Note 11—Borrowings

The borrowing facilities described throughout this Note 11 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2018.

Assets Sold Under Agreement to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale at fair value or participation certificates backed by MSRs. Eligible mortgage loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds rate or on LIBOR depending on the terms of the respective agreements. 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 September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,563,053		$	1,960,332		$	1,618,008		$	1,854,786
Weighted average interest rate (1)		3.91	%		3.23	%		3.72	%		3.15	%
Total interest expense (2)	$	4,676		$	19,203		$	15,943		$	52,249
Maximum daily amount outstanding	$	2,201,880		$	2,564,756		$	2,380,121		$	2,581,199


		September 30,			December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,738,839		$	2,380,866
Unamortized premiums and debt issuance costs, net		799			672
	$	1,739,638		$	2,381,538
Weighted average interest rate		3.93	%		3.24	%
Available borrowing capacity (3):
Committed	$	449,370		$	316,503
Uncommitted		2,796,791			2,257,631
	$	3,246,161		$	2,574,134
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	1,841,097		$	2,530,299
Servicing advances (4)	$	102,222		$	114,643
Mortgage servicing rights (4)	$	2,539,575		$	2,098,067
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	133,128		$	144,128
Margin deposits placed with counterparties (5)	$	3,750		$	3,750

(1)

Excludes the effect of amortization of net premiums totaling $10.9 million and $29.7 million for the quarter and nine months ended September 30, 2018, respectively, and commitment fees and issuance costs totaling $3.0 million and $7.9 million for the quarter and nine months ended September 30, 2017, respectively.

(2)

In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $12.8 million and $35.5 million of such incentives as a reduction in Interest expense during the quarter and nine months ended September 30, 2018, respectively. The master repurchase agreement is subject to a rolling six-month term through August 21, 2019, unless terminated earlier at the option of the lender. There can be no assurance that the lender will not terminate this agreement before its stated maturity.

(3)

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

(4)

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

(5)

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

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


Remaining maturity at September 30, 2018	Balance
	(dollars in thousands)
Within 30 days	$	444,530
Over 30 to 90 days		1,239,074
Over 90 to 180 days		5,235
Over one to two years		50,000
Total assets sold under agreements to repurchase	$	1,738,839
Weighted average maturity (in months)		2.3

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 under agreements to repurchase is summarized by counterparty below as of September 30, 2018:


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	1,290,904	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC	$	33,078	October 24, 2018	April 26, 2019
Deutsche Bank AG	$	84,185	December 19, 2018	August 21, 2019
Bank of America, N.A.	$	17,796	October 12, 2018	October 12, 2018
JP Morgan Chase Bank, N.A.	$	4,937	October 12, 2018	October 12, 2018
Morgan Stanley Bank, N.A.	$	4,656	December 19, 2018	August 23, 2019
BNP Paribas	$	4,384	November 16, 2018	November 16, 2018
Royal Bank of Canada	$	1,704	November 6, 2018	December 31, 2018
Citibank, N.A.	$	783	December 21, 2018	June 7, 2019

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

Mortgage Loan Participation Purchase and Sale Agreements

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

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

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


	Quarter ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(dollars in thousands)
Average balance	$	289,008		$	213,486		$	250,599		$	200,119
Weighted average interest rate (1)		3.31	%		2.48	%		3.14	%		2.25	%
Total interest expense	$	2,533		$	1,484		$	6,450		$	3,780
Maximum daily amount outstanding	$	722,611		$	532,266		$	722,611		$	532,266

(1)

Excludes the effect of amortization of facility fees totaling $92,000 and $134,000 for the quarters ended September 30, 2018 and 2017, respectively, and $475,000 and $365,000 for the nine months ended September 30, 2018 and 2017, respectively.


	September 30,			December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	524,686		$	527,706
Unamortized debt issuance costs		(19)			(311)
	$	524,667		$	527,395
Weighted average interest rate		3.51	%		2.81	%
Fair value of mortgage loans pledged to secure mortgage loan participation purchase and sale agreements	$	547,969		$	551,688

Notes Payable

Term Notes

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

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

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

On February 28, 2018, in connection with its issuance of the 2018-GT1 Notes, the Company also redeemed all of the 2017-GT1 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT1 Notes was $400 million plus all accrued and unpaid interest. As a result, the Company recognized debt issuance cost of $3.4 million for the nine months ended September 30, 2018.

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

On August 10, 2018, in connection with its issuance of the 2018-GT2 Notes, the Company also redeemed all of the 2017-GT2 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT2 Notes was $500 million plus all accrued and unpaid interest. As a result, the Company recognized debt issuance cost of $4.6 million for the quarter and nine months ended September 30, 2018.

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

Revolving Credit Agreement

The Company entered into a revolving credit agreement pursuant to which the lenders 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 accrues at a per annum rate of interest equal to, at an election of the Company, either LIBOR plus the applicable margin or an alternate base rate (as defined in the credit agreement). During the existence of certain events of default, interest accrues at a higher rate. The maturity date is November 16, 2018.

Notes payable are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(dollars in thousands)
Average balance	$	1,234,783		$	689,417		$	1,125,458		$	483,370
Weighted average interest rate (1)		5.07	%		5.85	%		5.29	%		5.87	%
Total interest expense	$	21,369		$	11,747		$	55,939		$	24,746
Maximum daily amount outstanding	$	1,300,000		$	890,879		$	1,300,000		$	891,011

(1)

Excluding the effect of amortization of debt issuance costs totaling $5.2 million and $1.2 million for the quarters ended September 30, 2018 and 2017, respectively, and $10.3 million and $3.2 million for the nine months ended September 30, 2018 and 2017, respectively. Also excludes the effect of non-utilization fees of $179,000 and $562,000 for the quarter and nine months ended September 30, 2018, respectively.


	September 30,			December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,300,000		$	900,006
Unamortized debt issuance costs		(8,153)			(8,501)
	$	1,291,847		$	891,505
Weighted average interest rate		4.82	%		5.66	%
Unused amount	$	150,000		$	280,000
Assets pledged to secure notes payable:
Cash	$	81,640		$	20,765
Other assets‒Carried Interest	$	—		$	8,552
Servicing advances (1)	$	102,222		$	114,643
Mortgage servicing rights (1)	$	2,539,575		$	2,098,067

(1)

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 March 23, 2020 and bears interest at a spread over one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(dollars in thousands)
Average balance	$	11,615		$	25,507		$	15,187		$	25,573
Weighted average interest rate		4.09	%		3.25	%		3.87	%		3.01	%
Total interest expense	$	122		$	205		$	444		$	585
Maximum daily amount outstanding	$	13,032		$	26,641		$	20,971		$	30,044


	September 30,			December 31,
	2018			2017
	(in thousands)
Unpaid principal balance	$	9,630		$	20,971
Weighted average interest rate		4.16	%		3.26	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	19,022		$	23,915
Capitalized software	$	1,231		$	1,568

Excess Servicing Spread Financing Payable to PennyMac Mortgage Investment Trust

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

Following is a summary of ESS:


	Quarter ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(in thousands)
Balance at beginning of period	$	229,470	$	261,796	$	236,534	$	288,669
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement		499		1,207		1,983		4,160
Accrual of interest		3,740		3,998		11,584		13,011
Repayment		(11,543)		(13,410)		(35,852)		(42,320)
Change in fair value		1,109		(4,828)		9,026		(14,757)
Balance at end of period	$	223,275	$	248,763	$	223,275	$	248,763