

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	1,264,922		$	1,246,000		$	1,236,538		$	1,217,616		$	1,208,155		$	1,189,232
Change in fair value:
$	$	37,845		$	18,923		$	9,461		$	(9,461)		$	(18,923)		$	(37,845)
%		3.1	%		1.5	%		0.8	%		(0.8)	%		(1.5)	%		(3.1)	%

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of March 31, 2017, 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	$	546,081		$	525,758		$	516,161		$	498,002		$	489,405		$	473,097
Change in fair value:
$	$	39,166		$	18,843		$	9,246		$	(8,913)		$	(17,510)		$	(33,818)
%		7.7	%		3.7	%		1.8	%		(1.8)	%		(3.5)	%		(6.7)	%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	544,091		$	524,830		$	515,714		$	498,419		$	490,209		$	474,594
Change in fair value:
$	$	37,176		$	17,915		$	8,798		$	(8,496)		$	(16,706)		$	(32,321)
%		7.3	%		3.5	%		1.7	%		(1.7)	%		(3.3)	%		(6.4)	%

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	528,395		$	517,655		$	512,285		$	501,545		$	496,175		$	485,436
Change in fair value:
$	$	21,479		$	10,740		$	5,370		$	(5,370)		$	(10,740)		$	(21,479)
%		4.2	%		2.1	%		1.1	%		(1.1)	%		(2.1)	%		(4.2)	%

73

Excess Servicing Spread Financing

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

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	288,543		$	282,908		$	280,171		$	274,848		$	272,261		$	267,227
Change in fair value:
$	$	11,059		$	5,424		$	2,686		$	(2,636)		$	(5,224)		$	(10,257)
%		4.0	%		2.0	%		1.0	%		(1.0)	%		(1.9)	%		(3.7)	%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	304,369		$	290,355		$	283,786		$	271,436		$	265,625		$	254,668
Change in fair value:
$	$	26,884		$	12,871		$	6,301		$	(6,049)		$	(11,859)		$	(22,817)
%		9.7	%		4.6	%		2.3	%		(2.2)	%		(4.3)	%		(8.2)	%

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

74

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of business. As of March 31, 2017, we were not involved in any such legal proceedings, claims or actions that management believes would be reasonably likely to have a material adverse effect on us.

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 9, 2017 and our Quarterly Reports on Form 10-Q filed thereafter.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

75

Item 6.  Exhibits

Exhibit Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
3.2	Amended and Restated Bylaws of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, 2013).
4.1	Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Amendment No. 4 to Form S-1 Registration Statement as filed with the SEC on April 29, 2013).
10.1	Fourth Amended and Restated Limited Liability Company Agreement of Private National Mortgage Acceptance Company, LLC, dated as of May 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.2	Exchange Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and Private National Mortgage Acceptance Company, LLC and the Company Unitholders (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.3	Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. Private National Mortgage Acceptance Company, LLC and each of the Members (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.4	Registration Rights Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and the Holders (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.5	Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and BlackRock Mortgage Ventures, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.6	Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and HC Partners LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.7†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.8†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 16, 2013).
10.9†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).
10.10†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible Participants (incorporated by reference to Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).
10.11†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).

76

Exhibit Number	Exhibit Description
10.12†	Form of PennyMac Financial Services, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Registrant’s Amendment No. 2 to Form S-1 Registration Statement as filed with the SEC on April 5, 2013).
10.13†	Employment Agreement, dated December 8, 2015, among Stanford L. Kurland, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.14†	First Amendment to Employment Agreement, dated as of April 5, 2017, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and Stanford L. Kurland (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 7, 2017).
10.15†	Employment Agreement, dated December 8, 2015, among David A. Spector, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.16†	First Amendment to Employment Agreement, dated as of April 5, 2017, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and David A. Spector (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 7, 2017).
10.17	Second Amended and Restated Management Agreement, dated as of September 12, 2016, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016).
10.18	Third Amended and Restated Flow Servicing Agreement, dated as of September 12, 2016, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016).
10.19	Amended and Restated Mortgage Banking Services Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016)
10.20	Amended and Restated MSR Recapture Agreement, dated as of September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 12, 2016)
10.21	Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.22	Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2014, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC (incorporated by reference to Exhibit 1.01 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 24, 2014).
10.23	Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 3, 2015, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.38 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).

77

Exhibit Number	Exhibit Description
10.24	Second Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, by and between PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.25	Second Amended and Restated Flow Servicing Agreement, dated as of August 1, 2008, as amended effective as of January 1, 2012, by and between PNMAC Mortgage Opportunity Fund Investors, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.15 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.26	Amendment No. 1 to the Second Amended and Restated Flow Servicing Agreement, dated as of December 5, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund Investors, LLC (incorporated by reference to Exhibit 10.43 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
10.27	Amended and Restated Flow Servicing Agreement, by and between PNMAC Mortgage Co., LLC and PennyMac Loan Services, LLC, dated August 1, 2010 (incorporated by reference to Exhibit 10.14 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).
10.28	Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Co., LLC (incorporated by reference to Exhibit 10.41 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
10.29	Amended and Restated Flow Servicing Agreement, dated as of August 1, 2010, by and between PNMAC Mortgage Opportunity Fund, LP and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.27 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).
10.30	Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund, L.P. (incorporated by reference to Exhibit 10.45 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
10.31	Investment Management Agreement, dated as of August 1, 2008, between PNMAC Mortgage Opportunity Fund Investors, LLC and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.17 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.32	Investment Management Agreement, as amended and restated May 26, 2011, by and between PNMAC Mortgage Opportunity Fund, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.16 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.33	Master Repurchase Agreement, dated as of March 17, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.34	Amendment No. 1 to Master Repurchase Agreement, dated as of July 21, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

78

Exhibit Number	Exhibit Description
10.35	Amendment No. 2 to Master Repurchase Agreement, dated as of March 23, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.36	Amendment No. 3 to Master Repurchase Agreement, dated as of August 28, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.37	Amendment No. 4 to Master Repurchase Agreement, dated as of January 3, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.38	Amendment No. 5 to Master Repurchase Agreement, dated as of March 28, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.39	Amendment No. 6 to Master Repurchase Agreement, dated as of January 31, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 6, 2014).
10.40	Amendment No. 7 to Master Repurchase Agreement, dated as of March 27, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.44 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.41	Amendment No. 8 to Master Repurchase Agreement, dated as of August 13, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.48 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014).
10.42	Amendment No. 9 to Master Repurchase Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.49 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.43	Amendment No. 10 to Master Repurchase Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.62 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.44	Guaranty, dated as of March 17, 2011, by Private National Mortgage Acceptance Company, LLC in favor of Bank of America, N.A (incorporated by reference to Exhibit 10.50 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.45	Amended and Restated Master Repurchase Agreement, dated as of March 3, 2017, among Citibank, N.A. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 8, 2017).
10.46	Guaranty Agreement, dated as of June 26, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Citibank, N.A (incorporated by reference to Exhibit 10.61 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

79

Exhibit Number	Exhibit Description
10.47	Loan and Security Agreement, dated as of April 30, 2015, among PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 6, 2015).
10.48	Amendment No. 1 to Loan and Security Agreement, dated as of October 30, 2015, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.87 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).
10.49	Amendment No. 2 to Loan and Security Agreement, dated as of November 10, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.92 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.50	Amendment No. 3 to Loan and Security Agreement, dated as of December 15, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.93 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.51	Amendment No. 4 to Loan and Security Agreement, dated as of January 28, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.94 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.52	Amendment No. 5 to Loan and Security Agreement, dated as of March 31, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.53	Amendment No. 6 to Loan and Security Agreement, dated as of September 26, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.71 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).
10.54	Amended and Restated Master Spread Participation Agreement, dated as of November 10, 2015, by and among PennyMac Loan Services, LLC and PennyMac Loan Services, LLC as the Initial Participant (incorporated by reference to Exhibit 10.189 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.55	Master Repurchase Agreement (Participation Certificates and Servicing), dated as of November 10, 2015, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on November 16, 2015).
10.56	Amendment No. 1 to Master Repurchase Agreement, dated as of December 19, 2016, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.74 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).
10.57	Third Amended and Restated Guaranty (Participation Certificates and Servicing), dated as of November 10, 2015, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 16, 2015).

80

Exhibit Number	Exhibit Description
10.58	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, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 3, 2017).
10.59	Amended and Restated Guaranty, dated as of April 28, 2017, by Private National Mortgage Acceptance LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 3, 2017).
10.60	Master Repurchase Agreement, dated as of July 2, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).
10.61	Amendment Number One to the Master Repurchase Agreement, dated as of August 26, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.49 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.62	Amendment Number Two to the Master Repurchase Agreement, dated as of January 28, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.63 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.63	Amendment Number Three to the Master Repurchase Agreement, dated as of June 30, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.70 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.64	Amendment Number Four to the Master Repurchase Agreement, dated as of June 29, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.98 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
10.65	Amendment Number Five to the Master Repurchase Agreement, dated as of July 27, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 27, 2015).
10.66	Amendment Number Six to the Master Repurchase Agreement, dated as of November 9, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.118 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.67	Amendment Number Seven to the Master Repurchase Agreement, dated July 26, 2016, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.91 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
10.68	Amendment Number Eight to the Master Repurchase Agreement, dated August 26, 2016, by and between PennyMac Loan Services, LLC,  Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).
10.69	Guaranty Agreement, dated as of July 2, 2013, by Private National Mortgage Acceptance Company, LLC in favor of Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).
10.70	Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 13, 2014, by and among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Bank of America, N.A. (incorporated by reference to Exhibit 10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

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Exhibit Number	Exhibit Description
10.71	Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.72	Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 22, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.122 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.73	Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
10.74	Amended and Restated Guaranty, dated as of August 13, 2014, by Private National Mortgage Acceptance Company, LLC in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.73 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.75	Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.124 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.76	Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.104 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
10.77	Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of June 1, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.100 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
10.78	Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp., PennyMac Holdings, LLC, any other parties signing this Agreement as owner of Mortgage Loans listed in Schedule I and any New Owners, PennyMac Loan Services, LLC, and Midland Loan Services, a division of PNC Bank, National Association (incorporated by reference to Exhibit 10.127 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).
10.79	Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.102 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
10.80	Master Repurchase Agreement, dated as of December 4, 2015, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).
10.81	Amendment Number One to Master Repurchase Agreement, dated as of September 29, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.97 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).
10.82	Amendment Number Two to Master Repurchase Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.101 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

82

Exhibit Number	Exhibit Description
10.83	Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 4, 2015, between PennyMac Loan Services, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).
10.84	Amendment Number One to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 2, 2016, between PennyMac Loan Services, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.103 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).
10.85	Loan and Security Agreement, dated as of December 4, 2015, among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).
10.86	Amendment Number One to the Loan and Security Agreement, dated as of February 26, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on March 3, 2016)
10.87	Amendment Number Two to the Loan and Security Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.106 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).
10.88	Amendment Number Three to the Loan and Security Agreement, dated as of January 30, 2017, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.107 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).
10.89	Master Lease Agreement No.  30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.90	Addendum to Master Lease Agreement No.  30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.91	Schedule Number 001 to Master Lease Agreement, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.92	Schedule Number 002 to Master Lease Agreement, dated as of May 4, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.140 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.93	Schedule Number 003 to Master Lease Agreement, dated as of November 3, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).

83

Exhibit Number	Exhibit Description
10.94	Schedule Number 004 to Master Lease Agreement, dated as of March 23, 2017, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2017).
10.95	Guaranty, dated as of December 9, 2015, by PennyMac Loan Services, LLC in favor of Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).
10.96	Amended and Restated Credit Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, the lenders that are parties thereto, Credit Suisse AG and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 22, 2016).
10.97	Amended and Restated Collateral and Guaranty Agreement, dated November 18, 2016, by and among Private National Mortgage Acceptance Company, LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac Financial Services, Inc., PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 22, 2016).
10.98	Master Repurchase Agreement, dated as of August 19, 2016, between PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).
10.99	Guaranty, dated as of August 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank. N.A. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).
10.100	Master Repurchase Agreement, dated as of September 19, 2016, between Royal Bank of Canada and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 22, 2016).
10.101	Base Indenture, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.102	Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).
10.103	Series 2016-MSRVF1 Indenture Supplement to Indenture, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.104	Series 2016-MBSADV1 Indenture Supplement to Indenture, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.122 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 9, 2017).

84

Exhibit Number	Exhibit Description
10.105	Omnibus Amendment No. 1 to the Series 2016-MSRVF1 Indenture Supplement and Series 2016-MBSADV1 Indenture Supplement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).
10.106	Series 2017-GT1 Indenture Supplement, dated as of February 16, 2017, to Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).
10.107	Master Repurchase Agreement, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.108	Amendment No. 1 to Master Repurchase Agreement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC and consented to by Citibank, N.A., Credit Suisse AG, Cayman Islands Branch, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).
10.109	Guaranty, dated as of December 19, 2016, made by Private National Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR ISSUER TRUST (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.110	Amendment No. 1 to Guaranty, dated as of February 16, 2017, by and between PNMAC GMSR ISSUER TRUST and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).
10.111	Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and PennyMac Mortgage Investment Trust,  (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.112	Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.113	Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.114	Master Repurchase Agreement, dated as of December 19, 2016, by and among, Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).
10.115	Guaranty, dated as of December 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.9 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

85

Exhibit Number	Exhibit Description
10.116	Master Repurchase Agreement, dated as of November 1, 2016, among JPMorgan Chase Bank, National Association, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).
10.117	Guaranty, dated as of November 1, 2016, by Private National Mortgage Acceptance Company, LLC, in favor of JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).
31.1	Certification of 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.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2017 and March 31, 2016, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2017 and March 31, 2016, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2017 and March 31, 2016 and (v) the Notes to the Consolidated Financial Statements.
*	The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
†	Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

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

	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)
Dated: May 9, 2017	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		President and Chief Executive Officer
Dated: May 9, 2017	By:	/s/ ANDREW S. CHANG
		Andrew S. Chang
		Chief Financial Officer

87