Note 13—Borrowings

The borrowing facilities described throughout this Note 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of December 31, 2018.

Assets Sold Under Agreements to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by 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:


	Year ended December 31,
	2018			2017			2016
	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,626,729		$	1,829,257		$	1,438,181
Weighted average interest rate (1)		3.87	%		3.18	%		2.91	%
Total interest expense (2)	$	22,463		$	60,286		$	49,791
Maximum daily amount outstanding	$	2,380,121		$	3,022,656		$	2,661,746


	December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,935,200		$	2,380,866
Unamortized debt issuance premiums and costs, net		(1,341)			672
	$	1,933,859		$	2,381,538
Weighted average interest rate		4.22	%		3.24	%
Available borrowing capacity (3):
Committed	$	695,767		$	316,503
Uncommitted		2,354,033			2,257,631
	$	3,049,800		$	2,574,134
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	1,923,857		$	2,530,299
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	131,025		$	144,128
Servicing advances (4)	$	162,895		$	114,643
Mortgage servicing rights (4)	$	2,807,333		$	2,098,067
Margin deposits placed with counterparties (5)	$	3,750		$	3,750

(1)

Excludes the effect of amortization of net premiums totaling $40.5 million and $1.3 million, for the years ended December 31, 2018 and 2017, respectively; and debt issuance costs of $7.3 million for the year ended December 31, 2016.

(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 $48.1 million and $9.2 million of such incentives as a reduction in Interest expense during the year ended December 31, 2018 and 2017, 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. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.

(3)

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

(4)

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

(5)

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

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


Remaining maturity at December 31, 2018	Balance
	(dollars in thousands)
Within 30 days	$	397,374
Over 30 to 90 days		1,397,080
Over 90 to 180 days		746
Over one to two years		140,000
Total assets sold under agreements to repurchase	$	1,935,200
Weighted average maturity (in months)		2.9

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of December 31, 2018:


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	1,416,794	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC	$	33,906	February 2, 2019	April 26, 2019
Deutsche Bank AG	$	53,901	March 16, 2019	June 30, 2019
Bank of America, N.A.	$	15,863	January 30, 2019	October 28, 2019
BNP Paribas	$	9,222	March 18, 2019	August 2, 2019
Morgan Stanley Bank, N.A.	$	5,825	March 7, 2019	August 23, 2019
JP Morgan Chase Bank, N.A.	$	5,286	March 3, 2019	October 11, 2019
Royal Bank of Canada	$	2,129	January 25, 2019	March 29, 2019
Citibank, N.A.	$	586	February 28, 2019	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 a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

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:


	Year ended December 31,
	2018			2017			2016
	(dollars in thousands)
Average balance	$	248,539		$	208,613		$	268,416
Weighted average interest rate (1)		3.29	%		2.34	%		1.75	%
Total interest expense	$	8,754		$	5,496		$	5,523
Maximum daily amount outstanding	$	722,611		$	532,266		$	1,268,871

(1)

Excludes the effect of amortization of debt issuance costs totaling $588,000, $545,000 and $740,000 for the years ended December 31, 2018, 2017 and 2016, respectively.


	December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	532,466		$	527,706
Unamortized debt issuance costs		(215)			(311)
	$	532,251		$	527,395
Weighted average interest rate		3.77	%		2.81	%
Fair value of mortgage loans pledged to secure mortgage loan participation purchase and sale agreements	$	555,001		$	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 bore interest at a rate equal to one-month LIBOR plus 4.0% per annum. The 2017-GT2 Notes were scheduled to mature on August 25, 2022 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2023 (unless earlier redeemed in accordance with their terms).

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

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

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

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

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

Corporate Revolving Line of Credit

On November 1, 2018, the Company, through its subsidiary, PennyMac (the “Borrower”), entered into amendments (the "Amendments") to that certain (i) amended and restated credit agreement, dated as of November 18, 2016, by and among the Borrower, the lenders that are parties thereto and Credit Suisse AG, as administrative agent and collateral agent, and Credit Suisse Securities (USA) LLC, as sole bookrunner and sole lead arranger (the “Credit Agreement”); and (ii) amended and restated collateral and guaranty agreement, dated as of November 18, 2016, by and among the Borrower, as grantor, Credit Suisse AG, Cayman Islands Branch (“CS Cayman”), as collateral agent, and PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) and certain of its subsidiaries, PCM, PLS and PNMAC Opportunity Fund Associates, LLC (Associates), as guarantors and grantors (“the “Guaranty”). Pursuant to the Credit Agreement, the lenders have agreed to make revolving loans to the Borrower in an amount not to exceed $150 million. Interest on the loans shall accrue at a per annum rate of interest equal to, at the election of the Borrower, either LIBOR plus the applicable margin or an alternate base rate (as defined in the Credit Agreement). During the existence of certain events of default, interest shall accrue at a higher default rate. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Borrower and its subsidiaries.

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

MSR Note Payable

During December 2015, the Company issued a note payable in favor of Barclays Bank PLC that was secured by Fannie Mae and Freddie Mac MSRs. Interest was charged at a rate based on LIBOR plus the applicable contract margin. The facility expired on February 1, 2018.

On February 1, 2018, the Company issued a note payable in favor of CS Cayman that is secured by Fannie Mae and Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on February 1, 2020. The maximum amount that the Company may borrow under the note payable is $400 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the VFN. The Company did not borrow under this note payable during the year ended December 31, 2018.

Notes payable are summarized below:


	Year ended December 31,
	2018			2017			2016
	(dollars in thousands)
Average balance	$	1,169,452		$	586,135		$	108,475
Weighted average interest rate (1)		5.29	%		5.86	%		5.13	%
Total interest expense	$	73,610		$	39,369		$	8,688
Maximum daily amount outstanding	$	1,300,000		$	900,006		$	153,849

(1)

Excluding the effect of amortization of debt issuance costs and non-utilization fees totaling $11.7 million, $4.5 million and $3.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.


	December 31,
	2018			2017
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,300,000		$	900,006
Unamortized debt issuance costs		(7,709)			(8,501)
	$	1,292,291		$	891,505
Weighted average interest rate		5.07	%		5.66	%
Unused amount	$	150,000		$	280,000
Assets pledged to secure notes payable:
Cash	$	108,174		$	20,765
Servicing advances (1)	$	162,895		$	114,643
Mortgage servicing rights (1)	$	2,807,333		$	2,098,067
Other assets‒Carried Interest	$	—		$	8,552

(1)

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. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable on the Company's consolidated balance sheet.

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:


	Year ended December 31,
	2018			2017			2016
	(dollars in thousands)
Average balance	$	13,498		$	24,830		$	18,620
Weighted average interest rate		3.96	%		3.07	%		2.47	%
Total interest expense	$	536		$	769		$	510
Maximum daily amount outstanding	$	20,971		$	30,044		$	24,242


	December 31,			December 31,
	2018			2017
	(in thousands)
Unpaid principal balance	$	6,605		$	20,971
Weighted average interest rate		4.46	%		3.26	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	16,281		$	23,915
Capitalized software	$	1,017		$	1,568

Excess Servicing Spread Financing at Fair Value

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

Following is a summary of ESS:


	Year ended December 31,
	2018		2017		2016
	(in thousands)
Balance at beginning of year	$	236,534	$	288,669	$	412,425
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement		2,688		5,244		6,603
Accrual of interest		15,138		16,951		22,601
Repayment		(46,750)		(54,980)		(69,992)
Settlement (1)		—		—		(59,045)
Change in fair value		8,500		(19,350)		(23,923)
Balance at end of year	$	216,110	$	236,534	$	288,669

(1)

On February 29, 2016, the Company and PMT terminated that certain master spread acquisition and MSR servicing agreement that the parties entered into effective February 1, 2013 (the “2/1/2013 Spread Acquisition Agreement”) and all amendments thereto. In connection with the termination of 2/1/2013 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 2/1/2013 Spread Acquisition Agreement and then subject to such 2/1/2013 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.