Edgar Filing: PennyMac Mortgage Investment Trust

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)


Maryland		27-0186273
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

6101 Condor Drive, Moorpark, California		93021
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

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

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

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 ¨ No x

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


Class		Outstanding at May 7, 2013
Common Shares of Beneficial Interest, $0.01par value		58,990,717

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 2013

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION			1
Item 1.	Financial Statements (Unaudited):		1
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		2
	Consolidated Statements of Changes in Shareholders’ Equity		3
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
	Observations on Current Market Opportunities		53
	Results of Operations		54
	Net Investment Income		55
	Expenses		66
	Balance Sheet Analysis		69
	Asset Acquisitions		69
	Investment Portfolio Composition		70
	Cash Flows		75
	Liquidity and Capital Resources		76
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		78
	Quantitative and Qualitative Disclosures About Market Risk		81
	Factors That May Affect Our Future Results		83
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		86
Item 4.	Controls and Procedures		86
PART II. OTHER INFORMATION			87
Item 1.	Legal Proceedings		87
Item 1A.	Risk Factors		87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		87
Item 3.	Defaults Upon Senior Securities		87
Item 4.	Mine Safety Disclosures		87
Item 5.	Other Information		87
Item 6.	Exhibits		88

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)


	March 31, 2013		December 31, 2012
ASSETS
Cash	$	19,376	$	33,756
Short-term investments		45,024		39,017
Mortgage loans acquired for sale at fair value		1,123,348		975,184
Mortgage loans at fair value		1,366,922		1,189,971
Real estate acquired in settlement of loans		84,486		88,078
Mortgage servicing rights at lower of amortized cost or fair value		179,136		125,430
Mortgage servicing rights at fair value		1,305		1,346
Principal and interest collections receivable		31,391		29,204
Interest receivable		3,136		3,029
Derivative assets		15,186		23,706
Servicing advances		37,695		32,191
Due from affiliates		5,991		4,829
Other assets		14,164		13,922

Total assets	$	2,927,160	$	2,559,663

LIABILITIES
Assets sold under agreements to repurchase:
Mortgage loans acquired for sale at fair value	$	1,035,486	$	894,906
Mortgage loans at fair value		576,018		353,805
Real estate acquired in settlement of loans		3,546		7,391
Derivative liabilities		2,079		967
Recourse liability		6,231		4,441
Accounts payable and accrued liabilities		22,259		42,402
Contingent underwriting fees payable		5,883		5,883
Payable to affiliates		14,748		12,216
Income taxes, net		38,481		36,316

Total liabilities		1,704,731		1,358,327


Commitments and contingencies

SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 58,990,225 and 58,904,456 common shares, respectively		590		589
Additional paid-in capital		1,131,231		1,129,858
Retained earnings		90,608		70,889

Total shareholders’ equity		1,222,429		1,201,336

Total liabilities and shareholders’ equity	$	2,927,160	$	2,559,663

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)


	Quarter ended March 31,
	2013			2012
Net Investment Income
Net gain on mortgage loans acquired for sale	$	29,279		$	13,370
Net gain on investments:
Mortgage-backed securities		—			357
Mortgage loans		63,980			11,131

		63,980			11,488

Interest income:
Short-term investments		31			9
Mortgage-backed securities		—			574
Mortgage loans		16,820			15,820
Other		24			22

		16,875			16,425

Loan origination fees		5,473			1,451
Results of real estate acquired in settlement of loans		(3,253	)		3,717
Net loan servicing fees		6,698			197
Other		—			1

Net investment income		119,052			46,649

Expenses
Loan fulfillment fees		28,136			6,124
Interest		11,236			6,674
Loan servicing		8,090			4,938
Management fees		6,492			1,804
Compensation		2,089			1,301
Professional services		2,384			442
Other		4,690			791

Total expenses		63,117			22,074

Income before provision for income taxes		55,935			24,575
Provision for income taxes		2,639			5,517

Net income	$	53,296		$	19,058


Earnings per share
Basic	$	0.90		$	0.65
Diluted	$	0.90		$	0.65
Weighted-average shares outstanding
Basic		58,927			29,076
Diluted		59,319			29,355
Dividends declared per share	$	0.57		$	0.55

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share data)


	Number of shares		Par value		Additional paid-in capital			Retained earnings			Total
Balance at December 31, 2011		28,404,554	$	284	$	518,272		$	27,461		$	546,017
Net income		—		—		—			19,058			19,058
Share-based compensation		87,999		—		883			—			883
Cash dividends, $0.55 per share		—		—		—			(15,692	)		(15,692	)
Proceeds from offerings of common shares		2,531,310		26		46,581			—			46,607
Underwriting and offering costs		—		—		(917	)		—			(917	)

Balance at March 31, 2012		31,023,863	$	310	$	564,819		$	30,827		$	595,956

Balance at December 31, 2012		58,904,456		589		1,129,858			70,889			1,201,336
Net income		—		—		—			53,296			53,296
Share-based compensation		85,769		1		1,451			—			1,452
Cash dividends, $0.57 per share		—		—		—			(33,577	)		(33,577	)
Underwriting and offering costs		—		—		(78	)		—			(78	)

Balance at March 31, 2013		58,990,225	$	590	$	1,131,231		$	90,608		$	1,222,429

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Quarter ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	53,296		$	19,058
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Net gain on mortgage loans acquired for sale at fair value		(29,279	)		(13,370	)
Net gain on mortgage-backed securities at fair value		—			(357	)
Net gain on mortgage loans at fair value		(63,980	)		(11,131	)
Accrual of unearned discounts on mortgage-backed securities at fair value and capitalization of interest and advances on mortgage loans at fair value		(5,230	)		(8,935	)
Results of real estate acquired in settlement of loans		3,253			(3,717	)
Change in fair value, amortization and impairment of mortgage servicing rights		4,539			455
Amortization of credit facility commitment fees		1,143			559
Accrual of costs related to forward purchase agreements		—			1,954
Share-based compensation expense		1,452			883
Purchases of mortgage loans acquired for sale at fair value		(8,849,152	)		(1,858,147	)
Sales of mortgage loans acquired for sale at fair value		8,683,133			1,931,024
Increase in principal and interest collections receivable		(2,187	)		(6,286	)
Increase in principal and interest collections receivable under forward purchase agreements		—			(2,379	)
(Increase) decrease in interest receivable		(107	)		113
Increase in due from affiliates		(1,161	)		(5,117	)
Increase in other assets		(5,420	)		(6,491	)
(Decrease) increase in accounts payable and accrued liabilities		(20,142	)		579
Increase in payable to affiliates		2,532			5,181
Increase in income taxes, net		2,165			4,042

Net cash (used) provided by operating activities		(225,145	)		47,918

Cash flows from investing activities
Net increase in short-term investments		(6,007	)		(33,125	)
Repayment of United States Treasury security		—			50,000
Repayments of mortgage-backed securities at fair value		—			11,086
Purchases of mortgage loans at fair value		(200,473	)		—
Repayments of mortgage loans at fair value		61,421			34,781
Repayments of mortgage loans under forward purchase agreements at fair value		—			8,701
Sales of real estate acquired in settlement of loans		32,024			26,777
Sales of real estate acquired in settlement of loans under forward purchase agreements		—			6,787
Purchases of mortgage servicing rights		—			(29	)
(Increase) decrease in margin deposits and restricted cash		(1,493	)		4,540

Net cash (used) provided by investing activities		(114,528	)		109,518

Cash flows from financing activities
Sales of securities under agreements to repurchase		—			291,914
Repurchases of securities sold under agreements to repurchase		—			(354,339	)
Sale of mortgage loans acquired for sale at fair value under agreements to repurchase		8,224,637			1,721,043
Repurchases of mortgage loans acquired for sale at fair value sold under agreements to repurchase		(8,084,057	)		(1,789,901	)
Sale of mortgage loans at fair value under agreements to repurchase		286,321			7,137
Repurchases of mortgage loans at fair value sold under agreements to repurchase		(64,108	)		(26,549	)
Repayments of note payable secured by mortgage loans at fair value		—			(2,044	)
Repayments of borrowings under forward purchase agreements		—			(27,129	)
Sales of real estate acquired in settlement of loans financed under agreement to repurchase		—			3,797
Repurchases of real estate acquired in settlement of loans financed under agreement to repurchase		(3,845	)		(9,547	)
Proceeds from issuance of common shares		—			46,607
Payment of common share underwriting and offering costs		(78	)		(917	)
Payment of dividends		(33,577	)		(15,692	)

Net cash provided (used) by financing activities		325,293			(155,620	)

Net (decrease) increase in cash		(14,380	)		1,816
Cash at beginning of period		33,756			14,589

Cash at end of period	$	19,376		$	16,405

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

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 commenced 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 operates in two segments: correspondent lending and investment activities:

•

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 newly originated prime credit quality mortgage loans either directly or in the form of mortgage backed securities (“MBS”), using the services of PNMAC Capital Management, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”).

Most of the loans the Company has acquired in its correspondent lending activities have been eligible for sale to government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) or government agencies such as the U.S. Department of Housing and Urban Development’s Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”.

•

The investment activities segment represents the Company’s investments in distressed mortgage loans, real estate acquired in settlement of loans (“REO”), MBS and mortgage servicing rights (“MSRs”). The Company seeks to maximize the value of the distressed mortgage loans that it acquires through proprietary loan modification programs, special servicing or 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 Company is externally managed by PCM, 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 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 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.

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, 2012 (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 periods ended March 31, 2013 are not necessarily indicative of the results for the year ending December 31, 2013.

Note 2—Concentration of Risks

As discussed in Note 1—Organization and Basis of Presentation above, PMT’s operations and 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. Before acquiring 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 distressed loans purchased by the Company has been acquired from or through one or more subsidiaries of Citigroup, Inc. 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 and unemployment rates and residential real estate values in the markets where the properties securing the Company’s mortgage loans are located;

•

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 effect 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 July 12, 2011 and December 20, 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 commitment under the forward purchase agreement dated July 12, 2011 was settled during the quarter ended June 30, 2012. The commitment under the forward purchase agreement dated December 20, 2011 was settled during the quarter ended September 30, 2012. There were no similar forward purchase agreements entered into or outstanding as of March 31, 2013.

The CGM Assets were 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 were included as Borrowings under forward purchase agreements. The CGM Assets were held by CGM within a separate trust entity deemed a variable interest entity. The Company’s interests in the CGM Assets were 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.” For these transactions, the silo consisted of the CGM Assets and its related liability. The Company directed 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 were attributable solely to the Company, and such cash flows could only be used to settle the related liability.

As a result of consolidating the silo, the Company’s consolidated statements of income and cash flows for the three months ended March 31, 2012 include the following amounts related to the silo:


	Quarter ended March 31, 2012
	(in thousands)
Net income:
Net gain on mortgage loans	$	6,700
Interest income on mortgage loans	$	502
Interest expense	$	1,515
Loan servicing fees	$	585
Cash flows:
Repayments of mortgage loans	$	8,701
Repayments of borrowings under forward purchase agreements	$	27,129

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.

The following table presents the fair value of mortgage loans (including forward purchase agreements) and REO purchased for its investment portfolio, including the CGM Assets:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Investment portfolio purchases:
Loans	$	200,473	$	286
REO		—		53

	$	200,473	$	339

Investment portfolio purchases above through one or more subsidiaries of Citigroup, Inc.:
Loans	$	200,297	$	286
REO		—		53

	$	200,297	$	339

Note 3—Transactions with Related Parties

Management Fees

Before February 1, 2013, under a management agreement, PMT paid PCM a base management fee payable quarterly and in arrears. The base management fee was calculated at 1.5% per year of shareholders’ equity. The performance incentive fee was calculated at 20% per year of the amount by which “core earnings,” on a rolling four-quarter basis and before the incentive fee, exceeded an 8% “hurdle rate” as defined in the management agreement.

Effective February 1, 2013, the management agreement was amended to provide that:

•

The base management fee is equal to the sum of (i) 1.5% per year of shareholders’ equity up to $2 billion, (ii) 1.375% per year of shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of shareholders’ equity in excess of $5 billion.

•

The performance incentive fee is calculated at a defined annualized percentage of the amount by which “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

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

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

“Net income” is defined as net income or loss computed in accordance with U.S. GAAP and certain other non-cash charges determined after discussions between the Company’s Manager and our independent trustees and approval by a majority of our independent trustees.

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

The “high watermark” starts at zero and is adjusted quarterly. The quarterly adjustment reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the Fannie Mae MBS yield (the target yield) for such quarter. If the net income is lower than the target yield, the high watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for our Manager to earn a performance incentive fee are adjusted cumulatively based on the performance of our net income over (or under) the target yield, until the net income in excess of the target yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.

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

Following is a summary of the base management and performance incentive fees recorded by the Company for the periods presented:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Base management fee	$	4,364	$	1,804
Performance incentive fee		2,128		—

Total management fee incurred during the period	$	6,492	$	1,804

Mortgage Loan Servicing

The Company, through its Operating Partnership, has a loan servicing agreement with PLS. Before February 1, 2013, the servicing fee rates were based on the risk characteristics of the mortgage loans serviced and total servicing compensation was established at levels that management believed were competitive with those charged by other servicers or specialty servicers, as applicable.

•

Servicing fee rates for nonperforming loans ranged between 50 and 100 basis points per year on the unpaid principal balance of the mortgage loans serviced on the Company’s behalf. PLS was 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 effected a refinancing of a loan on the Company’s behalf and not through a third party lender and the resulting loan was readily saleable, or originated a loan to facilitate the disposition of real estate that the Company had acquired in settlement of a loan, PLS was entitled to receive from the Company market-based fees and compensation.

•

For mortgage loans serviced by the Company as a result of acquisitions and sales with servicing rights retained in connection with the Company’s correspondent lending business, PLS was entitled to base subservicing fees and other customary market-based fees and charges as described above.

Effective February 1, 2013, the servicing agreement was amended to provide for servicing fees payable to PLS that changed from being based on a percentage of the loan’s unpaid principal balance to fixed per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO. PLS also remains entitled to market-based fees and charges relating to boarding, deboarding, liquidation, disposition, assumption, modification and origination fees and late charges relating to loans it services for the Company.

The term of the servicing agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement. The base servicing fees for distressed whole loans are calculated based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or the related underlying real estate. Presently, the base servicing fees for distressed whole loans range from $30 per month for current loans up to $125 per month for loans that are severely delinquent and in foreclosure.

The base servicing fees for loans subserviced by PLS on our behalf are also calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fees for loans subserviced on our behalf are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable rate mortgage loans. To the extent that these loans become delinquent, PLS is entitled to an additional servicing fee per loan falling within a range of $10 to $75 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or the related underlying real estate. PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination fees.

PLS is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement because the Company does not have any employees or infrastructure. For these services, PLS receives a supplemental fee of $25 per month for each distressed whole loan and $3.25 per month for each other subserviced loan. PLS is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Servicer in connection with the performance of its servicing obligations.

PLS, on behalf of the Company, currently participates in U.S. Department of Housing and Urban Development’s Home Affordable Modification Program (“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 incentive payments.

Following is a summary of mortgage loan servicing fees payable to PLS for the periods presented:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Loan servicing fees to PLS:
Base	$	4,361	$	3,028
Activity-based		3,729		1,910

	$	8,090	$	4,938

Correspondent Lending

Effective February 1, 2013, the mortgage banking and warehouse services agreement provides for a fulfillment fee paid to PLS based on the type of mortgage loan that the Company acquires. The fulfillment fee is equal to a percentage of the unpaid principal balance of mortgage loans purchased, with the addition of potential fee rate discounts applicable to the Company’s monthly purchase volume in excess of designated thresholds. PLS has also agreed to provide such services exclusively for the Company’s benefit, and PLS and its affiliates are prohibited from providing such services for any other third party. Before February 1, 2013, the Company paid PLS a fulfillment fee of 50 basis points of the unpaid principal balance of mortgage loans sold to non-affiliates where the Company is approved or licensed to sell to such non-affiliate.

PLS is entitled to a fulfillment fee based on the type of mortgage loan that the Company acquires and equal to a percentage of the unpaid principal balance of such mortgage loan. Presently, the applicable percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide, (iii) 0.80% for Home Affordable Refinance Program (“HARP”) mortgage loans with a loan-to-value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan-to-value ratio of greater than 105%, and (v) 0.50% for all other mortgage loans not contemplated above. At this time, the Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a servicer. Accordingly, under the mortgage banking and warehouse services agreement, PLS currently purchases loans underwritten in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at our cost less an administrative fee plus accrued interest and a sourcing fee of three basis points.

In the event that the Company purchases mortgage loans with an aggregate unpaid principal balance in any month greater than $2.5 billion and less than $5 billion, PLS has agreed to discount the amount of such fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.025%, (ii) the amount of unpaid principal balance in excess of $2.5 billion and (iii) the percentage of the aggregate unpaid principal balance relating to mortgage loans for which PLS collected fulfillment fees in such month. In the event the Company purchases mortgage loans with an aggregate unpaid principal balance in any month greater than $5 billion, our PLS has agreed to discount the amount of such fulfillment fees by reimbursing us an amount equal to the product of (i) 0.05%, (ii) the amount of unpaid principal balance in excess of $5 billion and (iii) the percentage of the aggregate unpaid principal balance relating to mortgage loans for which PLS collected fulfillment fees in such month.

In consideration for the mortgage banking services provided by PLS with respect to the Company’s acquisition of mortgage loans under the Servicer’s early purchase program, PLS is entitled to fees accruing (i) at a rate equal to $25,000 per year, and (ii) in the amount of $50 for each mortgage loan the Company acquires. In consideration for the warehouse services provided by PLS with respect to mortgage loans that the Company finances for its warehouse lending clients, with respect to each facility, PLS is entitled to fees accruing (i) at a rate equal to $25,000 per year, and (ii) in the amount of $50 for each mortgage loan that the Company finances thereunder. Where we have entered into both an early purchase agreement and a warehouse lending agreement with the same client, our Servicer shall only be entitled to one $25,000 per annum fee and, with respect to any mortgage loan that becomes subject to both such agreements, only one $50 per loan fee.

The term of our mortgage banking and warehouse services agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

Following is a summary of correspondent lending activity between the Company and PLS for the periods presented:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Sourcing fees received	$	1,010	$	244
Fulfillment fees	$	28,136	$	6,124
Fair value of loans sold to PLS	$	3,548,397	$	838,120
Fair value of mortgage loans included in mortgage loans acquired for sale pending sale to PLS at period end	$	542,490	$	41,247

Investment Activities

Pursuant to the terms of a MSR recapture agreement, effective February 1, 2013, if PLS refinances through its retail lending business loans for which PMT previously held the MSRs, PLS is generally required to transfer and convey to one of the Company’s wholly-owned subsidiaries, PennyMac Corp. (“PMC”), without cost to PMC, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. MSR recapture amounts are shown in Note 24—Net loan servicing fees. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with the terms of the agreement.

Pursuant to the spread acquisition and MSR servicing agreement, PMT may acquire from PLS the rights to receive certain excess servicing spread arising from MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related mortgage loans. The terms of each transaction under the spread acquisition and MSR servicing agreement will be subject to the terms of such agreement as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

Other Transactions

In connection with the initial public offering of PMT’s common shares (“IPO”) on August 4, 2009, the Company entered into an agreement with PCM pursuant to which the Company agreed to reimburse PCM for the $2.9 million payment that it made to the IPO underwriters (the “Conditional Reimbursement”) if the Company satisfied certain performance measures over a specified period of time. Effective February 1, 2013, the Company amended the terms of the reimbursement agreement to provide for the reimbursement of PCM of the Conditional Reimbursement if the Company is required to pay PCM performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The reimbursement agreement also provides for the payment to the IPO underwriters of the payment that the Company agreed to make to them at the time of the IPO if the Company satisfied certain performance measures over a specified period of time. As PCM earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million.

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

The Company reimburses PCM and its affiliates for other expenses, including common overhead expenses incurred on its behalf by PCM and its affiliates, in accordance with the terms of its management agreement.

The foregoing expenses are summarized below:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Reimbursement of expenses incurred on PMT’s behalf	$	1,358	$	2,410
Reimbursement of common overhead incurred by PCM and its affiliates		2,606		386

	$	3,964	$	2,796

Payments and settlements during the period (1)	$	33,362	$	5,485

(1)	Payments and settlements include payments for correspondent lending activities itemized in the preceding table and netting settlements made pursuant to master netting agreements between the Company and PCM and its affiliates.

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


	March 31, 2013		December 31, 2012
	(in thousands)
Management fee	$	6,518	$	4,499
Contingent offering costs		2,941		2,941
Other expenses		5,289		4,776

	$	14,748	$	12,216

Amounts due from affiliates totaling $6.0 million and $4.8 million at March 31, 2013 and December 31, 2012, respectively, 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, 2013 and December 31, 2012.

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 determined 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.

The Company makes 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 share, unvested

share-based compensation awards containing non-forfeitable rights to receive 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:


	Quarter ended March 31,
	2013			2012
	(in thousands, except per share amounts)
Basic earnings per share:
Net income	$	53,296		$	19,058
Effect of participating securities—share-based compensation instruments		(518	)		(213	)

Net income attributable to common shareholders	$	52,778		$	18,845

Weighted-average shares outstanding		58,927			29,076
Basic earnings per share	$	0.90		$	0.65
Diluted earnings per share:
Net income	$	53,296		$	19,058

Weighted-average shares outstanding		58,927			29,076
Dilutive potential common shares—shares issuable under share-based compensation plan		392			279

Diluted weighted-average number of common shares outstanding		59,319			29,355

Diluted earnings per common share	$	0.90		$	0.65

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.

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 as well as unpaid principal balance information at period end:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Cash flows:
Proceeds from sales	$	8,683,133	$	1,931,024
Service fees received	$	16,965	$	701
Period-end information:
Unpaid principal balance of loans outstanding at period-end	$	16,642,130	$	1,532,615
Delinquencies:
30-89 days	$	38,272	$	1,487
90 or more days or in foreclosure or bankruptcy	$	4,257	$	—

Note 6—Netting of Financial Instruments

The Company uses derivative instruments to manage exposure to interest rate risk created by the commitments it makes to correspondent lenders to purchase loans at specified interest rates, also called interest rate lock commitments (“IRLCs”), mortgage loans acquired for sale at fair value and MSRs. All derivative financial instruments are recorded on the balance sheet at fair value. The

Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) by (or to) its counterparties when subject to an enforceable master netting arrangement. In the event of default, all counterparties are subject to legally enforceable master netting agreements. The derivatives that are not subject to a master netting arrangement are IRLCs. As of March 31, 2013 and December 31, 2012, the Company did not enter into reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following table.

Offsetting of Derivative Assets


	March 31, 2013								December 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the balance sheet			Net amounts of assets presented in the balance sheet			Gross amounts of recognized assets		Gross amounts offset in the balance sheet			Net amounts of assets presented in the balance sheet
	(in thousands)
Derivatives:
MBS put options	$	326	$	—		$	326		$	977	$	—		$	977
MBS call options		1,052		—			1,052			—		—			—
Forward purchase contracts		6,460		—			6,460			2,617		—			2,617
Forward sale contracts		1,121		—			1,121			3,458		—			3,458
Netting		—		(4,825	)		(4,825	)		—		(2,825	)		(2,825	)

Total derivatives, subject to a master netting arrangement		8,959		(4,825	)		4,134			7,052		(2,825	)		4,227
Total derivatives, not subject to a master netting arrangement		11,052		—			11,052			19,479		—			19,479

Total	$	20,011	$	(4,825	)	$	15,186		$	26,531	$	(2,825	)	$	23,706

Derivative Assets, and Collateral Held by Counterparty

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


	March 31, 2013								December 31, 2012
			Gross amounts not offset in the balance sheet								Gross amounts not offset in the balance sheet
	Net amount of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount		Net amount of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	11,052	$	—	$	—	$	11,052	$	19,479	$	—	$	—	$	19,479
Barclays		1,400		—		—		1,400		15		—		—		15
Bank of America, N.A.		596		—		—		596		1,219		—		—		1,219
Cantor Fitzgerald LP		579		—		—		579		581		—		—		581
Citibank		456		—		—		456		1,009		—		—		1,009
Credit Suisse First Boston Mortgage Capital LLC		166		—		—		166		820		—		—		820
Morgan Stanley Bank, N.A.		104		—		—		104		316		—		—		316
Other		833		—		—		833		267		—		—		267

Total	$	15,186	$	—	$	—	$	15,186	$	23,706	$	—	$	—	$	23,706

Offsetting of Derivative Liabilities and Financial Liabilities

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


	March 31, 2013								December 31, 2012
	Gross amounts of recognized liabilities		Gross amounts offset in the balance sheet			Net amounts of liabilities presented in the balance sheet			Gross amounts of recognized liabilities		Gross amounts offset in the balance sheet			Net amounts of liabilities presented in the balance sheet
	(in thousands)
Derivatives:
Forward purchase contracts	$	462	$	—		$	462		$	1,741	$	—		$	1,741
Forward sale contracts		8,560		—			8,560			4,520		—			4,520
Netting		—		(6,943	)		(6,943	)		—		(5,294	)		(5,294	)

Total derivatives, subject to a master netting arrangement		9,022		(6,943	)		2,079			6,261		(5,294	)		967
Total derivatives, not subject to a master netting arrangement		—		—			—			—		—			—

Total derivatives		9,022		(6,943	)		2,079			6,261		(5,294	)		967

Assets sold under agreements to repurchase:
Mortgage loans acquired for sale at fair value		1,035,486		—			1,035,486			894,906		—			894,906
Mortgage loans at fair value		576,018		—			576,018			353,805		—			353,805
Real estate acquired in settlement of loans		3,546		—			3,546			7,391		—			7,391

Total assets sold under agreements to repurchase		1,615,050		—			1,615,050			1,256,102		—			1,256,102

Total	$	1,624,072	$	(6,943	)	$	1,617,129		$	1,262,363	$	(5,294	)	$	1,257,069

Derivative Liabilities, Financial Liabilities, and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that does not meet the accounting guidance qualifying for offset. All assets sold under agreements to repurchase have sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.


	March 31, 2013									December 31, 2012
	Net liabilities in the balance sheet		Gross amounts not offset in the balance sheet					Net amount		Net liabilities in the balance sheet		Gross amounts not offset in the balance sheet					Net amount
	Net liabilities in the balance sheet		Financial instruments			Cash collateral pledged		Net amount		Net liabilities in the balance sheet		Financial instruments			Cash collateral pledged		Net amount
	(in thousands)
Citibank	$	778,701	$	(777,825	)	$	—	$	876	$	474,625	$	(474,625	)	$	—	$	—
Bank of America, N.A.		259,858		(259,858	)		—		—		256,711		(256,711	)		—		—
Credit Suisse First Boston Mortgage Capital LLC		372,985		(372,663	)		—		322		243,525		(243,525	)		—		—
Morgan Stanley Bank, N.A.		133,413		(133,413	)		—		—		155,321		(155,321	)		—		—
Barclays		71,291		(71,291	)		—		—		79,253		(78,780	)		—		473
Wells Fargo Bank, N.A.		88		—			—		88		47,140		(47,140	)		—		—
Other		793		—			—		793		494		—			—		494

Total	$	1,617,129	$	(1,615,050	)	$	—	$	2,079	$	1,257,069	$	(1,256,102	)	$	—	$	967

Note 7—Fair Value

The Company’s consolidated 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 non cash financial assets, including short-term investments and mortgage loans, as well as 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 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 at the lower of amortized cost or fair value.

The Company’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are generally aimed at moderating the effects of changes in interest rates on the assets’ values. During the period, a portion of the IRLCs, the fair value of which typically increases when prepayment speeds increase, were used to mitigate the effect of changes in fair value of the servicing assets, which typically decreases as prepayment speeds increase.

For loans sold under agreements to repurchase, REO financed through agreements to repurchase and borrowings under forward purchase agreements, management has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt, thereby matching the debt issuance cost 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:


	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	45,024	$	—	$	—	$	45,024
Mortgage loans acquired for sale at fair value		—		1,123,348		—		1,123,348
Mortgage loans at fair value		—		—		1,366,922		1,366,922
Mortgage servicing rights at fair value		—		—		1,305		1,305
Derivative assets:
Interest rate lock commitments		—		—		11,052		11,052
MBS put options		—		326		—		326
MBS call options		—		1,052		—		1,052
Forward purchase contracts		—		6,460		—		6,460
Forward sales contracts		—		1,121		—		1,121

Total derivative assets before netting		—		8,959		11,052		20,011
Netting (1)		—		—		—		(4,825	)

Total derivative assets		—		8,959		11,052		15,186

	$	45,024	$	1,132,307	$	1,379,279	$	2,551,785

Liabilities:
Derivative liabilities:
Forward purchase contracts	$	—	$	462	$	—	$	462
Forward sales contracts		—		8,560		—		8,560

Total derivative liabilities before netting		—		9,022		—		9,022
Netting (1)		—		—		—		(6,943	)

Total derivative liabilities	$	—	$	9,022	$	—	$	2,079

(1)

Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.


	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	39,017	$	—	$	—	$	39,017
Mortgage loans acquired for sale at fair value		—		975,184		—		975,184
Mortgage loans at fair value		—		—		1,189,971		1,189,971
Mortgage servicing rights at fair value		—		—		1,346		1,346
Derivative assets:
Interest rate lock commitments		—		—		19,479		19,479
MBS put options		—		977		—		977
Forward purchase contracts		—		2,617		—		2,617
Forward sales contracts		—		3,458		—		3,458

Total derivative assets before netting (1)		—		7,052		19,479		26,531
Netting (1)		—		—		—		(2,825	)

Total derivative assets		—		7,052		19,479		23,706

	$	39,017	$	982,236	$	1,210,796	$	2,229,224

Liabilities:
Derivative liabilities:
Forward purchase contracts	$	—	$	1,741	$	—	$	1,741
Forward sales contracts		—		4,520		—		4,520

Total derivative liabilities before netting		—		6,261		—		6,261
Netting (1)		—		—		—		(5,294	)

Total derivative liabilities	$	—	$	6,261	$	—	$	967

(1)

The Company’s MBS, mortgage loans at fair value, mortgage loans under forward purchase agreements, MSRs, IRLCs and securities sold under agreements to repurchase were measured using Level 3 inputs on a recurring basis. The following is a summary of changes in those items:


	Quarter ended March 31, 2013
	Mortgage loans			Mortgage servicing rights			Interest rate lock commitments			Total
	(in thousands)
Assets:
Balance, December 31, 2012	$	1,189,971		$	1,346		$	19,479		$	1,210,796
Purchases		200,473			—			—			200,473
Repayments		(61,421	)		—			—			(61,421	)
Interest rate lock commitments issued, net		—			—			35,414			35,414
Capitalization of interest		5,230			—			—			5,230
Servicing received as proceeds from sales of mortgage loans		—			26			—			26
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		8,445			—			—			8,445
Other factors		55,535			(67	)		—			55,468

		63,980			(67	)		—			63,913

Transfers of mortgage loans to REO		(31,311	)		—			—			(31,311	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(43,841	)		(43,841	)

Balance, March 31, 2013	$	1,366,922		$	1,305		$	11,052		$	1,379,279

Changes in fair value recognized during the period relating to assets still held at March 31, 2013	$	50,608		$	(67	)	$	11,052		$	61,593

Accumulated changes in fair value relating to assets still held at March 31, 2013	$	147,627					$	11,052


	Quarter ended March 31, 2012
	Mortgage- backed securities			Mortgage loans			Mortgage loans under forward purchase agreements			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2011	$	72,813		$	696,266		$	129,310		$	749		$	899,138
Purchases		—			—			286			20			306
Repayments		(11,086	)		(26,187	)		(8,701	)		—			(45,974	)
Accrual of unearned discounts		335			—			—			—			335
Servicing received as proceeds from sales of mortgage loans		—			—			—			520			520
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		—			7,704			1,743			—			9,447
Other factors		363			(3,367	)		4,957			(101	)		1,852

		363			4,337			6,700			(101	)		11,299

Transfers of mortgage loans to REO		—			(24,201	)		—			—			(24,201	)
Transfer from mortgage loans acquired for sale		—			18			—			—			18
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			—			(5,256	)		—			(5,256	)
Transfers of mortgage loans under forward purchase agreements to mortgage loans		—			17,309			(17,309	)		—			—

Balance, March 31, 2012	$	62,425		$	667,542		$	105,030		$	1,188		$	836,185

Changes in fair value recognized during the period relating to assets still held at March 31, 2012	$	363		$	26		$	4,494		$	(101	)	$	4,782

Accumulated changes in fair value relating to assets still held at March 31, 2012	$	(2,288	)	$	58,748		$	9,091


	Securities sold under agreements to repurchase
	(in thousands)
Liabilities:
Balance, December 31, 2011	$	115,493
Changes in fair value included in income		—
Sales		291,914
Repurchases		(354,339	)

Balance, March 31, 2012	$	53,068

Changes in fair value recognized during the period relating to liabilities still outstanding at March 31, 2012	$	—

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):


	March 31, 2013
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	1,123,348	$	1,078,360	$	44,988
90 or more days delinquent (1)		—		—		—

		1,123,348		1,078,360		44,988

Other mortgage loans at fair value:
Current through 89 days delinquent		448,054		673,684		(225,630	)
90 or more days delinquent (1)		918,868		1,679,842		(760,974	)

		1,366,922		2,353,526		(986,604	)

	$	2,490,270	$	3,431,886	$	(941,616	)


	December 31, 2012
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	975,184	$	931,787	$	43,397
90 or more days delinquent (1)		—		—		—

		975,184		931,787		43,397

Other mortgage loans at fair value:
Current through 89 days delinquent		404,016		640,722		(236,706	)
90 or more days delinquent (1)		785,955		1,483,311		(697,356	)

		1,189,971		2,124,033		(934,062	)

	$	2,165,155	$	3,055,820	$	(890,665	)

(1)	Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

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


	Quarter ended March 31, 2013
	Net gain on mortgage loans acquired for sale		Net gain on investments		Interest income		Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—	$	—	$	—		$	—
Mortgage loans acquired for sale at fair value		24,757		—		—		—			24,757
Mortgage loans at fair value		—		63,980		—		—			63,980
Mortgage servicing rights at fair value		—		—		—		(67	)		(67	)

	$	24,757	$	63,980	$	—	$	(67	)	$	88,670


	Quarter ended March 31, 2012
	Net gain on mortgage loans acquired for sale		Net gain on investments		Interest income		Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—	$	—	$	—		$	—
Mortgage-backed securities at fair value		—		357		335		—			692
Mortgage loans acquired for sale at fair value		13,370		—		—		—			13,370
Mortgage loans at fair value		—		4,431		—		—			4,431
Mortgage loans under forward purchase agreements at fair value		—		6,700		—		—			6,700
Mortgage servicing rights at fair value		—		—		—		(101	)		(101	)

	$	13,370	$	11,488	$	335	$	(101	)	$	25,092

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:


	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Real estate asset acquired in settlement of loans	$	—	$	—	$	42,254	$	42,254
Mortgage servicing assets at lower of amortized cost or fair value		—		—		111,935		111,935

	$	—	$	—	$	154,189	$	154,189


	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Real estate asset acquired in settlement of loans	$	—	$	—	$	56,156	$	56,156
Mortgage servicing rights at lower of amortized cost or fair value		—		—		86,215		86,215

	$	—	$	—	$	142,371	$	142,371

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


	Quarter ended March 31,
	2013			2012
	(in thousands)
Real estate asset acquired in settlement of loans	$	(4,954	)	$	(2,782	)
Real estate asset acquired in settlement of loans under forward purchase agreements		—			(348	)
Mortgage servicing assets at lower of amortized cost or fair value		2,486			(106	)

	$	(2,468	)	$	(3,236	)

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 initial carrying value of the REO is 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 for impairment with reference to the assets’ fair value. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSRs 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 point ranges for fixed-rate mortgage loans with note rates between 3% and 4.5% and a single pool for 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 carrying value of the MSRs for that pool reduced by the existing valuation allowance, those MSRs are impaired.

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

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.

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s cash balances as well as its borrowings secured by its inventory of mortgage loans acquired for sale and its investments in nonperforming loans and REO in the form of repurchase agreements are carried at amortized cost.

Management has concluded that the estimated fair values of Cash, Mortgage loans acquired for sale at fair value sold under agreements to repurchase, Mortgage loans at fair value sold under agreements to repurchase and Real estate acquired in settlement of loans financed under agreements to repurchase approximate the agreements’ carrying values due to the immediate realizability of cash at its carrying amount and to the borrowing agreements’ short terms and variable interest rates.

Cash is measured using Level 1 inputs. The Company’s borrowings carried at amortized cost do not have active markets or observable inputs and the fair value is measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” financial statement items as of March 31, 2013 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair value.

Valuation Techniques and Assumptions

Most of the Company’s assets are carried at fair value with changes in fair value recognized in current period income. A substantial portion of those assets are “Level 3” financial statement items which require the use of significant unobservable inputs in the 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 under the circumstances.

The Manager has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to its Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Company’s investment portfolios and maintenance of its 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 activities are used to calibrate subsequent projections used for valuation.

The FAV group is responsible for reporting to the valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors 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.

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

Mortgage Loans

Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets:

•

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, comprised of the Company’s mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value, are categorized as “Level 3” financial statement items, and their fair

values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices, prepayment speeds, default speeds 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 its 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 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.

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


	Range (Weighted Average)
Key Inputs	March 31, 2013	December 31, 2012
Discount rate	8.3% – 20.5%	8.8% – 20.7%
	(12.5%)	(13.1%)
Twelve-month projected housing price index change	2.1% – 5.6%	0.4% – 1.5%
	(3.6%)	(1.1%)
Prepayment speed (1)	0.0% – 4.6%	0.4% – 4.4%
	(2.5%)	(2.2%)
Total prepayment speed (2)	0.6% – 41.2%	5.9% – 31.2%
	(21.0%)	(20.6%)

(1)	Prepayment speed is measured using life voluntary Conditional Prepayment Rate (“CPR”).

(2)	Total prepayment speed is measured using life total CPR.

Derivative Financial Instruments

The Company estimates the fair value of an IRLC based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the percentage of loans that the Company expects to ultimately fund as a percentage of the commitments it has made (the “pull-through rate”).

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, could result in a significant change in fair value measurement. The financial impact of these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in market value in comparison to the agreed-upon purchase price.

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


	Range (Weighted average)
	March 31, 2013	December 31, 2012
Key Inputs	Range (Weighted average)
Pull-through rate	65.0% – 98.0%	44.2% – 98.0%
	(83.5%)	(80.6%)
MSR value expressed as:
Servicing fee multiple	0.9 – 5.2	1.8 – 4.8
	(4.5)	(4.5)
Percentage of unpaid principal balance	0.2% – 1.3%	0.4% – 1.2%
	(1.1%)	(1.1%)

The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the interest rate 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 or 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 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.

MSRs are generally subject to loss in value when mortgage rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the MSRs, thereby reducing MSR value. Reductions in the value of MSRs affect income primarily through change in fair value and impairment charges. For MSRs backed by mortgage loans with historically low interest rates, factors other than interest rates (such as housing price changes) take on increasing influence on prepayment behavior of the underlying mortgage loans.

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


	Quarter ended March 31,
	2013		2012
	Range (Weighted average)
Key Inputs	Amortized cost	Fair value	Amortized cost	Fair value
Pricing spread (1)	5.4% – 14.4%	7.5% – 14.4%	7.5% – 14.5%	7.5% – 14.5%
	(7.0%)	(8.5%)	(7.5%)	(8.3%)
Life (in years)	2.7 – 6.9	2.8 – 6.8	2.8 – 7.0	2.8 – 7.0
	(6.4)	(6.1)	(6.5)	(5.8)
Annual total prepayment speed (2)	8.5% – 22.7%	10.4% – 27.0%	6.7% – 27.4%	7.9% – 27.4%
	(9.1%)	(14.4%)	(7.9%)	(13.1%)
Annual per-loan cost of servicing	$68 – $140	$68 – $68	$68 – $140	$68 – $140
	($68)	($68)	($69)	($89)

(1)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

(2)	Prepayment speed is measured using CPR.

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


	March 31, 2013						December 31, 2012
	Range (Weighted average)
Key Inputs	Amortized cost			Fair value			Amortized cost			Fair value
	(unpaid principal balance and effect on value amounts in thousands)
Unpaid principal balance of underlying loans	$	16,479,081		$	163,049		$	11,986,957		$	181,783
Pricing spread (1)		5.4% – 19.0	%		8.6% – 14.5	%		7.5% – 16.5	%		7.5% – 16.5%
		(6.8%)			(9.0%)			(7.7%)			(7.7%)
Effect on value of 5% adverse change	$	(3,056	)	$	(19	)	$	(2,052	)	$	(21	)
Effect on value of 10% adverse change	$	(6,020	)	$	(38	)	$	(4,041	)	$	(40	)
Effect on value of 20% adverse change	$	(11,686	)	$	(73	)	$	(7,845	)	$	(78	)

Average life (in years)		1.8 – 6.9			1.5 – 6.8			1.7 – 6.3			1.4 – 6.3
		(6.4)			(6.2)			(6.3)			(6.0)
Prepayment speed (2)		8.6% – 45.9	%		10.4% – 50.9	%		10.3% – 47.8	%		10.3% – 65.9	%
		(9.5%)			(15.1%)			(10.3%)			(13.2%)
Effect on value of 5% adverse change	$	(4,214	)	$	(43	)	$	(3,026	)	$	(52	)
Effect on value of 10% adverse change	$	(8,275	)	$	(83	)	$	(5,937	)	$	(100	)
Effect on value of 20% adverse change	$	(15,966	)	$	(159	)	$	(11,436	)	$	(190	)

Annual per-loan cost of servicing		$68 – $140			$68 – $140			$68 – $140			$68 – $140
		$(68)			$(73)			$(68)			$(74)
Effect on value of 5% adverse change	$	(1,138	)	$	(12	)	$	(778	)	$	(12	)
Effect on value of 10% adverse change	$	(2,275	)	$	(24	)	$	(1,556	)	$	(24	)
Effect on value of 20% adverse change	$	(4,551	)	$	(47	)	$	(3,112	)	$	(48	)

(1)

(2)	Prepayment speed is measured using CPR.

The preceding sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated 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.

Note 8—Short-Term Investments

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

Note 9—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:


	March 31, 2013				December 31, 2012
	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
Loan Type	(in thousands)
Government insured or guaranteed	$	542,490	$	516,633	$	153,326	$	144,619
Conventional:
Agency-eligible		574,006		555,061		820,492		785,830
Jumbo loans		6,852		6,666		1,366		1,338

	$	1,123,348	$	1,078,360	$	975,184	$	931,787

Loans pledged to secure loans sold under agreements to repurchase	$	1,122,940			$	972,079

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. As discussed in Note 3—Transactions with Related Parties, the Company transfers government insured or guaranteed mortgage loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee of three basis points on the unpaid principal balance of each such loan.

Note 10—Derivative Financial Instruments

The Company is exposed to price risk relative to its mortgage loans acquired for sale as well as to the IRLCs it issues to correspondent lenders. The Company bears price risk from the time a IRLC is issued to a correspondent lender to the time the purchased mortgage loan is sold. During this period, the Company is exposed to losses if mortgage interest rates increase, because the value of the purchase commitment or mortgage loan acquired for sale decreases.

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 IRLCs and inventory of mortgage loans acquired for sale.

The Company is also exposed to risk relative to the fair value of its MSRs. The Company is exposed to loss in value of its MSRs when interest rates decrease. Beginning in the fourth quarter of 2012, the Company includes MSRs in its hedging activities.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company had the following derivative assets and liabilities and related margin deposits recorded within the Derivative assets and Derivative liabilities on the consolidated balance sheets:


	March 31, 2013								December 31, 2012
			Fair value								Fair value
Instrument	Notional amount		Derivative assets			Derivative liabilities			Notional amount		Derivative assets			Derivative liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Free-standing derivatives (economic hedges):
Interest rate lock commitments	$	933,768	$	11,052		$	—		$	1,694,739	$	19,479		$	—
Forward purchase contracts		1,890,960		6,460			462			2,206,539		2,617			1,741
Forward sales contracts		3,224,190		1,121			8,560			4,266,983		3,458			4,520
MBS put options		225,000		326			—			495,000		977			—
MBS call options		350,000		1,052			—			—		—			—

Total derivative instruments before netting		6,623,918		20,011			9,022			8,663,261		26,531			6,261
Netting		—		(4,825	)		(6,943	)		—		(2,825	)		(5,294	)

Total	$	6,623,918	$	15,186		$	2,079		$	8,663,261	$	23,706		$	967

Margin deposits with derivatives counterparties			$	2,118							$	2,469

The following table summarizes the notional amount activity for derivative contracts used to hedge the Company’s IRLCs, inventory of mortgage loans acquired for sale and Agency MBS:


Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended March 31, 2013
MBS put options		495,000		1,480,000		(1,750,000	)		225,000
MBS call options		—		900,000		(550,000	)		350,000
Forward purchase contracts		2,206,539		12,442,344		(12,757,923	)		1,890,960
Forward sales contracts		4,266,983		17,850,273		(18,893,066	)		3,224,190


Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended March 31, 2012
MBS put options		28,000		97,500		(55,500	)		70,000
MBS call options		5,000		25,000		(10,000	)		20,000
Forward purchase contracts		398,400		1,381,283		(1,017,359	)		762,324
Forward sales contracts		756,691		2,835,824		(2,377,235	)		1,215,280

The Company recorded net gains on derivative financial instruments used to hedge the Company’s IRLCs and inventory of mortgage loans totaling $10.9 million and $602 thousand for the quarters ending March 31, 2013 and 2012, respectively. Derivative gains and losses are included in Net gains on mortgage loans acquired for sale in the Company’s consolidated statements of income.

The Company recorded net losses on derivative financial instruments used as economic hedges of MSRs totaling $2.0 million for the quarter ending March 31, 2013. The derivative losses are included in Net loan servicing fees in the Company’s consolidated statements of income. The Company had no similar economic hedges in place for the quarter ending March 31, 2012.

Note 11—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.

Following is a summary of the distribution of the Company’s mortgage loans at fair value:


	March 31, 2013				December 31, 2012
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)				(in thousands)
Nonperforming loans	$	918,868	$	1,679,842	$	785,955	$	1,483,311
Performing loans:
Fixed		226,329		344,652		201,212		322,005
Adjustable rate/hybrid		143,239		194,475		134,196		195,381
Interest rate step-up		78,343		134,339		68,475		123,117
Balloon		143		218		133		219

		448,054		673,684		404,016		640,722

	$	1,366,922	$	2,353,526	$	1,189,971	$	2,124,033

Mortgage loans at fair value pledged to secure borrowings at period end:
Sales of loans under agreements to repurchase	$	1,203,387			$	947,522

Mortgage loans held in a consolidated subsidiary whose stock is pledged to secure financings of such loans	$	8,233			$	9,061

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans at fair value:


Concentration	March 31, 2013	December 31, 2012
Portion of mortgage loans originated between 2005 and 2007	74%	74%
Percentage of fair value of mortgage loans with unpaid-principal-balance-to current-property-value in excess of 100%	69%	68%
Percentage of mortgage loans secured by California real estate	19%	18%
Additional states contributing 5% or more of mortgage loans	New York Florida New Jersey	New York Florida New Jersey

Note 12—Real Estate Acquired in Settlement of Loans

Following is a summary of the activity in REO:


	Quarter ended March 31,
	2013			2012
	(in thousands)
Balance at beginning of period	$	88,078		$	80,570
Transfers from mortgage loans at fair value and advances		31,510			25,419
Results of REO:
Valuation adjustments, net		(6,089	)		(2,554	)
Gain on sale, net		2,836			4,551

		(3,253	)		1,997
Sale proceeds		(31,849	)		(26,777	)

Balance at period end	$	84,486		$	81,209

At period end:
REO pledged to secure agreements to repurchase	$	8,233		$	9,061

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties	$	7,122		$	14,773

Note 13—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

There was no REO under forward purchase agreements for the quarter ended March 31, 2013. Following is a summary of the activity in REO under forward purchase agreements for the quarter ended March 31, 2012:


	Quarter ended March 31, 2012
Balance at beginning of period	$	22,979
Purchases		53
Transfers from mortgage loans under forward purchase agreements at fair value and advances		5,696
Results of REO under forward purchase agreements:
Valuation adjustments, net		(381	)
Gain on sale, net		2,101

		1,720
Sale proceeds		(6,787	)

Balance at period end	$	23,661

Note 14—Mortgage Servicing Rights

Carried at Fair Value:

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


	Quarter ended March 31,
	2013			2012
	(in thousands)
Balance at beginning of period	$	1,346		$	749
Additions:
Purchases		—			20
MSRs resulting from loan sales		26			520

Total additions		26			540

Change in fair value:
Due to changes in valuation inputs or assumptions used in valuation model (1)		—			(64	)
Other changes in fair value (2)		(67	)		(37	)

		(67	)		(101	)

Balance at period end	$	1,305		$	1,188

(1)	Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

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

Carried at Lower of Amortized Cost or Fair Value:

The activity in MSRs carried at amortized cost is summarized below:


	Quarter ended March 31,
	2013			2012
	(in thousands)
Mortgage Servicing Rights:
Balance at beginning of period	$	132,977		$	5,282
MSRs received as proceeds from loan sales		56,190			12,409
Purchases		—			9
Sales		—			—
Amortization		(4,970	)		(248	)
Application of valuation allowance to write down MSRs with other-than temporary impairment		—			—

Balance at period end		184,197			17,452

Valuation Allowance for Impairment of Mortgage Servicing Rights:
Balance at beginning of period		(7,547	)		—
Reversals (additions)		2,486			(106	)
Application of valuation allowance to write down MSRs with other-than temporary impairment		—			—

Balance at period end		(5,061	)		(106	)

Mortgage Servicing Rights, net at period end	$	179,136		$	17,346

Estimated Fair Value of MSRs at period end	$	186,209		$	17,396

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, 2013 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.


Twelve month period ending March 31,	Estimated MSR amortization
	(in thousands)
2014	$	20,897
2015		19,373
2016		17,487
2017		15,936
2018		14,669
Thereafter		95,835

Total	$	184,197

Servicing fees relating to MSRs are recorded in Net loan servicing fees on the consolidated statements of income and are summarized below:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Contractual servicing fees	$	8,937	$	646
Late charges		—		—
Ancillary fees		—		—

	$	8,937	$	646

Note 15—Securities Sold Under Agreements to Repurchase at Fair Value

As of and during the quarter ended March 31, 2013, the Company had no securities sold under agreements to repurchase outstanding. Following is a summary of financial information relating to securities sold under agreements to repurchase at fair value as of and for the quarter ended:


	Quarter ended March 31, 2012
	(dollar amounts in thousands)
Period end:
Balance	$	53,068
Weighted-average interest rate		0.99	%
Fair value of securities securing agreements to repurchase	$	62,425
During the period:
Weighted-average interest rate		0.90	%
Average balance of securities sold under agreements to repurchase	$	69,030
Total interest expense	$	157
Maximum daily amount outstanding	$	115,493

Note 16—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:


	Quarter ended March 31,
	2013			2012
	(dollar amounts in thousands)
Period end:
Balance	$	1,035,486		$	143,819
Unused amount (1)	$	664,514		$	246,181
Weighted-average interest rate		2.39	%		2.27	%
Fair value of mortgage loans acquired for sale securing agreements to repurchase	$	1,122,940		$	155,295
During the period:
Weighted-average interest rate during the period (2)		2.30	%		2.11	%
Average balance of loans sold under agreements to repurchase	$	774,417		$	177,864
Total interest expense	$	6,175		$	1,364
Maximum daily amount outstanding	$	1,035,613		$	263,890

(1)	The amount the Company is able to borrow under loan repurchase agreements is tied to the fair value of unencumbered mortgage loans eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the collateral sold.

(2)	Weighted-average interest rate during the periods excludes the effect of amortization of debt issuance costs of $1.7 million and $417,000 during the quarters ended March 31, 2013 and 2012, respectively.

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


Remaining maturity at March 31, 2013	Balance
	(in thousands)
Within 30 days	$	246,210
Over 30 to 90 days		789,276
Over 90 days to 180 days		—
Over 180 days to 1 year		—

	$	1,035,486

Weighted average maturity (in months)		1.97

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. The Company had $3.0 million and $4.1 million on deposit with its loan repurchase agreement counterparties at March 31, 2013 and December 31, 2012, respectively. Margin deposits are included in Other assets in the consolidated balance sheets.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s mortgage loans acquired for sale sold under agreements to repurchase is summarized by counterparty below as of March 31, 2013:


Counterparty	Amount at risk		Weighted-average repurchase agreement maturity
	(in thousands)
Citibank	$	25,794	May 23, 2013
Credit Suisse First Boston Mortgage Capital LLC	$	27,062	October 29, 2013
Bank of America, N.A.	$	22,678	January 4, 2014
Morgan Stanley Bank, N.A.	$	7,233	November 19, 2013
Barclays Bank PLC	$	6,647	July 1, 2013

Note 17—Mortgage Loans at Fair Value Sold Under Agreements to Repurchase

Following is a summary of financial information relating to mortgage loans sold under agreements to repurchase:


	Quarter ended March 31,
	2013			2012
	(dollar amounts in thousands)
Period end:
Balance	$	576,018		$	282,810
Unused amount (1)	$	173,982		$	167,190
Weighted-average interest rate		3.45	%		3.85	%
Fair value of mortgage loans at fair value and REO securing agreements to repurchase	$	1,211,620		$	631,945
During the period:
Weighted-average interest rate (2)		3.43	%		4.07	%
Average balance of loans sold under agreements to repurchase	$	442,151		$	285,817
Total interest expense	$	4,357		$	3,138
Maximum daily amount outstanding	$	576,018		$	299,091

(1)	The amount the Company is able to borrow under loan repurchase agreements is tied to the fair value of unencumbered mortgage loans eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the collateral sold.

(2)	Weighted-average interest rate during the period excludes the effect of amortization of debt issuance costs of $563,000 and $199,000 during the quarters ended March 31, 2013 and 2012, respectively.

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


Remaining Maturity at March 31, 2013	Balance
	(in thousands)
Within 30 days	$	484,185
Over 30 to 90 days		91,833
Over 90 days to 180 days		—
Over 180 days to 1 year		—

	$	576,018

Weighted average maturity (in months)		0.9

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. The Company had no margin deposits as of March 31, 2013 and as of December 31, 2012, the Company had $379,000 on deposit with its loan repurchase agreement counterparties. Margin deposits are included in Other assets in the consolidated balance sheets.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s mortgage loans at fair value sold under agreements to repurchase is summarized by counterparty below as of March 31, 2013:


Counterparty	Amount at risk		Weighted-average repurchase agreement maturity
	(in thousands)
Citibank, N.A.	$	485,352	April 19, 2013
Credit Suisse First Boston Mortgage Capital LLC	$	149,897	June 5, 2013

Note 18—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:


	Quarter ended March 31,
	2013			2012
	(dollar amounts in thousands)
Period end:
Balance	$	3,546		$	21,744
Unused amount (1)	$	96,454		$	78,256
Weighted-average interest rate		3.95	%		3.99	%
Fair value of loans and REO held in a consolidated subsidiary whose stock is pledged to secure agreements to repurchase	$	7,523		$	43,269
During the period:
Weighted-average interest rate (2)		4.21	%		4.21	%
Average balance of REO sold under agreements to repurchase	$	5,198		$	24,589
Total interest expense	$	180		$	387
Maximum daily amount outstanding	$	7,391		$	27,494

(1)

The amount the Company is able to borrow under repurchase agreements is subject to a sublimit of the commitment amount available pursuant to the repurchase facility for mortgage loans at fair value. The facility is tied to the fair value of unencumbered REO eligible for contribution to the subsidiary, whose stock is pledged to secure those agreements, and the Company’s ability to fund the agreements’ margin requirements relating to the collateral so contributed.

(2)	Weighted-average interest rate during the period excludes the effect of amortization of debt issuance costs of $125,000 for the quarters ended March 31, 2013 and 2012, respectively.

The repurchase agreement collateralized by REO has a remaining term of approximately 2.2 months at March 31, 2013.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s REO held in a consolidated subsidiary, whose stock is pledged to secure agreements to repurchase is summarized by counterparty below as of March 31, 2013:

Note 19—Borrowings under Forward Purchase Agreements

Following is a summary of financial information relating to borrowings under forward purchase agreements:


	Quarter ended March 31, 2012
	(dollar amounts in thousands)
Period end:
Balance	$	127,591
Weighted-average interest rate		4.24	%
Fair value of underlying loans and REO	$	127,411
During the period:
Weighted-average interest rate		4.09	%
Average balance	$	146,512
Interest expense	$	1,515
Maximum daily amount outstanding	$	152,428

Note 20—Recourse liability

The Company’s agreements with Fannie Mae and Freddie Mac include representations and warranties related to the loans the Company sells to those Agencies. The representations and warranties require adherence to Agency origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of its representations and warranties, the Company may be required to either repurchase the 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 credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, had sold such mortgage loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that originator.

The Company records a provision for losses relating to the representations and warranties it makes as part of its loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time loans are sold and continually updates its liability estimate.

Following is a summary of the Company’s Recourse liability in the consolidated balance sheets:


	Quarter ended March 31,
	2013		2012
	(in thousands)
Balance, beginning of period	$	4,441	$	205
Provisions for losses		1,790		426
Incurred losses		—		—

Balance, end of period	$	6,231	$	631

Following is a summary of the Company’s repurchase activity:


	Quarter ended March 31,
	2013		2012
	(in thousands)
During the period:
Unpaid balance of mortgage loans repurchased	$	648	$	—
Incurred losses on repurchased loans	$	—	$	—
At period end:
Unpaid balance of mortgage loans subject to pending claims for repurchase	$	—	$	—

The Company’s representations and warranties are generally not subject to stated limits of exposure. However, management believes that the current unpaid principal balance of loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties. The level of the liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that will change over the lives of the underlying loans, However, management believes the amount and range of reasonably possible losses in relation to the recorded liability is not material to the Company’s financial condition or results of operations.

Note 21—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, 2013, 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:


	March 31, 2013
	(in thousands)
Commitments to purchase mortgage loans:
Correspondent lending	$	933,768
Other mortgage loans	$	—

Note 22—Shareholders’ Equity

During the three months ended March 31, 2012, the Company sold common shares under a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. Pursuant to the Controlled Equity Offering Sales Agreement, the Company sold a total of 2,531,310 of its common shares 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. On February 1, 2013, the Company entered into an Amended and Restated Underwriting Fee Reimbursement Agreement (“Reimbursement Agreement”), by and among the Company, the Operating Partnership and PCM. The Reimbursement Agreement provides that, to the extent the Company is required to pay PCM performance incentive fees under the management agreement, the Company will reimburse PCM for underwriting costs it paid on the offering date at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement is subject to a maximum reimbursement in any particular 12-month period of $980,422, and the maximum amount that may be reimbursed under the agreement is $2.9 million.

The Reimbursement Agreement also provides for the payment to the IPO underwriters of the payment that the Company agreed to make to them at the time of the IPO if the Company satisfied certain performance measures over a specified period of time. As PCM earns performance incentive fees under the management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $1,960,844 and the maximum

amount that may be paid under the agreement is $5.9 million. The reimbursement agreement expires on February 1, 2019. Management has concluded that these amounts are likely to be paid 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 23—Net Gain on Mortgage Loans Acquired For Sale

Net gain on mortgage loans acquired for sale is summarized below:


	Quarter ended March 31,
	2013			2012
	(in thousands)
Cash gain (loss):
Sales proceeds	$	(27,247	)	$	548
Hedging activities		13,614			(803	)

		(13,633	)		(255	)
Non cash gain (loss):
Change in fair value of IRLCs		(8,426	)		(1,464	)
Receipt of MSRs in loan sale transactions

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