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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

Commission file number: 001-34416

PennyMac Mortgage Investment Trust
(Exact name of registrant as specified in its charter)

(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 ý    No o

        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 ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

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

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

   

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PENNYMAC MORTGAGE INVESTMENT TRUST
FORM 10-Q
March 31, 2012

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

   

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

   

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands, except share data)

   

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

   

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Basis of Presentation

        PennyMac Mortgage Investment Trust ("PMT" or the "Company") was organized in Maryland on May 18, 2009, and began operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest ("shares"). The Company is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage loans and mortgage-related assets.

        The Company's objective is to provide attractive risk-adjusted returns to its investors over the long-term, principally through dividends and secondarily through capital appreciation. The Company intends to achieve this objective largely by investing in distressed mortgage assets and acquiring, pooling, securitizing or selling newly originated prime credit quality residential mortgage loans ("correspondent lending").

        The Company operates two segments: investment activities and correspondent lending. The investment activities segment focuses on mortgage assets that are acquired and held for investment purposes and the correspondent lending segment focuses on the purchase for resale of newly originated mortgage loans.

        The investment activities segment represents the Company's investments in distressed mortgage loans, real estate acquired in settlement of loans ("REO"), mortgage-backed securities ("MBS") and mortgage servicing rights ("MSRs"). Management seeks to maximize the value of the distressed mortgage loans acquired by the Company through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

        The correspondent lending segment represents the Company's operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling the loans either directly or in the form of MBS, using the operations of the Company's Manager.

        The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), beginning with its taxable period ended on December 31, 2009. To maintain its tax status as a REIT, the Company plans to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

        The Company is externally managed by an affiliate, PNMAC Capital Management, LLC ("PCM" or the "Manager"), an investment adviser registered with the Securities and Exchange Commission (the "SEC") that specializes in and focuses on residential mortgage loans. Under the terms of a management agreement, PCM is paid a management fee with a base component and a performance incentive component. Determination of the amount of management fees is discussed in Note 3—Transactions with Related Parties.

        The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the "Operating Partnership"), and the Operating Partnership's subsidiaries. A subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Organization and Basis of Presentation (Continued)

        The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States ("U.S. GAAP") 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 U.S. 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, 2011 (the "Annual Report").

        Preparation of financial statements in compliance with U.S. GAAP requires management to make estimates and assumptions 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.

        In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2012 are not necessarily indicative of the results for the year ending December 31, 2012.

Note 2—Concentration of Risks

        As discussed in Note 1—Organization and Basis of Presentation above, PMT's investing activities are centered in real estate-related assets, a substantial portion of which are distressed at acquisition. Because of the Company's investment strategy, many of the mortgage loans in its targeted asset class are purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies. Prior to the acquisition of loans or other assets, PCM validates key information provided by the sellers that is necessary to determine the value of the acquired asset. A substantial portion of the non-correspondent lending loans purchased by the Company has been acquired from or through one or more subsidiaries of Citigroup, Inc.

        Through its management agreement with PCM and its loan servicing agreements with its loan servicers, primarily an affiliated company, PennyMac Loan Services, LLC ("PLS"), PMT works with borrowers to perform loss mitigation activities. Such activities include the use of loan modification programs (such as the U.S. Department of the Treasury and Housing and Urban Development's Home Affordable Modification Program ("HAMP")) and workout options that PCM believes have the highest probability of successful resolution for both borrowers and PMT. Loan modification or resolution may include PMT accepting a reduction of the principal balances of certain mortgage loans in its investment portfolio. When loan modifications and other efforts are unable to cure distressed loans, the Company's objective is to effect timely acquisition and liquidation of the property securing the mortgage loan.

        Because of the Company's investment focus, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks that borrowers may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and to the effects of fluctuations in the residential real estate market on the performance of its investments. Factors influencing these risks include, but are not limited to:

•

changes in the overall economy, unemployment and residential real estate values in the markets where the properties securing the Company's mortgage loans are located;

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Concentration of Risks (Continued)

•

PCM's ability to identify, and the Company's loan servicers' ability to execute, optimal resolutions of problem mortgage loans;



•

the accuracy of valuation information obtained during the Company's due diligence activities;



•

PCM's ability to effectively model, and to develop appropriate model assumptions that properly anticipate, future outcomes;



•

the level of government support for problem loan resolution and the effect of current and future proposed and enacted legislative and regulatory changes on the Company's ability to effect cures or resolutions to distressed loans; and



•

regulatory, judicial and legislative support of the foreclosure process, and the resulting impact on the Company's ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

        Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT's behalf will prevent significant losses arising from the Company's investments in real estate-related assets.

        On December 20, 2011 and July 12, 2011, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. ("CGM"), a subsidiary of Citigroup Inc., to purchase certain nonperforming residential mortgage loans and residential real property acquired in settlement of loans (collectively, the "CGM Assets"). The CGM Assets were acquired by CGM from unaffiliated money center banks. The initial purchase price under the forward commitment on December 20, 2011 was $22.1 million. The remaining purchase price as of March 31, 2012 is $20.1 million. Remaining subsequent adjustments may increase the purchase price to $20.5 million based on the date the purchase is settled. The initial purchase price under the forward commitment on July 12, 2011 was $172.7 million. The remaining purchase price as of March 31, 2012, is $98.3 million. Remaining subsequent adjustments may increase the purchase price to $99.2 million based on the date the purchase is settled.

        The Company also pays CGM a cost of carry on the CGM Assets pending purchase through the date such CGM Assets are ultimately acquired. The Company recognized the assets subject to the transactions and the related liability. The CGM Assets are serviced by PLS.

        The CGM Assets are included on the Company's consolidated balance sheet as Mortgage loans under forward purchase agreements at fair value and Real estate acquired in settlement of loans under forward purchase agreements and the related liabilities are included as Borrowings under forward purchase agreements. The CGM Assets are being held by CGM within a separate trust entity deemed a variable interest entity. The Company's interest in the CGM Assets is deemed to be contractually segregated from all other interests in the trust. When assets are contractually segregated, they are often referred to as a "silo." The silo consists of the CGM Assets and its related liability. The Company directs all of the activities that drive the economic results of the CGM Assets. All of the changes in the fair value and cash flows of the CGM Assets are attributable solely to the Company, and such cash flows can only be used to settle the related liability.

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Concentration of Risks (Continued)

        As a result of consolidating the silo, the Company's consolidated statement of income for the three months ended March 31, 2012 includes net gain on mortgage loans of $6.7 million, interest income on mortgage loans of $502,000, interest expense of $1.5 million and loan servicing fees expense of $585,000. The Company received repayments of mortgage loans totaling $8.7 million and repaid borrowings under the forward purchase agreements totaling $27.1 million during the three months ended March 31, 2012. The Company has no other variable interests in the trust entity, or other exposure to the creditors of the trust entity which could expose the Company to loss.

        On April 13 and April 24, 2012, PCM committed to acquire on the Company's behalf mortgage loans from or through one or more subsidiaries of Citigroup, Inc. with purchase prices totaling approximately $20.2 million and $139.2 million, respectively.

        On April 27, 2012, the Company, through PCM, completed the purchase of $56.5 million in fair value of mortgage loans from a subsidiary of Citigroup, Inc.

        During the three months ended March 31, 2011, the Company purchased $243.1 million of mortgage loans at fair value for its investment portfolio. Of that total, $227.3 million at fair value of mortgage loans were purchased from or through one or more subsidiaries of Citigroup, Inc.

        Beginning in the fourth quarter of 2011, the Company's correspondent lending activities have experienced substantial growth. As a result of such growth, the Company's correspondent lending segment contributed approximately 42% of PMT's pre-tax income during the quarter ended March 31, 2012 and the inventory of mortgage loans acquired for sale at fair value represented approximately 12% of the Company's investments at March 31, 2012.

        Correspondent lending activities introduce different risks from those posed by investments in distressed assets. The Company's correspondent lending activities and the MSRs that are held in the Company's investment segment that the Company receives as proceeds from such correspondent lending sales are more sensitive to the level and volatility of interest rates. For example, a decline in mortgage rates generally increases the demand for home loans as borrowers refinance, but also generally leads to accelerated payoffs in the Company's mortgage servicing portfolio, which negatively impacts the value of MSRs.

        Management attempts to manage the sensitivity of earnings to this risk through the use of derivative financial instruments to moderate the effects of changes in the level and volatility of interest rates on the fair value of the Company's inventory of mortgage loans acquired for sale at fair value and commitments to purchase mortgage loans for sale. The Company does not presently use derivative financial instruments to moderate the effects of changes in the fair value of its investment in MSRs on PMT's earnings.

        The success of the Company's interest rate risk management strategies is dependent on management's ability to predict the earnings sensitivity of its loan servicing and loan production operations in various interest rate environments. There are many market factors that affect the performance of the Company's interest rate risk management activities including interest rate volatility, the shape of the yield curve and the spread between mortgage interest rates and United States Treasury or swap rates. The success of this strategy affects PMT's net income and the effect can be either positive or negative, and can be material to the Company.

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Concentration of Risks (Continued)

        The correspondent lending segment's ability to sell loans profitably is affected by many factors, including the relative demands for such loans and MBS evidencing interests in such loans, the cost of credit enhancements, investor perceptions of such loans and MBS and the risks posed by such products.

Note 3—Transactions with Related Parties

        The Company is managed externally by PCM under the terms of a management agreement that expires on August 4, 2012 and will be automatically renewed for a one-year term each anniversary date thereafter unless previously terminated. The management agreement provides for an annual review of PCM's performance under the management agreement by the Company's independent trustees. PMT's board of trustees reviews the Company's financial results, policy compliance and strategic direction.

        As more fully described in the Company's Annual Report, certain of the underwriting costs incurred in the Company's initial public offering ("IPO") were paid on PMT's behalf by PCM and a portion of the underwriting discount was deferred by agreement with the underwriters of the offering. PMT will reimburse PCM the underwriting costs as discussed in Note 25—Shareholders' Equity.

        PMT pays PCM a base management fee and may pay a performance incentive fee, both payable quarterly and in arrears.

        Following is a summary of management fee expense and the related liability recorded by the Company for the periods presented:

        Both the management and termination fees are more fully described in Note 4—Transactions with Related Parties to the Company's Annual Report.

        The Company, through its Operating Partnership, also has a loan servicing agreement with PLS. Servicing fee rates are based on the risk characteristics of the mortgage loans serviced and total servicing compensation is established at levels that management believes are competitive with those charged by other servicers or specialty servicers, as applicable.

        Servicing fee rates for nonperforming loans are expected to range between 30 and 100 basis points per year on the unpaid principal balance of the mortgage loans serviced on the Company's behalf. PLS is also entitled to certain customary market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges, as well as interest on funds on deposit in custodial accounts. In the event PLS either effects a refinancing

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Transactions with Related Parties (Continued)

of a loan on the Company's behalf and not through a third party lender and the resulting loan is readily saleable, or originates a loan to facilitate the disposition of real estate that the Company has acquired in settlement of a loan, PLS is entitled to receive from the Company market-based fees and compensation.

        PLS, on behalf of the Company, currently participates in HAMP (and other similar mortgage loan modification programs), which establishes standard loan modification guidelines for "at risk" homeowners and provides incentive payments to certain participants, including loan servicers, for achieving modifications and successfully remaining in the program. The loan servicing agreement entitles PLS to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to PLS under HAMP in connection with a mortgage loan modification for which the Company previously paid PLS a modification fee, PLS shall reimburse the Company an amount equal to the lesser of such modification fee or such incentive payments.

        In connection with the Company's correspondent lending business, through which the Company acquires mortgage loans originated by correspondent lenders for resale to the government-sponsored agencies such as the Federal National Mortgage Association ("Fannie Mae") or securitization through Government National Mortgage Association ("Ginnie Mae") (Fannie Mae and Ginnie Mae are each referred to as an "Agency" and, collectively, as the "Agencies") and other investors, PLS is entitled to base servicing fees, which range from 4 to 20 basis points per year of the unpaid principal balance of such loans, and other customary market-based fees and charges as described above. PLS also provides certain mortgage banking services, including fulfillment and disposition-related services, to the Company for a fulfillment fee based on a percentage of the unpaid principal balance of the mortgage loans to be sold to non-affiliates where the Company is approved or licensed to sell to such non-affiliate. The fulfillment fee for such services is currently 50 basis points. During the quarter ended March 31 2012 and 2011, the Company recorded fulfillment fees totaling $6.1 million and $12,000, respectively.

        The Company collects interest income and a sourcing fee of three basis points for each mortgage loan it purchases from a correspondent and sells to PLS for ultimate disposition to a third party where the Company is not approved or licensed to sell to such third party. During the quarters ended March 31, 2012 and 2011, the Company sold loans with unpaid balances totaling approximately $799.2 million and $3.5 million and received sourcing fees totaling approximately $240,000 and $4,000, respectively. The Company held mortgage loans pending sale to PLS with unpaid balances totaling approximately $39.5 million and $44.2 million at March 31, 2012 and December 31, 2011, respectively.

        The Company paid servicing and other fees to PLS as described above and as provided in its loan servicing agreement and recorded other expenses, including common overhead expenses incurred on its behalf by PCM and its affiliates, in accordance with the terms of its management agreement.

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Transactions with Related Parties (Continued)

        Following is a summary of those expenses for the periods presented:

        Amounts due to affiliates are summarized below as of the dates presented:

        Amounts due from affiliates totaled $5.5 million and $347,000 at March 31, 2012 and December 31, 2011, respectively, and represent amounts receivable pursuant to loan sales to PLS and reimbursable expenses paid on the affiliates' behalf by the Company.

        PCM's parent company, Private National Mortgage Acceptance Company, LLC, held 75,000 of the Company's common shares of beneficial interest at both March 31, 2012 and December 31, 2011.

Note 4—Earnings Per Share

        Basic earnings per share is determined using net income divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding, assuming all potentially dilutive common shares were issued. In periods in which the Company records a loss, potentially dilutive common shares are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

        During the year ended December 31, 2011, the Company made grants of restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. For purposes of calculating earnings per

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4—Earnings Per Share (Continued)

share, unvested share-based compensation awards containing non-forfeitable rights to dividends or dividend equivalents (collectively, "dividends") are classified as "participating securities" and are included in the basic earnings per share calculation using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to each class of common shares and participating securities, based on their respective rights to receive dividends.

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

Note 5—Loan Sales

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5—Loan Sales (Continued)

        The following table summarizes cash flows between the Company and transferees upon sale of loans in transactions whereby the Company maintains continuing involvement with the mortgage loan and period-end information relating to such loans:

Note 6—Fair Value

        The Company's financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates 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 estimated fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

        Management identified all of its financial assets, including short-term investments, United States Treasury security, MBS, and mortgage loans as well as its securities sold under agreements to repurchase and its MSRs relating to loans with initial interest rates of more than 4.5% that were acquired as a result of its correspondent lending operations to be accounted for at estimated fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company's investment performance.

        For MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5% that were acquired as a result of the Company's correspondent lending operations, management has concluded that such assets present different risks to the Company than MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management's risk management efforts relating to these assets are aimed at moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets' values. Management has identified these assets for accounting using the amortization method. Management's risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at moderating the effects of changes in interest rates on the assets' values.

        For loans sold under agreements to repurchase subject to agreements made beginning in December 2010, REO financed through agreements to repurchase beginning in June 2011 and borrowings under forward purchase agreements beginning in July 2011, management has determined

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

that historical cost accounting is more appropriate because under this method debt issuance costs are spread over the term of the debt, thereby matching the debt issuance expense to the periods benefiting from the usage of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

        Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis as of the dates presented:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

        The Company's non-Agency MBS, mortgage loans at fair value, mortgage loans under forward purchase agreements at fair value, MSRs and securities sold under agreements to repurchase were

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

measured using Level 3 inputs on a recurring basis. The following is a summary of changes in those items for the periods presented:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

        Following are the fair values and related principal amounts due upon maturity of mortgage loans accounted for under the fair value option (including mortgage loans acquired for sale, mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value) as of the dates presented:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

        Following are the changes in fair value included in current period income by consolidated statements of income line item for financial statement items accounted for under the fair value option:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

        Following is a summary of financial statement items that are measured at estimated fair value on a nonrecurring basis as of the dates presented:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

Real Estate Acquired in Settlement of Loans

        The Company measures its investment in REO at the respective properties' estimated fair values less cost to sell on a nonrecurring basis. The value of the REO is initially established as the lesser of (a) either the fair value of the loan at the date of transfer, (b) the fair value of the real estate less estimated costs to sell as of the date of transfer or (c) the purchase price of the property. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or management receiving indications that the property's value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the value at which the property was initially recorded is recognized in Results of real estate acquired in settlement of loans in the consolidated statements of income.

Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value

        The Company evaluates its MSRs at lower of amortized cost or fair value with reference to the assets' fair value. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSR at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying the MSRs. Mortgage loans are grouped into note rate pools of 50 basis points for fixed-rate mortgage loans with note rates between 3% and 4.5% and a single pool for mortgage loans with note rates below 3%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the note rate pools is below the amortized cost of the MSRs for that pool reduced by any existing valuation allowance, those MSRs are impaired.

        When MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted using a valuation allowance. If the value of the MSRs subsequently increases, the restoration of value is recognized in current period earnings only to the extent of the valuation allowance.

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

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

Fair Value of Financial Instruments Carried at Amortized Cost

        The Company has debt facilities to finance its investment in nonperforming loans and REO in the form of repurchase agreements and borrowings under forward purchase agreements. As discussed in Fair Value Accounting Elections above, management designated these agreements to be accounted for at amortized cost.

        Management has concluded that the estimated fair values of Mortgage loans acquired for sale at fair value sold under agreements to repurchase, Mortgage loans at fair value sold under agreements to repurchase, Real estate acquired in settlement of loans financed under agreements to repurchase, Note payable secured by mortgage loans at fair value and Borrowings under forward purchase agreements approximate the agreements' carrying values due to the agreements' short terms and variable interest rates.

Valuation Techniques and Assumptions

        Most of the Company's assets are carried at fair value with changes in fair value recognized in current period results of operations. A substantial portion of those assets are "Level 3" financial statement items which require the use of significant unobservable inputs in its estimation of the assets' values. Unobservable inputs reflect the Company's own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

        The Manager has assigned the responsibility for estimating the fair values of its "Level 3" financial statement items to a specialized valuation group and has developed procedures and controls governing the valuation process relating to these assets. The estimation of fair values of the Company's financial assets are assigned to the Manager's Financial Analysis and Valuation group (the "FAV group"), which is responsible for valuing and monitoring the Company's investment portfolios as well as the maintenance of the valuation policies and procedures.

        The FAV group reports to the Manager's senior management valuation committee, which oversees and approves the valuations. The valuation committee includes the chief executive, financial, investment and credit officers of the Manager. The FAV group monitors the models used for valuation of the Company's "Level 3" financial statement items, including the models' performance versus actual results and reports those results to the valuation committee. The results developed in the FAV group's monitoring activites are used by the FAV group to calibrate subsequent projections used for valuation.

        The FAV group is also responsible for reporting to the valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major drivers affecting the valuation and any changes in model methods and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of each of the changes to the significant inputs to the models.

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(Unaudited)

Note 6—Fair Value (Continued)

        The following describes the methods used in estimating the fair values of Level 2 and Level 3 financial statement items:

Mortgage-Backed Securities

        MBS values are presently determined based on whether the securities are issued by one of the Agencies as discussed below:

•

Agency MBS are categorized as "Level 2" financial statement items. Fair value of Agency MBS is estimated based on quoted market prices for similar securities.



•

Non-Agency MBS are categorized as "Level 3" financial statement items. Fair value of non-Agency MBS is estimated using broker indications of value. For indications of value received, the FAV group reviews the price indications provided by non-affiliate brokers for completeness, accuracy and consistency across all similar bonds managed by PCM. Bond-level analytics such as yield, weighted average life and projected prepayment and default speeds of the underlying collateral are computed. The reasonableness of the brokers' indications of value and of changes in value from period to period is evaluated in light of the analytical review performed and considering market conditions. The review of the FAV group is reported to PCM's valuation committee as part of their review and approval of monthly valuation results. PCM has not adjusted, and does not intend to adjust, its fair value estimates to amounts different than the brokers' indications of value.

        The significant unobservable inputs used in the fair value measurement of the Company's non-Agency MBS are discount rates, prepayment speeds, default speeds and loss severities in the event of default (or "collateral remaining loss percentage"). Significant changes in any of those inputs in isolation could result in a significant change in fair value measurement. Changes in these assumptions are not directly correlated, as they may be separately affected by changes in collateral characteristics and performance, servicer behavior, legal and regulatory actions, economic and housing market data and market sentiment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

        Following is a quantitative summary of key inputs used by PCM's valuation staff to evaluate the reasonableness of the fair value of Non-Agency MBS:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

Mortgage Loans

        Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets with established counterparties and transparent pricing:

•

Mortgage loans that are saleable into active markets, comprised of the Company's mortgage loans acquired for sale at fair value, are categorized as "Level 2" financial statement items and their fair values are estimated using their quoted market or contracted price or market price equivalent.



•

Loans that are not saleable into active markets are categorized as "Level 3" financial statement items, and their fair values are estimated using a discounted cash flow approach. Inputs to the model include current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices, prepayment speeds, default and loss severities. The valuation process includes the computation by stratum of loan population and a review for reasonableness of various measures such as weighted average life, projected prepayment and default speeds, and projected default and loss percentages. The FAV group computes the effect on the valuation of changes in input variables such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the loan valuation. The results of the estimates of fair value of "Level 3" mortgage loans are reported to PCM's valuation committee as part of their review and approval of monthly valuation results.

        Changes in fair value attributable to changes in instrument-specific credit risk are measured by the change in the respective loan's delinquency status at period-end from the later of the beginning of the period or acquisition date.

        The significant unobservable inputs used in the fair value measurement of the Company's distressed mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value, are discount rate, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans' fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Fair Value (Continued)

        Following is a quantitative summary of key inputs used in the valuation of mortgage loans at fair value:

Derivative Financial Instruments

        The Company estimates the fair value of an interest rate lock commitment based on quoted Agency MBS prices, its estimate of the fair value of the mortgage servicing rights it expects to receive in the sale of the loans and the probability that the mortgage loan will fund within the terms of the interest rate lock commitment. The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the MBS options and futures it purchases and sells based on observed interest rate volatilities in the MBS market. The Company estimates the fair value of its MBS interest rate swaptions based on quoted market prices.

Real Estate Acquired in Settlement of Loans

        REO is measured based on its fair value on a nonrecurring basis and is categorized as a "Level 3" financial statement item. Fair value of REO is determined by using a current estimate of value from a broker's price opinion, a full appraisal or the price given in a current contract of sale.

        REO values are reviewed by PCM's staff appraisers when the Company obtains multiple indications of value and there is a significant discrepancy between the values received. PCM's staff appraisers will attempt to resolve the discrepancy between the indications of value. In circumstances where the appraisers are not able to generate adequate data to support a value conclusion, the staff appraisers will order an additional appraisal to resolve the property's value.

Mortgage Servicing Rights

        MSRs are categorized as "Level 3" financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key assumptions used in the estimation of

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(Unaudited)

Note 6—Fair Value (Continued)

the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable discount rate, and cost to service loans. The key assumptions used in the Company's discounted cash flow model are based on market factors which management believes are consistent with assumptions and data used by market participants valuing similar MSRs. The results of the estimates of fair value of MSRs are reported to PCM's Valuation Committee as part of their review and approval of monthly valuation results.

        The significant unobservable inputs used in the fair value measurement of the Company's MSRs are pricing spreads, prepayment speeds (or life) and annual per-loan cost of servicing. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key assumptions are not necessarily directly related.

        Following are the key assumptions used in determining the fair value of MSRs at the time of initial recognition:

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(Unaudited)

Note 6—Fair Value (Continued)

        Following is a quantitative summary of key assumptions used in the valuation of MSRs, and the effect on the estimated fair value from adverse changes in those assumptions as of the dates presented (weighted averages are based upon unpaid principal balance or fair value where applicable):

        The preceding 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 in the variables in relation to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect the Company's overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as an earnings forecast.

Securities Sold Under Agreements to Repurchase

        Fair value of securities sold under agreements to repurchase is based on the accrued cost of the agreements, which approximates the agreements' fair values, due to the agreements' short maturities.

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(Unaudited)

Note 7—Short-Term Investments

        The Company's short-term investments are comprised of money market accounts deposited with U.S. commercial banks.

Note 8—United States Treasury Security

        The Company's investment in a U.S. Treasury security of $50.0 million as of December 31, 2011 matured on January 19, 2012 and had a coupon interest rate of 0.00%.

Note 9—Mortgage-Backed Securities at Fair Value

        Investments in MBS were as follows as of the dates presented:

 

        All of the Company's MBS had remaining contractual maturities of more than ten years at March 31, 2012 and at December 31, 2011. At March 31, 2012, the Company had pledged $62.4 million of its MBS and at December 31, 2011, the Company had pledged all of its MBS to secure agreements to repurchase.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10—Mortgage Loans Acquired for Sale at Fair Value

        Mortgage loans acquired for sale at fair value is comprised of recently originated mortgage loans purchased by the Company for resale. Following is a summary of the distribution of the Company's mortgage loans acquired for sale at fair value as of the dates presented:

        The Company is not approved by Ginnie Mae as an issuer of securities backed by government insured or guaranteed loans. Therefore, the Company transfers such government insured or guaranteed loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, for a sourcing fee of three basis points on the unpaid principal balance of each such loan.

        Mortgage loans acquired for sale at fair value totaling $155.3 million and $231.7 million were pledged to secure sales of loans under agreements to repurchase at March 31, 2012 and December 31, 2011, respectively.

Note 11—Derivative Financial Instruments

        Following is a summary of the distribution of the Company's derivative financial instruments which are included in Other assets on the consolidated balance sheets as of the dates presented:

        The Company is exposed to price risk relative to its mortgage loans acquired for sale, to the commitments it makes to acquire loans from correspondent lenders and to the holding of Agency MBS.

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(Unaudited)

Note 11—Derivative Financial Instruments (Continued)

The Company bears price risk from the time a commitment to purchase a loan is made to a correspondent lender to the time the purchased mortgage loan is sold. Similarly, the Company bears price risk relative to its holdings of Agency MBS during the period it holds such securities. During this period, the Company is exposed to losses if mortgage interest rates rise, because the value of the purchase commitment or mortgage loan acquired for sale declines.

        The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in interest rates. To manage this price risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the value of the Company's interest rate lock commitments, inventory of mortgage loans acquired for sale and Agency MBS. The Company does not use derivative financial instruments for purposes other than in support of its risk management activities.

        The following table summarizes the activity for derivative contracts used to hedge the Company's interest rate lock commitments, inventory of mortgage loans acquired for sale and Agency MBS at notional value:

        As of March 31, 2012 and December 31, 2011, the Company had $850,000 and $1.5 million, respectively, on deposit with its derivatives counterparties. Margin deposits are included in Other assets on the consolidated balance sheets as of March 31, 2012 and December 31, 2011.

Note 12—Mortgage Loans at Fair Value

        Mortgage loans at fair value are comprised of mortgage loans not acquired for resale. Such loans may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan.

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(Unaudited)

Note 12—Mortgage Loans at Fair Value (Continued)

        Following is a summary of the distribution of the Company's mortgage loans at fair value as of the dates presented:

        At March 31, 2012, approximately 72% of the mortgage loan portfolio consisted of mortgage loans that were originated between 2005 and 2007. Approximately 74% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at March 31, 2012.

        The mortgage loan portfolio consists of mortgage loans originated throughout the United States with loans secured by California real estate comprising approximately 22% of the loan portfolio's estimated fair value at March 31, 2012. The mortgage loan portfolio contained loans from New York, Florida and New Jersey that each represented 5% or more of the portfolio's estimated fair value at March 31, 2012.

        At December 31, 2011, approximately 72% of the mortgage loan portfolio consisted of mortgage loans that were originated between 2005 and 2007. Approximately 72% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at December 31, 2011.

        The mortgage loan portfolio consisted of mortgage loans originated throughout the United States with loans secured by California real estate that comprised approximately 24% of the loan portfolio's estimated fair value at December 31, 2011. The mortgage loan portfolio contained loans from New York, Florida and New Jersey that each represented 5% or more of the portfolio's estimated fair value at December 31, 2011.

        At March 31, 2012 and December 31, 2011, mortgage loans in this portfolio with fair values totaling $626.0 million and $607.3 million, respectively, were pledged to secure sales of loans under agreements to repurchase and mortgage loans with fair values totaling $1.2 million and $1.9 million, respectively, were held in a consolidated subsidiary of the Company whose stock was pledged to secure financing of the mortgage loans held in that subsidiary.

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(Unaudited)

Note 13—Mortgage Loans Under Forward Purchase Agreements at Fair Value

        Mortgage loans under forward purchase agreements at fair value are comprised of mortgage loans not acquired for resale. Such loans may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified loan.

        Following is a summary of the distribution of the Company's mortgage loans under forward purchase agreements at fair value as of the periods presented:

        At March 31, 2012, approximately 75% of the estimated fair value of the mortgage loans under forward purchase agreements consisted of mortgage loans that were originated between 2005 and 2007. Approximately 72% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at March 31, 2012.

        Mortgage loans under forward purchase agreements consists of mortgage loans originated throughout the United States with loans secured by California real estate comprising approximately 29% of the loan portfolio's estimated fair value at March 31, 2012. The mortgage loan portfolio contained loans from Florida, New York and New Jersey that each represented 5% or more of the portfolio's estimated fair value at March 31, 2012.

        At December 31, 2011, approximately 74% of the estimated fair value of the mortgage loans under forward purchase agreements consisted of mortgage loans that were originated between 2005 and 2007. Approximately 74% of the estimated fair value of the mortgage loans in this portfolio was comprised of loans with unpaid-principal-balance-to-current-property-value ratios in excess of 100% at December 31, 2011.

        Mortgage loans under forward purchase agreements consists of mortgage loans originated throughout the United States with loans secured by California real estate that comprised approximately 33% of the loan portfolio's estimated fair value at December 31, 2011. The mortgage loan portfolio contained loans from Florida, New York and New Jersey that each represented 5% or more of the portfolio's estimated fair value at December 31, 2011.

        At both March 31, 2012 and December 31, 2011, the entire balance of mortgage loans under forward purchase agreements was subject to borrowings under forward purchase agreements.

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(Unaudited)

Note 14—Real Estate Acquired in Settlement of Loans

        Following is a summary of the activity in REO for the periods presented:

        At March 31, 2012, REO with carrying values totaling $6.0 million were financed under agreements to repurchase and $43.3 million was held in a consolidated subsidiary of the Company whose stock was pledged to secure financing of the real estate held in that subsidiary. At December 31, 2011, REO with carrying values totaling $4.3 million were financed under agreements to repurchase and no stock was pledged to secure financing of real estate held in a consolidated subsidiary.

Note 15—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

        Following is a summary of the activity in REO under forward purchase agreements for the periods presented:

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(Unaudited)

Note 15—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements (Continued)

        At March 31, 2012, REO under forward purchase agreements totaling $22.4 million were subject to borrowings under forward purchase agreements. The Company did not have REO under forward purchase agreements during the quarter ended March 31, 2011.

Note 16—Mortgage Servicing Rights

Carried at Fair Value:

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

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(Unaudited)

Note 16—Mortgage Servicing Rights (Continued)

Carried at Amortized Cost:

        The activity in MSRs carried at amortized cost is summarized below for the periods presented:

        The following table summarizes the Company's estimate of amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its March 31, 2012 valuation of MSRs. The assumptions 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. Therefore, the following estimates will change in a manner and amount not presently determinable by management.

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(Unaudited)

Note 17—Securities Sold Under Agreements to Repurchase at Fair Value

        Following is a summary of financial information relating to securities sold under agreements to repurchase at fair value as of and for the periods presented:

        The repurchase agreements collateralized by securities have an average term of 18 days. All repurchase agreements collateralized by securities matured within 30 days of March 31, 2012 and all such repurchase agreements were subsequently replaced with new repurchase agreements. At March 31, 2012, all non-Agency MBS owned by the Company were pledged under the repurchase agreements and such pledged securities were held by the buyer. All agreements collateralized by MBS are to repurchase the same or substantially identical securities.

        The amount at risk (the fair value of the securities pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to the Company's securities sold under agreements to repurchase is summarized by counterparty below as of March 31, 2012:

        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 value (as determined by the applicable lender) of the MBS or mortgage loans securing those agreements decreases. As of March 31, 2012, the Company did not have any amount on deposit with its securities repurchase agreement counterparties. As of December 31, 2011, the Company had $3.8 million on deposit with its securities repurchase agreement counterparties. Margin deposits are included in Other assets in the consolidated balance sheets.

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(Unaudited)

Note 18—Mortgage Loans Acquired for Sale Sold Under Agreements to Repurchase

        Following is a summary of financial information relating to mortgage loans acquired for sale sold under agreements to repurchase as of and for the periods presented:

        The repurchase agreements collateralized by loans have an average remaining term of approximately 7.2 months at March 31, 2012. All of the repurchase agreements have maturities of more than 90 days.

        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 the Company's mortgage loans acquired for sale sold under agreements to repurchase is summarized by counterparty below as of March 31, 2012:

        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 value (as determined by the applicable lender) of the mortgage loans securing those agreements decreases. As of March 31, 2012 and December 31, 2011, the Company had $1.9 million and $1.6 million, respectively, on deposit with its loan repurchase agreement counterparties. Margin deposits are included in Other assets in the consolidated balance sheets.

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(Unaudited)

Note 19—Mortgage Loans at Fair Value Sold Under Agreements to Repurchase

        Following is a summary of financial information relating to mortgage loans at fair value sold under agreements to repurchase as of and for the periods presented:

        The repurchase agreements collateralized by loans have an average remaining term of approximately 2.8 months at March 31, 2012.

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

        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 the Company's mortgage loans

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(Unaudited)

Note 19—Mortgage Loans at Fair Value Sold Under Agreements to Repurchase (Continued)

at fair value sold under agreements to repurchase is summarized by counterparty below as of March 31, 2012:

        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 value (as determined by the applicable lender) of the loans securing those agreements decreases. As of March 31, 2012 and December 31, 2011, the Company had $598,000 and $471,000, respectively, on deposit with its loan repurchase agreement counterparties. Margin deposits are included in Other assets in the consolidated balance sheets.

Note 20—Real Estate Acquired in Settlement of Loans Financed Under Agreements to Repurchase

        Following is a summary of financial information relating to REO financed under agreements to repurchase as of and for the periods presented:

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(Unaudited)

Note 20—Real Estate Acquired in Settlement of Loans Financed Under Agreements to Repurchase (Continued)

        The repurchase agreement pursuant to which the Company finances REO has an average term of approximately 2.2 months at March 31, 2012.

        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 the Company's REO held in a consolidated subsidiary, the stock of which is pledged to secure agreements to repurchase, is summarized by counterparty below as of March 31, 2012:

        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 value (as determined by the applicable lender) of the underlying REOs decreases.

        The Company did not have REO financed under agreements to repurchase during the three months ended March 31, 2011.

Note 21—Note Payable Secured by Mortgage Loans at Fair Value

        Following is a summary of financial information relating to the note payable secured by mortgage loans at fair value as of and for the periods presented:

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(Unaudited)

Note 21—Note Payable Secured by Mortgage Loans at Fair Value (Continued)

        At March 31, 2012, the Company did not have any borrowings under the note payable. At December 31, 2011, the Company had $28.6 million borrowings under the note payable and $237,000 on deposit with its counterparty.

Note 22—Borrowings Under Forward Purchase Agreements

        Following is a summary of financial information relating to borrowings under forward purchase agreements as of and for the periods presented:

        The forward purchase agreements have an average term of approximately 9.0 months at March 31, 2012. Both of the forward purchase agreements have maturities of more than 90 days.

        At March 31, 2012, there was no amount at risk (the fair value of the mortgage loans pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to the Company's borrowings under forward purchase agreements.

Note 23—Liability for Representations and Warranties

        The Company has liability under the representations and warranties made to purchasers of the loans it sells. In the event of a breach of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the mortgage loans. The Company's representations and warranties are generally not subject to stated limits or exposure.

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(Unaudited)

Note 23—Liability for Representations and Warranties (Continued)

        Following is a summary of the Company's liability for representations and warranties included in accounts payable and accrued liabilities for the periods presented:

Note 24—Commitments and Contingencies

        From time to time, the Company may be involved in various proceedings, claims and legal actions arising in the ordinary course of business. As of March 31, 2012, the Company was not involved in any such proceedings, claims or legal actions that would have a material adverse effect on the Company.

Mortgage Loan Commitments

        The following table summarizes the Company's outstanding contractual loan commitments as of the date presented:

Note 25—Shareholders' Equity

        On November 19, 2010, the Company entered into a Controlled Equity Offering Sales Agreement (the "2010 Sales Agreement") with Cantor Fitzgerald & Co. During the three months ended March 31, 2012, the Company sold a total of 2,531,310 of its common shares under the 2010 Sales Agreement at a weighted average price of $18.41 per share, providing net proceeds to the Company of approximately $45.7 million, net of sales commissions. The sales agent received a total of approximately $917,000, which represents an average commission of approximately 2.0% of the gross sales price.

        As more fully described in the Company's Annual Report, certain of the underwriting costs incurred in the Company's IPO were paid on PMT's behalf by PCM and a portion of the underwriting discount was deferred by agreement with the underwriters of the offering. Reimbursement to PCM and payment to the underwriters of the deferred underwriting discount are both contingent on PMT's performance during any full four calendar quarter period during the 24 full calendar quarters after the date of the completion of its IPO, August 4, 2009. If PMT meets the specified performance levels during any full four calendar quarter period during the 24-quarter period, the Company will reimburse

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(Unaudited)

Note 25—Shareholders' Equity (Continued)

PCM approximately $2.9 million of underwriting costs paid by PCM on the offering date and pay the underwriters approximately $5.9 million in deferred underwriting discount. If this requirement is not satisfied by the end of such 24-quarter period, the Company's obligation to reimburse PCM and make the conditional payment of the underwriting discount will terminate. Management has concluded that this contingency is probable of being met during the 24-quarter period and has recognized a liability for reimbursement to PCM and payment of the contingent underwriting discount as a reduction of additional paid-in capital.

Note 26—Net Gain on Mortgage Loans Acquired For Sale

        Net gain (loss) on mortgage loans acquired for sale is summarized below for the periods presented:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 27—Net Loan Servicing Fees

        Net loan servicing fees is summarized below for the periods presented:

Note 28—Share-Based Compensation Plan

        The Company's equity incentive plan allows for grants of equity-based awards up to a total of 8% of PMT's issued and outstanding shares on a diluted basis at the time of the award. Restricted share units have been awarded to trustees and officers of the Company and to employees of PCM and its affiliates at no cost to the grantees. Such awards generally vest over a one- to four-year period. Expense relating to awards is included in the consolidated statements of income under the caption Compensation.

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 28—Share-Based Compensation Plan (Continued)

        The table below summarizes restricted share unit activity and compensation expense for the periods presented:

Note 29—Income Taxes

        The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. Therefore, PMT generally will not be subject to corporate federal or state income tax to the extent that qualifying distributions are made to shareholders and the Company meets REIT requirements including certain asset, income, distribution and share ownership tests. The Company believes that it has met the distribution requirements, as it has declared dividends sufficient to distribute substantially all of its taxable income. Taxable income will generally differ from net income. The primary difference between net income and the REIT taxable income (before deduction for qualifying distributions) is the income of the taxable REIT subsidiaries ("TRSs") and the method of determining the income or loss related to valuation of the mortgage loans owned by the qualified REIT subsidiary ("QRS"). Other differences between REIT book income and REIT taxable income are not material.

        In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 29—Income Taxes (Continued)

gain distributions or a return of capital. Most of the 2011 distributions and all of the 2010 distributions will be characterized as ordinary income. Approximately 5% of the 2011 distributions will be characterized as long term capital gain.

        The Company has elected to treat two of its subsidiaries as TRSs. Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to the REIT. No such dividend distributions have been made to date. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for the TRSs is included in the consolidated statements of income.

        The Company files U.S. federal and state income tax returns for both the REIT and TRSs. These returns for 2009 and forward are subject to examination by the respective tax authorities. No returns are currently under examination.

        The following table details the Company's provision for income taxes which relates primarily to the TRSs, for the periods presented:

        The following table is a reconciliation of the Company's provision for income taxes at statutory rates to the provision for income taxes at the Company's effective rate:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 29—Income Taxes (Continued)

        The Company's components of the provision for deferred income taxes are as follows:

        The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

        The net deferred income tax liability is recorded in Income taxes payable in the consolidated balance sheets as of March 31, 2012 and December 31, 2011.

        At March 31, 2012 and December 31, 2011, the Company had no unrecognized tax benefits and does not anticipate any increase in unrecognized tax benefits. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company's policy to record such accruals in the Company's income tax accounts. No such accruals existed at March 31, 2012 and December 31, 2011.

Note 30—Segments and Related Information

        The Company has two business segments: investment activities and correspondent lending.

        The investment activities segment represents the Company's investments in distressed mortgage loans, REO, MBS and MSRs. Management seeks to maximize the value of the mortgage loans acquired by the Company through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 30—Segments and Related Information (Continued)

of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner. The Company also invests in MBS and other mortgage-related real estate and financial assets.

        The correspondent lending segment represents the Company's operations aimed at serving as an intermediary between mortgage originators, particularly mortgage lenders, and the capital markets by purchasing, pooling and reselling the loans either directly or in the form of MBS.

        Before the third quarter of 2011, the Company's activities were almost exclusively within the investment activities segment. Financial highlights by operating segment for the quarter ended March 31, 2012 are as follows:

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 30—Segments and Related Information (Continued)

        The accounting policies of the reportable segments are the same as those described in Note 3—Significant Accounting Policies to the Company's Annual Report except that intersegment transactions are not eliminated.

Note 31—Supplemental Cash Flow Information

Note 32—Regulatory Net Worth Requirement

        PennyMac Corp. ("PMC"), an indirect subsidiary of the Company, is a seller-servicer for Fannie Mae. To retain its status as an approved seller-servicer, PMC is required to meet Fannie Mae's capital standards, which require PMC to maintain a minimum net worth of $2.5 million. Management believes PMC complies with Fannie Mae's net worth requirement as of March 31, 2012.

Note 33—Subsequent Events

        Management has evaluated all events or transactions through the date the Company issued these financial statements. During this period:

•

On May 3, 2012, the Company's Board of Trustees declared a cash dividend of $0.55 per share payable on May 31, 2012 to holders of record of the Company's common shares as of May 16, 2012.



•

On April 13 and 24, 2012, PCM committed to acquire on PMT's behalf mortgage loans with purchase prices totaling $20.2 million and $139.2 million, respectively. The pending transactions

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 33—Subsequent Events (Continued)

are subject to continuing due diligence, customary closing conditions and obtaining additional capital adequate to fund the acquisitions. There can be no assurance that the committed amount will ultimately be acquired or that the transaction will be completed at all.

•

On April 20, 2012, the Company entered into an amendment (the "Amendment") to its master repurchase agreement, dated as of December 9, 2010 (the "Citi Repo Facility"), with Citibank, N.A. ("Citi"), pursuant to which PMC may sell, and later repurchase, distressed residential mortgage loans pending the sale, securitization or liquidation of such loans. The Citi Repo Facility is committed for a period of 364 days, and the obligations of PMC are fully guaranteed by the Company and the Operating Partnership.

Under the terms of the Amendment, the termination date was extended until April 19, 2013. Through PMC, the Company is required to pay Citi a commitment fee for, as well as certain other administrative costs and expenses in connection with Citi's structuring, management and ongoing administration of, the Citi Repo Facility. All other terms and conditions of the Citi Repo Facility and the related guaranty remain the same in all material respects.

•

On April 27, 2012, the Company completed the purchase of $56.5 million of mortgage loans from a subsidiary of Citigroup, Inc.

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

        We are a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, principally through dividends and secondarily through capital appreciation. We intend to achieve this objective largely by investing in distressed mortgage assets and acquiring, pooling, securitizing or selling newly originated prime credit quality residential mortgage loans ("correspondent lending").

        We invest in distressed mortgage loans through direct acquisitions of mortgage loan portfolios from institutions such as banks and mortgage companies. A substantial portion of the nonperforming loans we have purchased has been acquired from or through one or more subsidiaries of Citigroup, Inc.

        We seek to maximize the value of the distressed mortgage loans that we acquire using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs (such as the U.S. Departments of the Treasury and Housing and Urban Development's Home Affordable Modification Program ("HAMP")), special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage delinquency, our objective is to effect timely acquisition and/or liquidation of the property securing the loan through the use, in part, of short sales and deed-in-lieu of foreclosure programs. During the quarter ended March 31, 2012, we received proceeds from liquidation, payoffs and sales from our portfolio of distressed mortgage loans and real estate acquired in settlement of loans ("REO") totaling $68.4 million.

        Changes in the mortgage market have significantly reduced the outlets for sales of newly originated mortgage loans by mortgage lenders who have traditionally sold their loans to larger mortgage companies and banks who, in turn, sold those loans to Agencies and other investors or into securitizations. We believe that these changes are due in part to banks' anticipation of regulatory changes to loans and securitization-related capital requirements, along with a focus on retail lending; and that the changes provide us with the opportunity to act as a link between loan originators and the Agency and securitization markets.

        During the quarter ended March 31, 2012, we purchased loans with fair values totaling $1.9 billion in furtherance of our correspondent lending business. To the extent that we purchase loans that conform to standards to be FHA insured or Veterans Administration guaranteed, we sell such loans to PennyMac Loan Services, LLC ("PLS"), which is a licensed Ginnie Mae issuer and seller/servicer. The Company receives a sourcing fee from PLS of three basis points on the unpaid principal balance of each loan that it sells to PLS under such arrangement, and earns interest income on the loan for the time period it holds the loan prior to the sale to PLS. We held an inventory of mortgage loans acquired for sale totaling $155.3 million at March 31, 2012. To the extent that we transfer these loans into securitizations in the future, we may retain a portion of the securities created in the securitization transaction.

        We supplement these activities through participation in other mortgage-related activities, which are in various states of analysis, planning or implementation including:

•

Acquisition of REIT-eligible MBS. We purchased $112.4 million of MBS during the quarter ended March 31, 2012. Our portfolio of MBS totaled $174.6 million at March 31, 2012, including $62.4 million of securities backed by Alt-A, subprime and jumbo mortgage loans. We believe that our investing in distressed residential mortgage loans and correspondent lending activities provide insight into attractive investment opportunities in certain residential mortgage-backed securities.



•

Acquisition of MSRs from liquidating and other institutions. We believe that current market conditions may have adversely affected the financial condition and operations of certain owners

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of mortgage assets. Further, regulatory and capital issues may have contributed to their decision to reduce their portfolio of MSRs. We believe that MSR investments may allow us to earn attractive current returns and to leverage the loan servicing capabilities and efficiencies of PLS to improve the assets' value. We would also seek to leverage the loan origination capabilities of PLS provided we are able to structure an arrangement, including through the Federal government's Home Affordable Refinance Program ("HARP 2.0"), whereby we could recapture any new MSRs created upon PLS's refinance of mortgage loans relating to the acquired MSRs.

We also intend to continue to retain the MSRs that we receive as a portion of the proceeds from our sale or securitization of mortgage loans through our correspondent lending operation. We received MSRs as proceeds on sale of mortgage loans with fair values totaling $12.9 million during the quarter ended March 31, 2012 and held MSRs with carrying values of $18.5 million as of March 31, 2012.

•

Providing inventory financing of mortgage loans for mortgage lenders. We believe this activity may result in attractive investment assets for us and supplement and make our correspondent lending business more attractive to lenders from which we acquire newly originated loans.

        We are externally managed by PCM, an investment adviser that specializes in, and focuses on, residential mortgage loans. Most of our mortgage loan portfolio is serviced by PLS, an affiliate of PCM.

        We conduct substantially all of our operations, and make substantially all of our investments, through our operating partnership and its subsidiaries. We are the sole limited partner and one of our subsidiaries is the sole general partner of our operating partnership.

        We believe that we qualify to be taxed as a REIT. We believe that we will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet certain asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification. A portion of our activities, including our correspondent lending business, is conducted in two taxable REIT subsidiaries ("TRSs"), which are subject to corporate federal and state income taxes. Accordingly, we have made a provision for income taxes with respect to the operations of our TRSs. We expect that the effective rate for the provision for income taxes may be volatile in future periods. Our goal is to manage the business to take full advantage of the tax benefits afforded to us as a REIT.

Observations on Current Market Opportunities

        The U.S. economy continues its pattern of modest growth as reflected in recent economic data. During the first quarter of 2012, real U.S. gross domestic product expanded at an annual rate of 2.2% compared to 0.4% and 3.0% annual rates for the first and fourth quarters of 2011, respectively. Modest economic growth and pressure on state and federal government spending continued to affect unemployment rates during the first quarter of 2012. The national unemployment rate was 8.2% at March 31, 2012 compared to 8.9% and 8.5% at March 31, 2011 and December 31, 2011, respectively. Although currently in a declining trend, unemployment has persisted at a seasonally adjusted rate above 8% for 38 consecutive months during the period February, 2009 through March, 2012. The continued high unemployment levels are reflected in a continuing high number of personal and business bankruptcy filings as well as high delinquency rates on residential mortgage loans.

        Distress in the banking industry persists at historically high levels. However, the number of problem banks as identified by the FDIC is declining. As of December 31, 2011, the most recent date for which problem bank information is available, the FDIC identified 813 problem banks, a decrease from 888 at March 31, 2011 and 884 at December 31, 2010. The number of banks that have been

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seized is also declining with 16 depository institutions seized during the first quarter of 2012 compared to 26 depository institutions seized in the first quarter of 2011 and 18 depository institutions seized in the fourth quarter of 2011.

        Residential real estate transactions continue to see low levels of activity as a result of continuing historically high levels of unemployment, restrictive loan underwriting standards and uncertainties about economic prospects. Foreclosure activity decreased by 16% during the first quarter of 2012 as compared to the fourth quarter of 2011 and decreased by 15% during the first quarter of 2011 as compared to the fourth quarter of 2010. During 2011 and continuing into the first quarter of 2012 the level of foreclosure activity has moderated due to lenders addressing legal and documentation issues identified with their foreclosure processes. However, as these issues are remedied, foreclosure activity during 2012 is expected to increase over that of 2011.

        Thirty-year mortgage fixed mortgage interest rates ranged from a high of 4.08% to a low of 3.87% during the first quarter of 2012 (Source: Freddie Mac's Weekly Primary Mortgage Market Survey). Interest rates generally trended downward throughout 2011 but remained relatively flat throughout the first quarter of 2012.

        Our Manager continues to see substantial volumes of distressed residential mortgage loans (loan pools that consist of either nonperforming loans, troubled but performing loans or a combination thereof) offered for sale by a limited number of sellers. During the first quarter of 2012, our Manager reviewed 25 mortgage loan pools with unpaid principal balances totaling approximately $4.9 billion. We did not acquire any distressed mortgage loans during the first quarter of 2012; however, on March 28, 2012, our Manager committed on the Company's behalf to acquire mortgage loans with purchase prices totaling approximately $70.1 million, the transaction being subject to continuing diligence and customary closing conditions. There can be no assurance that the committed amounts will ultimately be acquired or that the transactions will be completed. During the first quarter of 2011, we acquired distressed mortgage loans with unpaid principal balances totaling $243.1 million, of which $227.3 million was acquired from or through one or more subsidiaries of Citigroup, Inc.

        We believe that the collapse of the independent mortgage company business model that occurred during the recent financial crisis in the United States and the shifting investment and operational priorities of banks and other traditional mortgage lenders have created additional opportunities for our business. Under current market conditions, these opportunities include the purchase from mortgage lenders of newly originated mortgage loans that are eligible for sale to a GSE. The HARP 2.0 program may increase the volume of such newly originated Agency-eligible loans available for purchase. These opportunities also include the purchase of newly originated mortgage loans that can be resold in the non-Agency whole loan market or securitized in the private label market as well as providing inventory financing to originators of such loans. During the three months ended March 31, 2012, we acquired approximately $1.9 billion in fair value of newly originated mortgage loans and received proceeds of approximately $1.9 billion on the sale of loans.

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Results of Operations

        The following is a summary of our key performance measures for the periods presented:

        During the quarter ended March 31, 2012, we recorded net income of $19.1 million, or $0.65 per diluted share. Our net income for the first quarter of 2012 reflects net gains on our investments in financial instruments totaling $24.9 million (comprised of net gain on investments and net gain on mortgage loans acquired for sale), including $6.7 million of valuation gains on MBS and mortgage loans excluding mortgage loans acquired for sale, supplemented by $16.4 million of interest income. Our results also reflect the growth in our correspondent lending segment. During the first quarter of 2012, we purchased $1.9 billion in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $13.4 million. At March 31, 2012, we held mortgage loans acquired for sale with fair values totaling $155.3 million.

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        During the quarter ended March 31, 2011, we recorded net income of $7.6 million, or $0.35 per diluted share. Our net income for the first quarter of 2011 reflected net gains on our investments in financial instruments totaling $10.0 million (comprised of net gain on investments and net gain on mortgage loans acquired for sale), including $7.6 million of valuation gains on MBS and mortgage loans excluding mortgage loans acquired for sale, supplemented by $6.2 million of interest income. During the first quarter of 2011, we purchased $19.6 million in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $83,000. At March 31, 2011, we held mortgage loans acquired for sale with fair values totaling $4.4 million.

Net Investment Income

        During the quarter ended March 31, 2012, we recorded net investment income of $46.6 million, comprised primarily of net gains on investments in financial instruments of $24.9 million supplemented by $16.4 million of interest income and $3.7 million from results of REO. This compares to net investment income of $17.3 million recognized during the quarter ended March 31, 2011, comprised primarily of $10.0 million of net gains on investments in financial instruments, supplemented by $6.2 million of interest income and $1.1 million of gains from results of REO.

        The growth in net investment income reflects the growth in the nonperforming loan portfolio, REOs and correspondent lending activities.

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        Net investment income on financial instruments is summarized below for the periods presented: