Edgar Filing: PennyMac Mortgage Investment Trust

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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, 2015

¨	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 5, 2015
Common Shares of Beneficial Interest, $0.01 par value		74,585,222

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 2015

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements			1
PART I. FINANCIAL INFORMATION			3
Item 1.	Financial Statements (Unaudited):		3
	Consolidated Balance Sheets		3
	Consolidated Statements of Income		5
	Consolidated Statements of Changes in Shareholders’ Equity		6
	Consolidated Statements of Cash Flows		7
	Notes to Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		51
	Observations on Current Market Conditions		53
	Results of Operations		54
	Net Investment Income		55
	Expenses		69
	Balance Sheet Analysis		72
	Asset Acquisitions		73
	Investment Portfolio Composition		74
	Cash Flows		80
	Liquidity and Capital Resources		81
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		83
	Quantitative and Qualitative Disclosures About Market Risk		87
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		91
Item 4.	Controls and Procedures		91
PART II. OTHER INFORMATION			92
Item 1.	Legal Proceedings		92
Item 1A.	Risk Factors		92
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		92
Item 3.	Defaults Upon Senior Securities		92
Item 4.	Mine Safety Disclosures		92
Item 5.	Other Information		92
Item 6.	Exhibits		93

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

•

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

•

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

•

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

•

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015.

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

•

changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

•

volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

•

events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

•

changes in general business, economic, market, employment and political conditions, or in consumer confidence and spending habits from those expected;

•

declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

•

the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives;

•

the inherent difficulty in winning bids to acquire distressed loans or correspondent loans, and our success in doing so;

•

the concentration of credit risks to which we are exposed;

•

the degree and nature of our competition;

•

our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

•

changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;

•

the availability, terms and deployment of short-term and long-term capital;

•

the adequacy of our cash reserves and working capital;

•

our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

•

the timing and amount of cash flows, if any, from our investments;

•

unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

•

the performance, financial condition and liquidity of borrowers;

•

the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;

•

incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;

•

changes in the number of investor repurchases or indemnifications and our ability to obtain indemnification or demand repurchase from our correspondent sellers;

•

the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

•

increased rates of delinquency, default and/or decreased recovery rates on our investments;

•

our ability to foreclose on our investments in a timely manner or at all;

•

increased prepayments of the mortgages and other loans underlying our mortgage-backed securities (“MBS”) or relating to our mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) and other investments;

•

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•

the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

•

our failure to maintain appropriate internal controls over financial reporting;

•

technologies for loans and our ability to mitigate security risks and cyber intrusions;

•

our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

•

our ability to detect misconduct and fraud;

•

our ability to comply with various federal, state and local laws and regulations that govern our business;

•

developments in the secondary markets for our mortgage loan products;

•

legislative and regulatory changes that impact the mortgage loan industry or housing market;

•

changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”), the Veterans Administration (the “VA”) or the U.S. Department of Agriculture (“USDA”), or government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;

•

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

•

the Consumer Financial Protection Bureau (“CFPB”) and its recently issued and future rules and the enforcement thereof;

•

changes in government support of homeownership;

•

changes in government or government-sponsored home affordability programs;

•

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exemption from registering as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries (“TRSs”) for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

•

changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

•

our ability to make distributions to our shareholders in the future;

•

the effect of public opinion on our reputation;

•

the occurrence of natural disasters or other events or circumstances that could impact our operations; and

•

our organizational structure and certain requirements in our charter documents.

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31, 2015		December 31, 2014
	(in thousands, except share data)
ASSETS
Cash	$	65,668	$	76,386

Short-term investments		44,949		139,900
Mortgage-backed securities at fair value pledged to secure assets sold under agreements to repurchase		316,292		307,363
Mortgage loans acquired for sale at fair value (includes $1,272,132 and $609,608 pledged to secure assets sold under agreements to repurchase and $74,051 and $20,862 pledged to secure mortgage loan participation and sale agreement)		1,366,964		637,722
Mortgage loans at fair value (includes $2,846,806 and $2,709,161 pledged to secure assets sold under agreements to repurchase and asset-backed secured financing of the variable interest entity at fair value)		2,859,326		2,726,952
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value		222,309		191,166
Derivative assets		12,668		11,107
Real estate acquired in settlement of loans (includes $200,504 and $150,649 pledged to secure assets sold under agreements to repurchase)		317,536		303,228
Mortgage servicing rights (includes $49,448 and $57,358 carried at fair value)		359,160		357,780
Servicing advances		79,261		79,878
Due from PennyMac Financial Services, Inc.		5,778		6,621
Other assets		87,499		66,193

Total assets	$	5,737,410	$	4,904,296


LIABILITIES
Assets sold under agreements to repurchase	$	3,563,293	$	2,730,130
Mortgage loan participation and sale agreement		71,829		20,236
Asset-backed secured financing of the variable interest entity at fair value		162,222		165,920
Exchangeable senior notes		250,000		250,000
Derivative liabilities		2,071		2,430
Accounts payable and accrued liabilities		71,835		67,806
Due to PennyMac Financial Services, Inc.		18,719		23,943
Income taxes payable		39,903		51,417
Liability for losses under representations and warranties		15,379		14,242

Total liabilities		4,195,251		3,326,124


Commitments and contingencies

SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,585,222 and 74,510,159 common shares, respectively		746		745
Additional paid-in capital		1,482,250		1,479,699
Retained earnings		59,163		97,728

Total shareholders’ equity		1,542,159		1,578,172

Total liabilities and shareholders’ equity	$	5,737,410	$	4,904,296

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entity (“VIE”) included in total assets and liabilities (the assets of the VIE can only be used to settle liabilities of the VIE):


	March 31, 2015		December 31, 2014
	(in thousands)
ASSETS
Mortgage loans at fair value	$	515,944	$	527,369
Other assets - interest receivable		1,608		1,651

	$	517,552	$	529,020

LIABILITIES
Asset-backed secured financing at fair value	$	162,222	$	165,920
Accounts payable and accrued expenses - interest payable		463		477

	$	162,685	$	166,397

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended March 31,
	2015			2014
	(in thousands, except per share data)
Net investment income
Net interest income:
Interest income
From nonaffiliates	$	36,933		$	36,484
From PennyMac Financial Services, Inc.		3,752			2,862

		40,685			39,346
Interest expense		25,746			19,775

		14,939			19,571

Net gain on mortgage loans acquired for sale		10,160			9,971
Loan origination fees		5,287			2,356
Net gain on investments:
From nonaffiliates		9,694			45,486
From PennyMac Financial Services, Inc.		(6,247	)		(2,901	)

		3,447			42,585
Net loan servicing fees		8,001			7,421
Results of real estate acquired in settlement of loans		(5,832	)		(6,626	)
Other		1,655			1,317

Net investment income		37,657			76,595

Expenses
Expenses earned by PennyMac Financial Services, Inc.:
Loan fulfillment fees		12,866			8,902
Loan servicing fees		10,670			14,591
Management fees		7,003			8,074
Compensation		2,808			2,942
Professional services		1,828			1,731
Other		6,302			4,066

Total expenses		41,477			40,306

(Loss) income before benefit from income taxes		(3,820	)		36,289
Benefit from income taxes		(11,328	)		(1,584	)

Net income	$	7,508		$	37,873


Earnings per share
Basic	$	0.09		$	0.52
Diluted	$	0.09		$	0.50
Weighted-average shares outstanding
Basic		74,528			71,527
Diluted		74,956			80,289
Dividends declared per share	$	0.61		$	0.59

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)


	Common shares				Additional paid-in capital			Retained earnings			Total
	Number		Par value		Additional paid-in capital			Retained earnings			Total
	(in thousands)
Balance at December, 2013		70,458	$	705	$	1,384,468		$	81,941		$	1,467,114
Net income		—		—		—			37,873			37,873
Share-based compensation		85		—		1,814			—			1,814
Dividends, $0.59 per share		—		—		—			(43,618	)		(43,618	)
Proceeds from issuance of common shares		3,387		34		80,983			—			81,017
Underwriting and offering costs		—		—		(918	)		—			(918	)

Balance at March 31, 2014		73,930	$	739	$	1,466,347		$	76,196		$	1,543,282

Balance at December 31, 2014		74,510	$	745	$	1,479,699		$	97,728		$	1,578,172
Net income		—		—		—			7,508			7,508
Share-based compensation		75		1		2,543			—			2,544
Dividends, $0.61 per share		—		—		—			(46,073	)		(46,073	)
Proceeds from issuance of common shares		—		—		8			—			8

Balance at March 31, 2015		74,585	$	746	$	1,482,250		$	59,163		$	1,542,159

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31
	2015			2014
	(in thousands)
Cash flows from operating activities
Net income	$	7,508		$	37,873
Adjustments to reconcile net income to net cash used by operating activities:
Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing		(402	)		(240	)
Capitalization of interest on mortgage loans at fair value		(10,209	)		(12,470	)
Accrual of interest on excess servicing spread		(3,752	)		(2,862	)
Amortization of credit facility commitment fees and debt issuance costs		2,581			2,360
Net gain on mortgage loans acquired for sale		(10,160	)		(9,971	)
Accrual of costs related to forward purchase agreements		—			2,200
Net gain on investments		(3,447	)		(46,727	)
Change in fair value, amortization and impairment of mortgage servicing rights		14,628			10,020
Results of real estate acquired in settlement of loans		5,832			6,626
Share-based compensation expense		2,544			1,814
Purchases of mortgage loans acquired for sale at fair value from nonaffiliates		(8,366,569	)		(5,043,212	)
Purchases of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(8,405	)		—
Repurchase of mortgage loans subject to representation and warranties		(7,708	)		(3,391	)
Sales and repurchase of mortgage loans acquired for sale at fair value to nonaffiliates		2,644,244			2,026,306
Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		4,990,358			3,130,531
Increase in servicing advances		(5,804	)		(5,647	)
Decrease in due from PennyMac Financial Services, Inc.		886			3,196
Decrease in other assets		7,164			17,434
Increase (decrease) in accounts payable and accrued liabilities		4,163			(1,124	)
(Decrease) increase in payable to PennyMac Financial Services, Inc.		(5,067	)		2,212
Decrease in income taxes payable		(11,514	)		(1,626	)

Net cash (used in) provided by operating activities		(753,129	)		113,302


Cash flows from investing activities
Net decrease in short-term investments		94,951			1,060
Purchases of mortgage-backed securities at fair value		(25,129	)		—
Repayments of mortgage-backed securities at fair value		17,802			1,978
Purchases of mortgage loans at fair value		(241,981	)		(256,280	)
Sales and repayments of mortgage loans at fair value		59,596			252,292
Repayments of mortgage loans under forward purchase agreements at fair value		—			5,329
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		(46,412	)		(20,526	)
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		12,731			7,413
Settlements of derivative financial instruments		(13,466	)		(259	)
Purchase of real estate acquired in settlement of loans		—			(3,049	)
Sales of real estate acquired in settlement of loans		65,976			31,772
Sales of real estate acquired in settlement of loans under forward purchase agreements		—			1,620
Sale of mortgage servicing rights		376			—
Increase in margin deposits and restricted cash		(15,792	)		(21,857	)

Net cash used in investing activities		(91,348	)		(507	)

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(CONTINUED)


	Quarter ended March 31,
	2015			2014
	(in thousands)
Cash flows from financing activities
Sales of assets under agreement to repurchase	$	9,744,632		$	6,814,735
Repurchases of assets sold under agreements to repurchase		(8,911,469	)		(6,966,561	)
Sales of mortgage loan participation certificates		1,014,727			—
Repayments of mortgage loan participation certificates		(963,134	)		—
Repayments of borrowings under forward purchase agreements		—			(13,124	)
Repayments of asset-backed secured financing at fair value		(4,641	)		(1,805	)
Issuances of common shares		8			81,017
Payment of common share underwriting and offering costs		—			(918	)
Payment of contingent underwriting fees payable		(470	)		(109	)
Payment of dividends		(45,894	)		(41,570	)

Net cash provided (used in) by financing activities		833,759			(128,335	)

Net decrease in cash		(10,718	)		(15,540	)
Cash at beginning of period		76,386			27,411

Cash at end of period	$	65,668		$	11,871

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 (“common 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 production and investment activities:

•

The correspondent production 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 (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”), both indirect subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

Most of the mortgage loans the Company has acquired in its correspondent production 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 through government agencies such as the 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 mortgage-related assets, which include distressed mortgage loans, real estate acquired in settlement of loans (“REO”), MBS, mortgage servicing rights (“MSRs”) and excess servicing spread (“ESS”). The Company seeks to maximize the value of its acquired distressed mortgage loans 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 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 has 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 wholly-owned 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 (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“Codification”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with 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.

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 mortgage-related assets, a substantial portion of which are distressed at acquisition. 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.

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 Servicer’s 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 mortgage 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 mortgage 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.

A substantial portion of the distressed mortgage loans and REO purchased by the Company in prior years has been acquired from or through one or more subsidiaries of Citigroup Inc. The following tables present purchases for the Company’s investment portfolio of mortgage loans and REO (including purchases under forward purchase agreements), and the portion thereof representing assets purchased from or through one or more subsidiaries of Citigroup Inc.:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Investment portfolio purchases:
Mortgage loans	$	241,981	$	257,200
REO		—		3,087

	$	241,981	$	260,287

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:
Mortgage loans	$	—	$	—
REO		—		38

	$	—	$	38

Following is a summary of the Company’s holdings of assets purchased through one or more subsidiaries of Citigroup Inc.:


	March 31, 2015		December 31, 2014
	(in thousands)

Mortgage loans at fair value	$	912,951	$	943,163
REO		98,174		108,302

	$	1,011,125	$	1,051,465

Total holdings of mortgage loans and REO	$	3,176,862	$	3,030,180

During the year ended December 31, 2013, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. (“CGM”), a subsidiary of Citigroup Inc., to purchase certain nonperforming mortgage loans and REO (collectively, the “CGM Assets”). The CGM Assets were acquired by CGM from unaffiliated money center banks and were held in a trust subsidiary by CGM pending settlement by the Company. The commitment under the forward purchase agreement was settled in full during the quarter ended June 30, 2014.

The Company recognized these assets and related obligations as of the dates of the forward purchase agreements and recognized all subsequent income and changes in value relating to such assets. As a result of recognizing these assets, the Company’s consolidated statements of income and cash flows for the period presented include the following amounts related to the forward purchase agreements:


	Quarter ended March 31, 2014
	(in thousands)
Statements of income:
Interest income	$	2,154
Interest expense	$	1,580
Net gain on investments	$	(940	)
Net loan servicing fees	$	316
Results of REO	$	(400	)
Statements of cash flows:
Repayments of mortgage loans	$	5,329
Sales of REO	$	1,622
Repayments of borrowings under forward purchase agreements	$	(13,124	)

The Company has no other variable interests in the trust entity or other exposure to the creditors of the trust entity that could expose the Company to loss.

Note 3—Transactions with Related Parties

Following is a summary of correspondent production activity between the Company and PLS:


	Quarter ended March 31,
	2015		2014
	(in thousands)

Fulfillment fee expense earned by PLS	$	12,866	$	8,902
Unpaid principal balance of loans fulfilled by PLS	$	2,890,132	$	1,919,578

Sourcing fees received from PLS	$	1,421	$	892
Unpaid principal balance of loans sold to PLS	$	4,735,374	$	2,974,077
Purchases of mortgage loans acquired for sale at fair value from PLS	$	8,405		—

At period end:
Mortgage loans included in mortgage loans acquired for sale pending sale to PLS	$	599,390	$	48,909

Following is a summary of mortgage loan servicing fees earned by PLS:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	26	$	17
Activity-based		31		26

		57		43

Distressed mortgage loans:
Base		4,032		4,966
Activity-based		2,894		6,386

		6,926		11,352
MSRs:
Base		3,656		3,148
Activity-based		31		48

		3,687		3,196

	$	10,670	$	14,591

Average investment in:
Mortgage loans acquired for sale at fair value	$	751,172	$	334,442

Distressed mortgage loans	$	2,080,704	$	1,976,166

Average mortgage loans servicing portfolio	$	34,599,043	$	26,492,742

Following is a summary of the base management and performance incentive fees payable to PCM recorded by the Company:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Base	$	5,730	$	5,521
Performance incentive		1,273		2,553

Total management fee incurred during the period	$	7,003	$	8,074

In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by PFSI, in each case during the 24-month period before termination.

Following is a summary of investment activity between the Company and PFSI:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Purchases of ESS	$	46,412		$	20,526
Interest income from ESS	$	3,752		$	2,862
Net loss on ESS	$	(7,536	)	$	(2,901	)
ESS recapture recognized	$	1,289		$	1,890
Repayment of ESS	$	12,731		$	7,413
MSR recapture recognized	$	—		$	8

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 if the Company satisfied certain performance measures over a specified period (the “Conditional Reimbursement”). 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. During the quarters ended March 31, 2015 and 2014, the Company paid $157,000 and $36,000 to PCM, respectively.

The Company has also agreed to pay the IPO underwriters an amount to which it agreed at the time of the offering if the Company satisfies certain performance measures over a specified period. As PCM earns performance incentive fees under the management agreement, such 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. During the quarters ended March 31, 2015 and 2014, the Company paid $313,000 and $72,000 to the underwriters, respectively.

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 as summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates	$	2,729	$	2,578
Expenses incurred on the Company’s behalf		379		445

	$	3,108	$	3,023


Payments and settlements during the period (1)	$	22,752	$	18,386

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

Amounts due to PCM and its affiliates are summarized below:


	March 31,		December 31,
	2015		2014
	(in thousands)
Allocated expenses	$	6,434	$	6,582
Management fees		7,003		8,426
Servicing fees		3,432		3,457
Contingent underwriting fees		980		1,136
Fulfillment fees		870		506
Unsettled ESS investment		—		3,836

	$	18,719	$	23,943

Amounts due from PCM and its affiliates totaled $5.8 million and $6.6 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled MSR and ESS recaptures.

PFSI held 75,000 of the Company’s common shares at both March 31, 2015 and December 31, 2014.

Note 4—Earnings Per Share

Basic earnings per share is determined using the two-class method, under which all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined using net income reduced by income attributable to the participating securities and divided by the weighted-average common shares outstanding during the period. The Company grants 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. 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.

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s exchangeable senior notes (the “Notes”), by the weighted-average common shares outstanding, assuming all potentially dilutive securities were issued. In periods in which the Company records a loss, potentially dilutive securities are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

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


	Quarter ended March 31,
	2015			2014
	(in thousands except per share amounts)
Basic earnings per share:
Net income	$	7,508		$	37,873
Effect of participating securities—share-based compensation awards		(576	)		(408	)

Net income attributable to common shareholders	$	6,932		$	37,465

Weighted-average shares outstanding		74,528			71,527

Basic earnings per share	$	0.09		$	0.52

Diluted earnings per share:
Net income	$	7,508		$	37,873
Effect of participating securities—share-based compensation awards		(576	)		—
Interest on Notes, net of income taxes		—			2,079

Net income attributable to diluted shareholders	$	6,932		$	39,952

Weighted-average shares outstanding		74,528			71,527
Potentially dilutive securities:
Shares issuable pursuant to exchange of the Notes		—			8,379
Shares issuable under share-based compensation plan		—			383

Diluted weighted-average number of shares outstanding		74,528			80,289

Diluted earnings per share	$	0.09		$	0.50

Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included or excluded that may differ in certain circumstances.

For the quarter ended March 31, 2015, approximately 8,433,000 shares issuable pursuant to the exchange feature embedded in Notes were excluded from the diluted earnings per share calculation as inclusion of the exchange of such shares would have been antidilutive.

Note 5—Loan Sales and Variable Interest Entities

The Company is a variable interest holder in various special purpose entities that relate to its loan transfer and financing activities. These entities are classified as VIEs for accounting purposes. The Company has segregated its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

Unconsolidated VIEs with Continuing Involvement

The following table summarizes cash flows between the Company and transferees in transfers that are accounted for as sales where PMT maintains continuing involvement with the mortgage loans, as well as unpaid principal balance information at period end:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Cash flows:
Proceeds from sales	$	2,644,244	$	2,026,306
Servicing fees received (1)	$	15,732	$	16,838
Period end information:
Unpaid principal balance of mortgage loans outstanding	$	35,036,725	$	27,192,550
Unpaid principal balance of delinquent mortgage loans:
30-89 days delinquent	$	112,083	$	70,365
90 or more days delinquent
Not in foreclosure		26,090		7,700
In foreclosure or bankruptcy		16,345		10,569

		42,435		18,269

	$	154,518	$	88,634

(1)	Net of guarantee fees.

Consolidated VIE

On September 30, 2013, the Company completed a securitization transaction in which a wholly-owned VIE issued $537.0 million in certificates backed by fixed-rate prime jumbo mortgage loans of PMT Loan Trust 2013-J1, at a 3.9% weighted yield. The Company retained $366.8 million of those certificates. The Manager concluded that the Company is the primary beneficiary of the VIE and, as a result, the Company consolidates the VIE. Consolidation of the VIE results in the securitized mortgage loans remaining on the consolidated balance sheets of the Company and the certificates issued by the VIE to nonaffiliates being accounted for as a secured financing. The certificates are secured solely by the assets of the VIE and not by any other assets of the Company. The assets of the VIE are the only source of repayment of the certificates.

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk created by its MBS, interest rate lock commitments (“IRLCs”), mortgage loans acquired for sale at fair value, mortgage loans at fair value, ESS 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 a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are IRLCs. As of March 31, 2015 and December 31, 2014, the Company did not enter into reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

Offsetting of Derivative Assets

Following is a summary of net derivative assets. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements.


	March 31, 2015								December 31, 2014
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	557	$	—		$	557		$	374	$	—		$	374
Forward purchase contracts		12,171		—			12,171			3,775		—			3,775
Forward sale contracts		461		—			461			52		—			52
Put options on interest rate futures		403		—			403			193		—			193
Call options on interest rate futures		3,642		—			3,642			3,319		—			3,319
Netting		—		(12,809	)		(12,809	)		—		(2,284	)		(2,284	)

		17,234		(12,809	)		4,425			7,713		(2,284	)		5,429
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		8,243		—			8,243			5,678		—			5,678

	$	25,477	$	(12,809	)	$	12,668		$	13,391	$	(2,284	)	$	11,107

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, 2015								December 31, 2014
			Gross amounts not offset in the consolidated balance sheet								Gross amounts not offset in the consolidated balance sheet
	Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount		Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	8,243	$	—	$	—	$	8,243	$	5,678	$	—	$	—	$	5,678
RJ O’Brien		2,839		—		—		2,839		3,034		—		—		3,034
Bank of America, N.A.		348		—		—		348		738		—		—		738
Daiwa Capital Markets		—		—		—		—		29		—		—		29
Fannie Mae Capital Markets		427		—		—		427		—		—		—		—
Morgan Stanley Bank, N.A.		22		—		—		22		104		—		—		104
Credit Suisse First Boston Mortgage Capital LLC		68		—		—		68		253		—		—		253
Other		721		—		—		721		1,271		—		—		1,271

Total	$	12,668	$	—	$	—	$	12,668	$	11,107	$	—	$	—	$	11,107

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.


	March 31, 2015								December 31, 2014
	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)

Derivatives subject to master netting arrangements:
Forward purchase contracts	$	431	$	—		$	431		$	34	$	—		$	34
Forward sales contracts		17,321		—			17,321			6,649		—			6,649
Treasury futures sales contracts		1,172		—			1,172			478		—			478
Netting		—		(16,882	)		(16,882	)		—		(4,748	)		(4,748	)

		18,924		(16,882	)		2,042			7,161		(4,748	)		2,413


Derivatives not subject to master netting arrangements:
Interest rate lock commitments		29		—			29			17		—			17

		18,953		(16,882	)		2,071			7,178		(4,748	)		2,430

Assets sold under agreements to repurchase		3,563,293		—			3,563,293			2,750,366		—			2,750,366

	$	3,582,246	$	(16,882	)	$	3,565,364		$	2,757,544	$	(4,748	)	$	2,752,796

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 do not meet the accounting guidance qualifying for netting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.


	March 31, 2015									December 31, 2014
			Gross amounts not offset in the consolidated balance sheet									Gross amounts not offset in the consolidated balance sheet
	Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount
	(in thousands)
Interest rate lock commitments	$	29	$	—		$	—	$	29	$	17	$	—		$	—	$	17
Morgan Stanley Bank, N.A.		201,177		(201,177	)		—		—		121,975		(121,975	)		—		—
Daiwa Capital Markets		127,537		(127,298	)		—		239		126,909		(126,909	)		—		—
Citibank		999,765		(999,329	)		—		436		797,851		(797,663	)		—		188
Credit Suisse First Boston Mortgage Capital LLC		1,047,735		(1,047,735	)		—		—		966,155		(966,155	)		—		—
JPMorgan Chase & Co.		459,182		(458,802	)		—		380		—		—			—		—
Bank of America, N.A.		728,952		(728,952	)		—		—		529,144		(529,144	)		—		—
RBS Securities		—		—			—		—		208,520		(208,520)			—		—
Other		987		—			—		987		2,225		—			—		2,225

Total	$	3,565,364	$	(3,563,293	)	$	—	$	2,071	$	2,752,796	$	(2,750,366	)	$	—	$	2,430

Note 7—Fair Value

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

Fair Value Accounting Elections

The Manager identified all of the Company’s non-cash financial assets and MSRs relating to loans with initial interest rates of more than 4.5%, to be accounted for at fair value. The Manager has elected to account for these financial statement items at 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. The Manager has also identified the Company’s asset-backed secured financing of the VIE to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of mortgage loans at fair value collateralizing this financing.

The Company’s subsequent accounting for MSRs is based on the class of MSRs. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% are accounted for at fair value with changes in fair value recorded in current period income.

For assets sold under agreements to repurchase, borrowings under forward purchase agreements and the Notes, the Manager 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 availability 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 fair value on a recurring basis:


	March 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	44,949	$	—	$	—	$	44,949
Mortgage-backed securities at fair value		—		316,292		—		316,292
Mortgage loans acquired for sale at fair value		—		1,366,964		—		1,366,964
Mortgage loans at fair value		—		515,944		2,343,382		2,859,326
Excess servicing spread purchased from PFSI		—		—		222,309		222,309
Derivative assets:
Interest rate lock commitments		—		—		8,243		8,243
MBS put options		—		557		—		557
Forward purchase contracts		—		12,171		—		12,171
Forward sales contracts		—		461		—		461
Put options on interest rate futures		403		—		—		403
Call options on interest rate futures		3,642		—		—		3,642

Total derivative assets before netting		4,045		13,189		8,243		25,477
Netting (1)		—		—		—		(12,809	)

Total derivative assets after netting		4,045		13,189		8,243		12,668
Mortgage servicing rights at fair value		—		—		49,448		49,448

	$	48,994	$	2,212,389	$	2,623,382	$	4,871,956

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	162,222	$	—	$	162,222
Derivative liabilities:
Interest rate lock commitments		—		—		29		29
Treasury futures sale contracts		1,172		—		—		1,172
Forward purchase contracts		—		431		—		431
Forward sales contracts		—		17,321		—		17,321

Total derivative liabilities before netting		1,172		17,752		29		18,953
Netting (1)		—		—		—		(16,882	)

Total derivative liabilities after netting		1,172		17,752		29		2,071

Total liabilities	$	1,172	$	179,974	$	29	$	164,293

(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, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	139,900	$	—	$	—	$	139,900
Mortgage-backed securities at fair value		—		307,363		—		307,363
Mortgage loans acquired for sale at fair value		—		637,722		—		637,722
Mortgage loans at fair value		—		527,369		2,199,583		2,726,952
Excess servicing spread purchased from PFSI		—		—		191,166		191,166
Derivative assets:
Interest rate lock commitments		—		—		5,678		5,678
MBS put options		—		374		—		374
Forward purchase contracts		—		3,775		—		3,775
Forward sales contracts		—		52		—		52
Put options on interest rate futures		193		—		—		193
Call options on interest rate futures		3,319		—		—		3,319

Total derivative assets		3,512		4,201		5,678		13,391
Netting (1)		—		—		—		(2,284	)

Total derivative assets after netting		3,512		4,201		5,678		11,107

Mortgage servicing rights at fair value		—		—		57,358		57,358

	$	143,412	$	1,476,655	$	2,453,785	$	4,071,568

Liabilities:
Asset-backed secured financing of the variable interestentity at fair value	$	—	$	165,920	$	—	$	165,920
Derivative liabilities:
Interest rate lock commitments		—		—		17		17
Treasury futures sales contracts		478		—		—		478
Forward purchase contracts		—		34		—		34
Forward sales contracts		—		6,649		—		6,649

Total derivative liabilities		478		6,683		17		7,178
Netting (1)		—		—		—		(4,748	)

Total derivative liabilities		478		6,683		17		2,430

Total liabilities	$	478	$	172,603	$	17	$	168,350

(1)

The following is a summary of changes in items measured using Level 3 inputs on a recurring basis:


	March 31, 2015
	Mortgage Loans at fair value			Excess servicing spread			Interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2014	$	2,199,583		$	191,166		$	5,661		$	57,358		$	2,453,768
Purchases		241,981			46,412			—			—			288,393
Repayments and sales		(45,882	)		(12,731	)		—			—			(58,613	)
Capitalization of interest		10,209			—			—			—			10,209
Accrual of interest		—			3,752			—			—			3,752
ESS received pursuant to a recapture agreement with PFSI		—			1,246			—			—			1,246
Interest rate lock commitments issued, net		—			—			19,400			—			19,400
Servicing received as proceeds from sales of mortgage loans		—			—			—			1,906			1,906
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		7,206			—			—			—			7,206
Other factors		9,980			(7,536	)		12			(9,816	)		(7,360	)

		17,186			(7,536	)		12			(9,816	)		(154	)

Transfers of mortgage loans to REO		(79,695	)		—			—			—			(79,695	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(16,859	)		—			(16,859	)

Balance, March 31, 2015	$	2,343,382		$	222,309		$	8,214		$	49,448		$	2,623,353

Changes in fair value recognized during the period relating to assets still held at March 31, 2015	$	24,665		$	(7,536	)	$	8,214		$	(9,816	)	$	15,527

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


	March 31, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			Net interest rate lock commitments (1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2013	$	2,076,665		$	218,128		$	138,723		$	1,249		$	26,452		$	2,461,217
Purchases		256,280			920			20,526			—			—			277,726
Repayments and sales		(246,839	)		(5,329	)		(7,413	)		—			—			(259,581	)
Capitalization of interest		11,726			744			—			—			—			12,470
Accrual of interest		—			—			2,862			—			—			2,862
ESS received pursuant to a recapture agreement with PFSI		—			—			1,113			—			—			1,113
Interest rate lock commitments issued, net		—			—			—			12,596			—			12,596
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			11,757			11,757
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		15,742			2,397			—			—			—			18,139
Other factors		25,116			(3,337	)		(4,792	)		2,430			(2,028	)		17,389

		40,858			(940	)		(4,792	)		2,430			(2,028	)		35,528

Transfers of mortgage loans under forward purchase agreements to mortgage loans		4,460			(4,460	)		—			—			—			—
Transfers of mortgage loans to REO		(64,130	)		—			—			—			—			(64,130	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(6,402	)		—			—			—			(6,402	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(13,004	)		—			(13,004	)

Balance, March 31, 2014	$	2,079,020		$	202,661		$	151,019		$	3,271		$	36,181		$	2,472,152

Changes in fair value recognized during the period relating to assets still held at March 31, 2014	$	34,209		$	(1,623	)	$	(4,792	)	$	3,271		$	(2,028	)	$	29,037

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

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 held in a consolidated VIE):


	March 31, 2015
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent	$	1,366,697	$	1,307,804	$	58,893
90 or more days delinquent (1)
Not in foreclosure		267		340		(73	)
In foreclosure		—		—		—

		267		340		(73	)

		1,366,964		1,308,144		58,820

Other mortgage loans at fair value:
Current through 89 days delinquent		1,239,392		1,486,030		(246,638	)
90 or more days delinquent (1)
Not in foreclosure		573,208		819,048		(245,840	)
In foreclosure		1,046,726		1,501,506		(454,780	)

		1,619,934		2,320,554		(700,620	)

		2,859,326		3,806,584		(947,258	)

	$	4,226,290	$	5,114,728	$	(888,438	)

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


	December 31, 2014
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	637,518	$	610,372	$	27,146
90 or more days delinquent (1)
Not in foreclosure		204		255		(51	)
In foreclosure		—		—		—

		204		255		(51	)

		637,722		610,627		27,095

Other mortgage loans at fair value:
Current through 89 days delinquent		1,191,635		1,452,885		(261,250	)
90 or more days delinquent (1)
Not in foreclosure		608,144		875,214		(267,070	)
In foreclosure		927,173		1,371,371		(444,198	)

		1,535,317		2,246,585		(711,268	)

		2,726,952		3,699,470		(972,518	)

	$	3,364,674	$	4,310,097	$	(945,423	)

(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, 2015
	Net gain on mortgage loans acquired for sale		Net interest income			Net gain on investments			Net loan servicing fees			Total
			(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		86			1,516			—			1,602
Mortgage loans acquired for sale at fair value		23,081		—			—			—			23,081
Mortgage loans at fair value		—		489			18,986			—			19,475
Excess servicing spread at fair value		—		—			(6,247	)		—			(6,247	)
Mortgage servicing rights at fair value		—		—			—			(9,816	)		(9,816	)

	$	23,081	$	575		$	14,255		$	(9,816	)	$	28,095

Liabilities:
Asset-backed secured financing at fair value	$	—	$	(173	)	$	(770	)	$	—		$	(943	)

	$	—	$	(173	)	$	(770	)	$	—		$	(943	)


	Quarter ended March 31, 2014
	Net gain on mortgage loans acquired for sale		Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		33			2,652			—			2,685
Mortgage loans acquired for sale at fair value		18,632		—			—			—			18,632
Mortgage loans at fair value		—		330			52,165			—			52,495
Mortgage loans under forward purchase agreements at fair value		—		—			(940	)		—			(940	)
Excess servicing spread at fair value		—		—			(2,901	)		—			(2,901	)
Mortgage servicing rights at fair value		—		—			—			(2,027	)		(2,027	)

	$	18,632	$	363		$	50,976		$	(2,027	)	$	67,944

Liabilities:
Asset-backed secured financing at fair value	$	—	$	(124	)	$	(2,780	)	$	—		$	(2,904	)

	$	—	$	(124	)	$	(2,780	)	$	—		$	(2,904	)

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at fair value on a nonrecurring basis:


	March 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	146,365	$	146,365
Mortgage servicing rights at lower of amortized cost or fair value		—		—		94,374		94,374

	$	—	$	—	$	240,739	$	240,739


	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	157,203	$	157,203
Mortgage servicing rights at lower of amortized cost or fair value		—		—		91,990		91,990

	$	—	$	—	$	249,193	$	249,193

The following table summarizes the net losses recognized during the period on assets measured at estimated fair values on a nonrecurring basis:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Real estate asset acquired in settlement of loans	$	(10,615	)	$	(7,314	)
Real estate asset acquired in settlement of loans under forward purchase agreements		—			(528	)
Mortgage servicing rights at lower of amortized cost or fair value		(6,379	)		(627	)

	$	(16,994	)	$	(8,469	)

Real Estate Acquired in Settlement of Loans

The Company measures its investment in REO at the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured by cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before acquisition in the case of acquisition in settlement of a loan. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or 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 property’s cost 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 pools with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3% and 4.5% and a single pool for mortgage loans with interest 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 interest rate pools is below the amortized cost of the MSRs reduced by the existing valuation allowance for that pool, 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 fair value of the MSRs subsequently increases, the increase in fair value is recognized in current period income only to the extent of the valuation allowance for the respective impairment stratum.

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

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s cash balances as well as certain of its borrowings are carried at amortized cost. The Manager has concluded that the fair values of Cash, Assets sold under agreements to repurchase, and Mortgage loan participation and sale agreement 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 assets sold under agreements to repurchase and mortgage loans participation and sale agreement are classified as “Level 3” financial statement instruments as of March 31, 2015 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Notes are carried at amortized cost. The fair value of the Notes at March 31, 2015 and December 31, 2014 was $239.6 million and $239.0 million, respectively. The fair value of the Notes is estimated using a broker indication of value. The Company has classified the Notes as “Level 3” financial statement items as of March 31, 2015 due to the lack of current market activity and use of a broker’s indication of value to estimate the instrument’s fair value.

Valuation Techniques and Assumptions

Most of the Company’s assets and its ESS liability are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” financial statement items which require the use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own 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.

Because the fair value of “Level 3” financial statement items is difficult to estimate, the Manager’s valuation process includes performance of these items’ valuation by a specialized staff and significant executive management oversight. 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 Manager’s FAV group submits the results of its valuations to the Manager’s valuation committee, which oversees and approves the fair values before such fair values are included in the Company’s periodic financial statements. The Manager’s valuation committee includes the chief executive, financial, operating, credit, and asset/liability management officers of PFSI.

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” financial statement items:

Mortgage-Backed Securities

The Company’s MBS securities include Agency and senior non-agency MBS. Agency MBS and senior non-agency MBS are categorized as “Level 2” financial statement items. Fair value of Agency and senior non-Agency MBS is estimated based on quoted market prices for the Company’s MBS or similar securities.

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 and mortgage loans at fair value held in a VIE, are categorized as “Level 2” financial statement items. The fair values of mortgage loans acquired for sale at fair value are estimated using their quoted market or contracted price or market price equivalent. For the mortgage loans at fair value held in a VIE, the fair values of all of the individual securities issued by the securitization trust are used to derive a fair value for the mortgage loans.

•

Loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value held outside the VIE 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, property type or contracted selling price, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

The valuation process includes the computation by stratum of the loans’ fair values 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 the Manager’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 effect on fair value of 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 and mortgage loans under forward purchase agreements at fair value:


Key inputs	March 31, 2015	December 31, 2014
Mortgage loans at fair value
Discount rate
Range	2.4% – 15.0%	2.3% – 15.0%
Weighted average	7.4%	7.7%

Twelve-month projected housing price index change
Range	1.9% – 5.3%	4.0% – 5.3%
Weighted average	4.0%	4.8%

Prepayment speed (1)
Range	0.0% – 5.6%	0.0% – 6.5%
Weighted average	3.5%	3.1%

Total prepayment speed (2)
Range	0.0% – 29.8%	0.0% – 27.9%
Weighted average	21.6%	21.6%

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

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

Excess Servicing Spread Purchased from PennyMac Financial Services, Inc.

The Company categorizes ESS as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include prepayment speed and discount rate. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to loss in fair value when interest rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the ESS, thereby reducing the fair value of ESS. Reductions in the fair value of ESS affect income primarily through change in fair value.

Interest income for ESS is accrued using the interest method, based upon the expected interest yield from the ESS through the expected life of the underlying mortgages. Changes to expected interest yield result in a change in Interest income which is recorded on the consolidated statement of income as Interest income. Changes to expected cash flows result in a change to fair value that is recognized in Net gain (loss) on investments.

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


Key inputs	March 31, 2015	December 31, 2014
Unpaid principal balance of underlying mortgage loans (in thousands)	$33,142,366	$28,227,340
Average servicing fee rate (in basis points)	30	31
Average ESS rate (in basis points)	16	16
Pricing spread (1)
Range	1.7% - 12.4%	1.7% - 12.0%
Weighted average	5.5%	5.3%

Life (in years)
Range	0.3 - 7.3	0.4 - 7.3
Weighted average	5.7	5.8

Annual total prepayment speed (2)
Range	7.6% - 77.3%	7.6% - 74.6%
Weighted average	11.6%	11.2%

(1)

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

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

Derivative Financial Instruments

The Company estimates the fair value of IRLCs 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 probability that the mortgage loan will be purchased as a percentage of the commitments it has made (the “pull-through rate”). The Company categorizes IRLCs as a “Level 3” financial statement item.

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, may result in a significant change in fair value. The financial effects of changes in 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 fair value.

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


Key inputs	March 31, 2015	December 31, 2014
Pull-through rate
Range	55.9% - 99.9%	65.0% - 98.0%
Weighted average	91.0%	94.9%
MSR value expressed as:
Servicing fee multiple
Range	1.6 - 5.1	0.7 - 5.2
Weighted average	4.3	4.3

Percentage of unpaid principal balance
Range	0.4% - 3.1%	0.2% - 1.3%
Weighted average	1.2%	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.

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 established 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 the Manager’s staff appraisers when the Company obtains multiple indications of value and there is a significant difference between the values received. PCM’s staff appraisers will attempt to resolve the difference 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 determine the 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 inputs used in the Company’s discounted cash flow model are based on market factors which the Manager believes are consistent with inputs and data used by market participants valuing similar MSRs. The key inputs used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable pricing spread or discount rate, and annual per-loan cost to service mortgage loans, all of which are unobservable. 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 inputs are not necessarily directly related. 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.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the MSRs, thereby reducing MSR fair value. Reductions in the fair 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,
	2015		2014
Key inputs	Amortized cost	Fair value	Amortized cost	Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$25,554	$1,906	$9,118	$11,757
Unpaid principal balance of underlying mortgage loans	$2,282,756	$223,653	$850,548	$1,091,714
Weighted-average annual servicing fee rate (in basis points)	26	26	25	25

Pricing spread (1)
Range	6.8% - 17.5%	10.3% - 14.3%	6.3% – 14.3%	8.5% - 12.3%
Weighted average	8.6%	11.0%	8.5%	8.9%

Life (in years)
Range	1.3 - 7.7	2.6 - 7.2	1.1 - 7.3	2.8 - 7.3
Weighted average	6.5	5.9	5.9	7.1

Annual total prepayment speed (2)
Range	7.6% - 51.0%	8.6% - 33.3%	7.6% – 56.4%	8.0% - 23.8%
Weighted average	9.3%	13.8%	10.3%	9.3%

Annual per-loan cost of servicing
Range	$62 - $134	$62 - $62	$68 – $68	$68 - $68
Weighted average	$63	$62	$68	$68

(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 Life Total CPR.

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those assumptions:


	March 31, 2015		December 31, 2014
	Amortized cost	Fair value	Amortized cost	Fair value
	(Carrying value, unpaid principal balance and effect on fair value amounts in thousands)

Carrying value	$309,712	$49,448	$300,422	$57,358

Key inputs:
Unpaid principal balance of underlying mortgage loans	$29,155,694	$6,000,743	$28,006,797	$6,278,676
Weighted-average annual servicing fee rate (in basis points)	26	25	26	25
Weighted-average note interest rate	3.81%	4.78%	3.80%	4.78%

Pricing spread (1) (2)
Range	6.3% - 17.5%	8.1% - 16.3%	6.3% – 17.5%	8.1% – 16.3%
Weighted average	8.1%	11.0%	7.9%	10.3%
Effect on fair value of a:
5% adverse change	$(5,846)	$(742)	$(5,801)	$(937)
10% adverse change	$(11,499)	$(1,463)	$(11,410)	$(1,845)
20% adverse change	$(22,263)	$(2,842)	$(22,086)	$(3,577)

Weighted average life (in years)
Range	1.7 - 7.2	2.1 - 7.2	1.8 - 7.2	1.8 - 7.2
Weighted average	6.3	6.1	6.4	6.7
Prepayment speed (1) (3)
Range	7.8% - 40.7%	8.0% - 35.0%	7.8% - 47.9%	8.0% - 39.6%
Weighted average	8.9%	13.5%	8.8%	11.4%
Effect on fair value of a:
5% adverse change	$(6,490)	$(1,335)	$(6,166)	$(1,430)
10% adverse change	$(12,769)	$(2,612)	$(12,138)	$(2,803)
20% adverse change	$(24,731)	$(5,002)	$(23,532)	$(5,394)

Annual per-loan cost of servicing
Range	$62 - $134	$62 - $134	$62 – $134	$62 – $134
Weighted average	$62	$62	$62	$62
Effect on fair value of a:
5% adverse change	$(1,882)	$(300)	$(1,807)	$(334)
10% adverse change	$(3,764)	$(600)	$(3,614)	$(668)
20% adverse change	$(7,527)	$(1,200)	$(7,228)	$(1,337)

(1)	The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.

(2)	Pricing spread represents a margin that is added 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.

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

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

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 fair values of the agreements, due to the short maturities of such agreements.

Note 8—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, 2015				December 31, 2014
	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
Loan type	(in thousands)
Conventional:
Agency-eligible	$	684,063	$	657,887	$	290,007	$	277,355
Jumbo		83,511		81,613		138,390		135,008
Government insured or guaranteed loans held for sale to PennyMac Loan Services, LLC		599,390		568,644		209,325		198,265

	$	1,366,964	$	1,308,144	$	637,722	$	610,628

Loans pledged to secure assets sold under agreements to repurchase	$	1,272,132			$	609,608

Loans pledged to secure mortgage loan participation and sale agreements	$	74,051			$	20,862

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. 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 plus interest earned during the period it holds each such loan.

Note 9—Derivative Financial Instruments

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 the 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 fair value of the Company’s MBS, IRLCs and inventory of mortgage loans acquired for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

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 an IRLC is issued to a correspondent lender to the time the purchased mortgage loan is sold. The Company is exposed to loss if mortgage interest rates increase, because the value of the purchase commitment or mortgage loan acquired for sale decreases.

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. The Company includes MSRs in its hedging activities.

The Company enters into Eurodollar futures, which settle daily, to economically hedge net fair value changes of a portion of fixed-rate mortgage loans at fair value held by VIE and MBS securities at fair value and the related variable rate repurchase agreement liabilities indexed to LIBOR. The Company uses the Eurodollar futures with the intention of moderating the risk of rising market interest rates that will result in unfavorable changes in the value of the Company’s fixed-rate assets and economic performance of its indexed variable interest LIBOR rate repurchase agreement liabilities.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the normal course of business when the Company commits to purchase mortgage loans acquired for sale.

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


	March 31, 2015								December 31, 2014
			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:
Interest rate lock commitments		996,074	$	8,243		$	29			695,488	$	5,678		$	17
Forward sales contracts		2,958,492		461			17,321			1,601,282		52			6,649
Forward purchase contracts		2,132,616		12,171			431			1,100,700		3,775			34
MBS put options		190,000		557			—			340,000		374			—
Eurodollar future sales contracts		6,355,000		—			—			7,426,000		—			—
Eurodollar future purchase contracts		—		—			—			800,000		—			—
Treasury futures sales contracts		85,000		—			1,172			85,000		—			478
Call options on interest rate futures		1,165,000		3,642			—			1,030,000		3,319			—
Put options on interest rate futures		1,020,000		403			—			275,000		193			—

Total derivative instruments before netting				25,477			18,953					13,391			7,178
Netting				(12,809	)		(16,882	)				(2,284	)		(4,748	)

			$	12,668		$	2,071				$	11,107		$	2,430

Margin deposits with (collateral received from)derivatives counterparties			$	4,073							$	2,465

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, MSRs, mortgage loans at fair value held in a VIE and MBS.


	Quarter ended March 31, 2015
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended March 31, 2015
Forward sales contracts		1,601,283		9,829,527		(8,472,318	)		2,958,492
Forward purchase contracts		1,100,700		7,047,676		(6,015,760	)		2,132,616
MBS put options		340,000		405,000		(555,000	)		190,000
Eurodollar future sale contracts		7,426,000		100,000		(1,171,000	)		6,355,000
Eurodollar future purchase contracts		800,000		—		(800,000	)		—
Treasury future sale contracts		85,000		96,500		(96,500	)		85,000
Call option on interest rate futures		1,030,000		640,000		(505,000	)		1,165,000
Put options on interest rate futures		275,000		1,120,000		(375,000	)		1,020,000


	Quarter ended March 31, 2014
	Balance,							Balance,
	beginning				Dispositions/			end
Period/Instrument	of period		Additions		expirations			of period
	(in thousands)
Quarter ended March 31, 2014
Forward purchase contracts		2,781,066		6,397,817		(7,401,530	)		1,777,353
Forward sales contracts		3,588,027		8,668,939		(9,759,006	)		2,497,960
MBS put option		55,000		430,000		(225,000	)		260,000
MBS call option		110,000		60,000		(135,000	)		35,000
Eurodollar Future sale contracts		8,779,000		126,000		(2,821,000	)		6,084,000
Eurodollar future purchase contracts		—		2,597,000		(2,597,000	)		—
Treasury Future sale contracts		105,000		103,800		(133,800	)		75,000
Treasury Future purchase contracts		—		96,600		(96,600	)		—
Put options on interest rate futures		52,500		437,000		(109,500	)		380,000
Call options on interest rate futures		—		150,000		(60,000	)		90,000

The Company recorded net losses on derivative financial instruments used to hedge the Company’s IRLCs and inventory of mortgage loans totaling $15.1 million and $10.7 million for the quarters ended March 31, 2015 and 2014, respectively. Derivative gains and losses are included in Net gain on mortgage loans acquired for sale in the Company’s consolidated statements of income.

The Company recorded net gains (losses) on derivative financial instruments used as economic hedges of MSRs totaling $11.1 million and $(99,000) for the quarters ended March 31, 2015 and 2014, respectively. The derivative net losses are included in Net loan servicing fees in the Company’s consolidated statements of income.

The Company recorded net losses on derivative financial instruments used to hedge the net change in fair value of fixed-rate assets and its variable LIBOR rate repurchase agreement liabilities of $10.0 million and $5.6 million for the quarters ended March 31, 2015 and 2014, respectively. The derivative losses are included in Net gain on investments in the Company’s consolidated statements of income.

Note 10—Mortgage Loans at Fair Value

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


	March 31, 2015				December 31, 2014
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)				(in thousands)
Nonperforming loans	$	1,619,934	$	2,320,554	$	1,535,317	$	2,246,585
Performing loans:
Fixed interest rate		350,758		471,794		322,704		449,496
Adjustable-rate mortgage (“ARM”)/hybrid		143,105		177,611		127,405		162,329
Interest rate step-up		229,424		332,631		213,999		323,350
Balloon		161		208		158		210

		723,448		982,244		664,266		935,385

Fixed interest rate jumbo loans held in a VIE		515,944		503,786		527,369		517,500

	$	2,859,326	$	3,806,584	$	2,726,952	$	3,699,470

Mortgage loans at fair value pledged to secure borrowings :
Assets sold under agreements to repurchase	$	2,684,584			$	2,543,242

Mortgage loans held in a consolidated VIE	$	515,944			$	527,369

Following is a summary of certain concentrations of credit risk in the portfolio of mortgage loans at fair value, excluding mortgage loans held in a VIE securing asset-backed financing:


Concentration	March 31, 2015			December 31, 2014
Portion of mortgage loans originated between 2005 and 2007		73	%		75	%
Percentage of fair value of mortgage loans with unpaid-principal- balance-to-current-property-value in excess of 100%		52	%		55	%
Percentage of mortgage loans secured by California real estate		23	%		22	%
Additional states contributing 5% or more of mortgage loans		New York New Jersey Florida			New York New Jersey Florida

Note 11—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Balance at beginning of period	$	303,228		$	138,942
Purchases		—			3,049
Transfers from mortgage loans at fair value and servicing advances		86,117			68,902
Transfers from REO under forward purchase agreements		—			92
Results of REO:
Valuation adjustments, net		(11,400	)		(8,408	)
Gain on sale, net		5,568			2,182

		(5,832	)		(6,226	)
Proceeds from sales		(65,977	)		(31,772	)


Balance at end of period	$	317,536		$	172,987


At period end:

REO pledged to secure assets sold under agreements to repurchase	$	71,716		$	29,966

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties	$	128,788		$	51,649

Note 12—Real Estate Acquired in Settlement of Loans Under Forward Purchase Agreements

The Company held no real estate acquired in settlement of loans under forward purchase agreements during the quarter ended March 31,2015. Following is a summary of the activity in REO under forward purchase agreements:


	Quarter ended March 31, 2014
	(in thousands)
Balance at beginning of period	$	9,138
Purchases		38
Transfers from mortgage loans under forward purchase agreements at fair value and advances		6,828
Transfers to REO		(92	)
Results of REO under forward purchase agreements:
Valuation adjustments, net		(484	)
Gain on sale, net		84

		(400	)
Proceeds from sales		(1,622	)

Balance at end of period	$	13,890

Note 13—Mortgage Servicing Rights

Carried at Fair Value:

Following is a summary of MSRs carried at fair value:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Balance at beginning of period	$	57,358		$	26,452
Addition resulting from mortgage loan sales		1,906			11,757
Change in fair value:
Due to changes in valuation inputs or assumptions used in valuation model (1)		(8,194	)		(1,232	)
Other changes in fair value (2)		(1,622	)		(796	)

		(9,816	)		(2,028	)

Balance at end of period	$	49,448		$	36,181

(1)	Principally reflects changes in pricing spread (discount rate) and prepayment speed inputs, 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:

Following is a summary of MSRs carried at lower of amortized cost or fair value:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Amortized Cost:
Balance at beginning of period	$	308,137		$	266,697
MSRs resulting from loan sales		25,554			9,118
Purchases		—			—
Amortization		(9,592	)		(7,365	)
Application of valuation allowance to write down
MSRs with other-than temporary impairment		—			—
Sales		(293	)		—

Balance at end of period		323,806			268,450

Valuation Allowance:
Balance at beginning of period		(7,715	)		(2,577	)
Additions		(6,379	)		(627	)

Balance at end of period		(14,094	)		(3,204	)

MSRs, net	$	309,712		$	265,246

Estimated fair value at beginning of period	$	322,230		$	289,737

Fair value at end of period	$	327,703		$	289,934

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the inputs used by the Manager in its March 31, 2015 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 the Manager.


Quarter ended March 31	Estimated MSR amortization
	(in thousands)
2015	$	35,045
2016		34,132
2017		31,455
2018		28,624
2019		25,779
Thereafter		168,771

Total	$	323,806

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,
	2015		2014
	(in thousands)
Contractually-specified servicing fees	$	21,588	$	16,816

Note 14— Assets Sold Under Agreements to Repurchase

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


	Quarter ended March 31,
	2015			2014
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		2.33	%		2.21	%
Average balance	$	2,847,915		$	1,795,702
Total interest expense	$	18,912		$	12,539
Maximum daily amount outstanding	$	3,860,671		$	2,079,090
At period end:
Balance	$	3,563,293		$	1,887,778
Weighted-average interest rate		2.22	%		2.31	%
Available borrowing capacity:
Committed	$	287,414		$	1,195,414
Uncommitted		257,238			865,223

	$	544,652		$	2,060,637

Margin deposits placed with counterparties	$	13,450		$	3,780
Fair value of assets securing agreements to repurchase:
Mortgage-backed securities	$	316,292		$	198,110
Mortgage loans acquired for sale at fair value		1,272,132			339,153
Mortgage loans at fair value		2,684,584			2,270,677
Real estate acquired in settlement of loans		200,504			81,615

	$	4,473,512		$	2,889,555

(1)	Excludes the effect of amortization of commitment fees and issuance costs of $2.3 million and $2.5 million for the quarters ended March 31, 2015 and 2014, respectively.

Following is a summary of maturities of outstanding assets sold under agreements to repurchase by facility maturity date:


Remaining Maturity at March 31, 2015	Balance
	(in thousands)
Within 30 days	$	290,335
Over 30 to 90 days		245,373
Over 90 days to 180 days		999,329
Over 180 days to 1 year		1,615,509
Over 1 year to 2 year		412,747

	$	3,563,293

Weighted average maturity (in months)		7.7

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 assets securing those agreements decreases. 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) and maturity information relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2015:

Mortgage loans acquired for sale, mortgage loans and REO sold under agreements to repurchase


Counterparty	Amount at risk		Mortgage loans acquired for sale weighted-average repurchase agreement maturity		Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	163,576		July 5, 2015	October 30, 2015
Bank of America, N.A.	$	60,643		June 20, 2015	January 30, 2016
Morgan Stanley	$	13,914		May 22, 2015	December 17, 2015
Citibank, N.A.	$	346,246		April 27, 2015	September 7, 2015
JPMorgan Chase & Co.	$	192,301		—	January 26, 2017

Securities sold under agreements to repurchase


Counterparty	Amount at risk		Maturity
	(in thousands)
Daiwa Capital Markets America Inc.	$	6,649		May 3, 2015
JPMorgan Chase & Co.	$	4,818		April 27, 2015
Bank of America, N.A.	$	7,083		May 15, 2015
Citibank, N.A.	$	761		June 30, 2015

The following is a summary of the tangible net worth and minimum required amounts for the Company and certain of its subsidiaries at March 31, 2015 to comply with the debt covenants contained in the borrowing agreements:


	Tangible net worth at March 31, 2015
	Balance		Minimum required
Entity	(in thousands)
PennyMac Mortgage Investment Trust	$	1,542,159	$	860,000
Operating Partnership		1,593,483		700,000
PennyMac Holdings, LLC		822,450		250,000
PennyMac Corp		295,467		150,000

Note 15—Mortgage Loan Participation and Sale Agreement

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

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

The mortgage loan participation and sale agreement is summarized below:


	Quarter ended March 31, 2015
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		1.42	%
Average balance	$	43,547
Total interest expense	$	207
Maximum daily amount outstanding	$	92,940
At period end:
Balance	$	71,829
Weighted-average interest rate		1.43	%
Mortgage loans pledged to secure mortgage loan participation and sale agreement	$	74,051

(1)	Excludes the effect of amortization of commitment fees of $52,000 for the three months ended March 31, 2015.

Note 16—Asset-Backed Secured Financing of the Variable Interest Entity at Fair Value

Following is a summary of financial information relating to the asset-backed secured financing of the VIE:


	Quarter ended March 31,
	2015			2014
	(dollars in thousands)
During the period:
Weighted-average fair value	$	165,522		$	166,894
Interest expense	$	1,583		$	1,617
Weighted-average effective interest rate		3.83	%		3.88	%
At period end:
Balance	$	162,222		$	166,514
Interest rate		3.50	%		3.58	%

The Asset-backed secured financing of the variable interest entity is a non-recourse liability and secured solely by the assets of the consolidated VIE and not by any other assets of the Company. The assets of the VIE are the only source of funds for repayment of the certificates.

Note 17—Exchangeable Senior Notes

PMC issued in a private offering $250 million aggregate principal amount of Notes due May 1, 2020. The Notes bear interest at a rate of 5.375% per year, payable semiannually. The Notes are exchangeable into common shares of the Company at a rate of 33.7327 common shares per $1,000 principal amount of the Notes as of March 31, 2015, which exchange rate increased from the initial exchange rate of 33.5149. The increase in the calculated exchange rate was the result of cash dividends exceeding the dividend threshold amount of $0.57 per share as provided in the related indenture.

Following is financial information relating to the Notes:


	Quarter ended March 31,
	2015		2014
	(dollars in thousands)
During the period:
Weighted-average balance	$	250,000	$	250,000
Interest expense (1)	$	3,597	$	3,584
At period end:
Balance	$	250,000	$	250,000
Unamortized issuance costs (2)	$	5,683	$	6,616

(1)	Total interest expense includes amortization of debt issuance costs of $239,000 and $225,000 during the quarters ended March 31, 2015 and 2014, respectively.

(2)	Unamortized issuance costs are included in Other assets in the consolidated balance sheets.

Note 18—Borrowings under Forward Purchase Agreements

There were no borrowings under forward purchase agreements during the quarter ended March 31, 2015. Following is a summary of financial information relating to borrowings under forward purchase agreements:


	Quarter ended March 31, 2014
	(dollars in thousands)
During the period:
Weighted-average effective interest rate		2.85	%
Weighted-average balance	$	221,769
Interest expense	$	1,580
Maximum daily amount outstanding	$	226,848
At period end:
Balance	$	216,614
Interest rate		3.01	%
Fair value of underlying loans and REO	$	215,693

Note 19—Liability for Losses Under Representations and Warranties

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


	Quarter ended March 31,
	2015			2014
	(in thousands)
Balance, beginning of period	$	14,242		$	10,110
Provision for losses		925			744
Losses incurred		(53	)		—
Recovery		265			—

Balance, end of period	$	15,379		$	10,854

Unpaid principal balance of mortgage loans subject to representations and warranties at period end	$	35,573,237		$	27,188,848

Note 20—Commitments and Contingencies

Litigation

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, 2015, the Company was not involved in any such proceedings, claims or legal actions that in management’s view would reasonably be likely to have a material adverse effect on the Company.

Mortgage Loan Commitments

The following table summarizes the Company’s outstanding contractual loan commitments:


	March 31, 2015
	(in thousands)
Commitments to purchase mortgage loans:
Mortgage loans acquired for sale at fair value	$	996,752

Note 21—Shareholders’ Equity

At March 31, 2015, the Company had approximately $106.9 million of common shares available for issuance under its ATM Equity Offering Sales Agreement^SM. During the quarter ended March 31, 2015, the Company did not sell any common shares under the agreement. During the quarter ended March 31, 2014, the Company sold a total of 3,387,022 of its common shares at a weighted average price of $23.92 per share, providing net proceeds to the Company of approximately $80.1 million, net of sales commissions of $874,000.

Note 22—Net Gain on Mortgage Loans Acquired for Sale

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


	Quarter ended March 31,
	2015			2014
	(in thousands)
Cash (loss) gain :
Sales proceeds, net	$	(7,544	)	$	(2,894	)
Hedging activities		(12,527	)		(3,547	)

		(20,071	)		(6,441	)

Non cash gain:
Receipt of MSRs in loan sale transactions		27,460			20,875
Provision for losses relating to representations and warranties provided in loan sales		(925	)		(744	)
Change in fair value of IRLCs, mortgage loans and hedging derivatives held at period end:
IRLCs		2,554			2,022
Mortgage loans		3,726			1,411
Hedging derivatives		(2,584	)		(7,152	)

		3,696			(3,719	)

	$	10,160		$	9,971

Note 23—Net Interest Income

Net interest income is summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Interest income:
Short-term investments	$	220	$	152
Mortgage-backed securities		2,633		1,761
Mortgage loans acquired for sale at fair value		7,101		3,625
Mortgage loans at fair value		21,554		23,286
Mortgage loans at fair value held by VIE		5,413		5,495
Mortgage loans under forward purchase agreements at fair value		—		2,154
Excess servicing spread purchased from PFSI, at fair value		3,752		2,862
Other		12		11

		40,685		39,346

Interest expense:
Assets sold under agreements to repurchase		18,912		12,539
Mortgage loans participation and sale agreement		207		—
Borrowings under forward purchase agreements		—		1,580
Asset-backed secured financing		1,583		1,617
Exchangeable senior notes		3,597		3,584
Other		1,447		455

		25,746		19,775

Net interest income	$	14,939	$	19,571

Note 24—Net Gain on Investments

Net gain on investments is summarized below:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Net gain (loss) on investments:
Mortgage-backed securities	$	1,516		$	709
Mortgage loans		17,186			39,918
Mortgage loans held in a VIE		1,800			11,307
Excess servicing spread purchased from PFSI at fair value		(6,248	)		(2,901	)
Asset-backed secured financing		(770	)		(2,780	)
Hedging derivatives		(10,037	)		(3,668	)

	$	3,447		$	42,585

Note 25—Net Loan Servicing Fees

Net loan servicing fees are summarized below:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Servicing fees (1)	$	22,629		$	17,532
MSR recapture fee receivable from PFSI		—			8
Effect of MSRs:
Carried at lower of amortized cost or fair value
Amortization		(9,592	)		(7,365	)
Provision for impairment		(6,379	)		(627	)
Gain on sale		83			—
Carried at fair value - change in fair value		(9,816	)		(2,028	)
Gains (losses) on hedging derivatives		11,076			(99	)

		(14,628	)		(10,119	)

Net loan servicing fees	$	8,001		$	7,421

Average servicing portfolio	$	34,599,043		$	26,492,742

(1)	Includes contractually specified servicing and ancillary fees.

Note 26—Share-Based Compensation Plans

On March 31, 2015 and 2014, the Company had one share-based compensation plan. The Company recognized compensation expense of $2.5 million and $2.6 million for the quarters ended March 31, 2015 and 2014, respectively. The Company granted 294,684 restricted share units with a grant date fair value of $6.3 million for the quarter ended March 31, 2015 compared to none in the same period in 2014, and 75,063 and 84,437 units vested during the quarters ended March 31, 2015 and 2014, respectively.

Note 27—Other Expenses

Other expenses are summarized below:


	Quarter ended March 31,
	2015		2014
	(in thousands)
Common overhead allocation from PFSI	$	2,392	$	2,578
Servicing and collection costs		1,445		632
Loan origination		953		37
Insurance		373		239
Technology		292		247
Other expenses		847		333

	$	6,302	$	4,066

Note 28—Income Taxes

The Company had a tax benefit of $11.3 million and $1.6 million for the quarters ended March 31, 2015 and 2014, respectively. The Company’s effective tax rate is 296.6% and (4.4)% for the quarters ended March 31, 2015 and 2014, respectively. The increase in the Company’s tax benefit is due primarily to an increased loss incurred at the Company’s taxable REIT subsidiary for the quarter ended March 31, 2015 as compared to the same period in 2014. The primary difference between the Company’s effective tax rate and the statutory tax rate is due to non-taxable REIT income resulting from the dividends paid deduction.

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

Note 29—Segments and Related Information

The Company has two segments: correspondent production and investment activities.

•

Most of the loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities such as Fannie Mae and Freddie Mac or through government agencies such as Ginnie Mae.

•

The investment activities segment represents the Company’s investments in mortgage-related assets, which include distressed mortgage loans, REO, MBS, MSRs and ESS. 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.

Financial highlights by operating segment are summarized below:


Quarter ended March 31, 2015	Correspondent production			Investment activities			Intersegment elimination & other		Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	10,160		$	—		$	—	$	10,160
Net gain on investments		—			3,447			—		3,447
Interest income		7,112			33,573			—		40,685
Interest expense		(3,820	)		(21,926	)		—		(25,746	)

		3,292			11,647			—		14,939
Net loan servicing fees		—			8,001					8,001
Other income (loss)		5,351			(4,241	)		—		1,110

		18,803			18,854			—		37,657

Expenses:
Loan fulfillment, servicing and management fees payable to PennyMac Financial Services, Inc.		13,170			17,369			—		30,539
Other		1,214			9,724			—		10,938

		14,384			27,093			—		41,477

Pre-tax income (loss)	$	4,419		$	(8,239	)	$	—	$	(3,820	)

Total assets at period end	$	1,392,680		$	4,344,730		$	—	$	5,737,410


Quarter ended March 31, 2014	Correspondent production			Investment activities			Intersegment elimination & other			Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	9,971		$	—		$	—		$	9,971
Net gain on investments		—			42,585			—			42,585
Interest income		3,635			36,598			(887	)		39,346
Interest expense		(3,655	)		(17,007	)		887			(19,775	)

		(20	)		19,591			—			19,571
Net loan servicing fees		—			7,421						7,421
Other income (loss)		2,356			(5,309	)		—			(2,953	)

		12,307			64,288			—			76,595

Expenses:
Loan fulfillment, servicing and management fees payable to PennyMac Financial Services, Inc.		9,071			22,496			—			31,567
Other		88			8,651			—			8,739

		9,159			31,147			—			40,306

Pre-tax (loss) income	$	3,148		$	33,141		$	—		$	36,289

Total assets at period end	$	359,348		$	3,868,189		$	—		$	4,227,537

Note 30—Supplemental Cash Flow Information


	Quarter ended March 31
	2015		2014
	(in thousands)
Cash paid for interest	$	21,188	$	25,490
Income tax paid	$	186	$	42
Non-cash investing activities:
Transfer of mortgage loans and servicing advances to real estate acquired in settlement of loans	$	86,117	$	68,902
Purchase of mortgage loans financed through forward purchase agreements	$	—	$	920
Transfer of mortgage loans under forward purchase agreements to mortgage loans at fair value	$	—	$	4,460
Transfer of mortgage loans under forward purchase agreements and advances to REO under forward purchase agreements	$	—	$	6,828
Receipt of MSRs as proceeds from sales of loans	$	27,460	$	20,875
Purchase of REO financed through forward purchase agreements	$	—	$	38
Receipt of ESS pursuant to recapture agreement with PFSI	$	1,246	$	1,113
Transfer of REO under forward purchase agreements to REO	$	—	$	92
Non-cash financing activities:	$	—
Purchase of mortgage loans financed through forward purchase agreements	$	—	$	920
Purchase of REO financed through forward purchase agreements	$	—	$	38
Dividends payable	$	46,073	$	43,618

Note 31—Regulatory Net Worth

PMC is a seller-servicer for Fannie Mae and Freddie Mac. To retain its status as an approved seller-servicer, PMC is required to meet Fannie Mae’s and Freddie Mac’s capital standards, which require PMC to maintain a minimum net worth of $92.5 million and $36.2 million, respectively. Management believes that PMC complies with Fannie Mae’s and Freddie Mac’s net worth requirement as of March 31, 2015.

Note 32—Recently Issued Accounting Pronouncements

In April of 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 should be applied on a retrospective basis and is effective for the Company for financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. The adoption of ASU 2015-03 is not expected to have a material effect on the Company’s consolidated financial statements.

Note 33—Subsequent Events

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

•

On April 28, 2015, PLS entered into a letter of intent with a third party to purchase a $9.3 billion unpaid principal balance portfolio of Agency MSRs. The Company intends to purchase from PLS approximately $74 million of ESS from this MSR portfolio.

The MSR acquisition by PLS and the Company’s purchase of ESS are subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions, including required regulatory approvals. There can be no assurance that the committed amounts will ultimately be acquired or that the transactions will be completed at all.

•

On April 30, 2015, the Company, through PMH, entered into an Amended and Restated Master Spread Acquisition and MSR Servicing Agreement with PLS (the “Spread Acquisition Agreement”). The Spread Acquisition Agreement amends and restates that certain spread acquisition and MSR servicing agreement originally entered into by and between PMH and PLS on December 30, 2013. The primary purpose of the amendment and restatement was to evidence the ownership of the ESS under participation certificates and to otherwise incorporate the terms of previously executed amendments.

•

On April 30, 2015, the Company, through its wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), entered into a loan and security agreement (the “Loan Agreement”) with PLS, pursuant to which PMH may borrow up to $150 million from PLS for the purpose of financing ESS. PLS then re-pledges such ESS to Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) under a Third Amended and Restated Loan and Security Agreement, dated as of March 27, 2015, by and among CSFB, PLS and Private National Mortgage Acceptance Company, LLC, as guarantor (the “CSFB LSA”), and pursuant to which PLS finances certain of its MSRs and related participation interests and servicing advance receivables with CSFB. In connection with the execution of the Loan Agreement, the CSFB LSA was amended to increase the maximum loan amount thereunder from $257 million to $407 million. The $150 million increase was implemented to allow for PLS’s re-pledge to CSFB of ESS pledged by PMH under the Loan Agreement. The aggregate loan amount outstanding under the CSFB LSA and relating to re-pledged ESS by PLS is guaranteed in full by the Company (the “Guaranty”).

•

On April 30, 2015, the Company, through PMH, entered into an Amended and Restated Security and Subordination Agreement (the “Security Agreement”) with CSFB. The Security Agreement amends and restates that certain security agreement originally entered into by and between PMH and PLS on December 30, 2013. The primary purpose of the amendment and restatement was to provide CSFB with remedies under the Security Agreement relating to the Company’s obligations under the Guaranty.

•

On May 1, 2015, the Company completed its purchase of $136 million in ESS relating to PLS’s acquisition of a $15 billion unpaid principal balance portfolio of Agency MSRs.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Mortgage Investment Trust (“PMT”) included within this Quarterly Report on Form 10-Q.

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

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

Our Company

We are a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. We have achieved this objective largely by investing in distressed mortgage assets and acquiring, pooling and selling newly originated prime credit quality residential mortgage loans (“correspondent production”) and retaining the MSRs.

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

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

We seek to maximize the value of the distressed mortgage loans that we acquire using means that are appropriate for the particular loan, including both proprietary and nonproprietary loan modification programs, special servicing and other initiatives focused on avoiding foreclosure, when possible. When we are unable to effect a cure for a mortgage delinquency, our objective is to effect timely acquisition and/or liquidation of the property securing the loan through the use, in part, of short sales and deed-in-lieu of foreclosure programs. During the three months ended March 31, 2015 and 2014 we acquired distressed mortgage loans with fair values totaling $242.0 million and $257.2 million, respectively, and we received proceeds from liquidation, payoffs and sales from our portfolio of distressed mortgage loans and REO totaling $111.9 million and $285.6 million, respectively.

During the three months ended March 31, 2015 and 2014, we purchased newly originated prime credit quality loans with fair values totaling $8.4 billion and $5.0 billion, respectively, in furtherance of our correspondent production business. To the extent that we purchase mortgage loans that are insured by the U.S. Department of Housing and Urban Development (“HUD”) through the FHA or insured or guaranteed by the VA or USDA, we and PLS have agreed that PLS will fulfill and purchase such mortgage loans, as PLS is a Ginnie Mae-approved issuer and servicer and we are not. This arrangement has enabled us to compete with other correspondent lenders that purchase both government and conventional mortgage loans. We receive a sourcing fee from PLS of three basis points on the unpaid principal balance (“UPB”) of each mortgage loan that we sell to PLS under such arrangement, and earn interest income on the loan for the time period we hold the mortgage loan prior to the sale to PLS. We received sourcing fees totaling $1.4 million relating to $5.0 billion of mortgage loans at fair value that we sold to PLS for the quarter ended March 31, 2015, compared to $892,000 relating to $3.1 billion of loans at fair value that we sold to PLS for the quarter ended March 31, 2014.

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

•

Acquisition of excess servicing spread (“ESS”) from mortgage servicing rights (“MSRs”) acquired by PLS. We believe that ESS is an attractive long-term investment that allows us to leverage the mortgage loan servicing and origination capabilities of PLS. In addition, ESS can act as a hedge for us against the interest-rate sensitivity of other assets, such as MBS or the inventory of

our correspondent production business. During the quarter ended March 31, 2015, we purchased ESS with fair values totaling $46.4 million and received $1.2 million pursuant to a recapture agreement with PFSI compared to $20.5 million and $1.1 million, respectively, during the quarter ended March 31, 2014.

We also intend to continue to retain the MSRs that we receive as a portion of the proceeds from our sale or securitization of mortgage loans through our correspondent production operation. During the quarter ended March 31, 2015, we received MSRs with fair values at initial recognition totaling $27.5 million, compared to $20.9 million during the quarter ended March 31, 2014.

•

To the extent that we transfer correspondent production loans into private label securitizations, retention of a portion of the securities created in the securitization transaction.

•

Acquisition of REIT-eligible mortgage-backed or mortgage-related securities. We purchased MBS with fair values totaling $25.1 million during the quarter ended March 31, 2015.

•

Acquisition of small balance (typically under $10 million) commercial mortgage loans.

•

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

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

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

Observations on Current Market Conditions

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues to grow as reflected in recent economic data. During the first quarter of 2015, real U.S. gross domestic product expanded at an annual rate of 0.2% compared to a 2.1% decrease for the first quarter of 2014 and a 2.2% increase for the fourth quarter of 2014. The national unemployment rate was 5.5% at March 31, 2015 compared to 5.6% at December 31, 2014 and 6.6% at March 31, 2014. Delinquency rates on residential real estate loans remain elevated compared to historical rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the fourth quarter of 2014, the delinquency rate on residential real estate loans held by commercial banks was 6.6%, a reduction from 8.2% during the fourth quarter of 2013.

Residential real estate activity appears to be improving. The seasonally adjusted annual rate of existing home sales for March 2015 was 10.4% higher than for March 2014, and the national median existing home price for all housing types was $212,100, a 7.8% increase from March 2014. On a national level, foreclosure filings during the first quarter of 2015 increased by 4% as compared to the first quarter of 2014. Foreclosure activity across the country decreased in 2014; however, it is expected to remain above historical average levels through 2015 and beyond.

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Thirty-year fixed mortgage interest rates ranged from a low of 3.59% to a high of 3.86% during the first quarter of 2015 while during the first quarter of 2014, thirty-year fixed mortgage interest rates ranged from a low of 4.23% to a high of 4.53% (Source: the Federal Home Loan Mortgage Corporation’s Weekly Primary Mortgage Market Survey).

Mortgage lenders originated an estimated $370 billion of home loans during the first quarter of 2015, up 60% from the first quarter of 2014. Although the low interest rate environment in the first quarter of 2015 led to an increase in the volume of borrowers seeking to refinance, we expect purchase-money loans to constitute a greater proportion of mortgage originations in the future. Mortgage originations are forecast to remain relatively flat, with current industry estimates for 2015 totaling $1.3 trillion (Source: average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts). We expect efforts to expand GSE product offerings (including 97% loan-to-value loans) and a recent reduction in FHA mortgage insurance premiums to make mortgage credit more affordable. In our correspondent production business we continue to see increased competition from new and existing market participants.

We believe there is significant long-term market opportunity in non-Agency jumbo mortgage loans, however current investor demand from institutional investors and large banks remains limited. The prime jumbo MBS securitization market was active during the first quarter of 2015, with issuances totaling $4.2 billion in UPB as compared with $960 million during the first quarter of 2014. During the first quarter of 2015, we produced approximately $60 million in UPB of jumbo loans compared to $13 million in UPB of jumbo loans produced during the first quarter of 2014.

Our Manager continues to see a robust market for distressed residential mortgage loans (sales of loan pools that consist of either non-performing loans, troubled but performing loans or a combination thereof) offered for sale. During 2014, the pool of sellers expanded to include new programmatic sellers, such as HUD and Freddie Mac. During the first quarter of 2015, our Manager reviewed 30 mortgage loan pools totaling approximately $9.8 billion in UPB. This compares to our Manager’s review of 25 mortgage loan pools totaling approximately $7.8 billion in UPB during the first quarter of 2014. We acquired distressed loans with fair values totaling $242 million and $261 million during the quarters ended March 31, 2015 and 2014, respectively. While we expect to see a continued supply of distressed whole loans, we believe the pricing for recent transactions has been less attractive for buyers. We remain patient and selective in making new investments in distressed whole loans and we continue to monitor the market to assess best execution opportunities for distressed portfolio investments.

Results of Operations

The following is a summary of our key performance measures:


	Quarter ended March 31,
	2015			2014
	(in thousands except per share amounts)

Net investment income	$	37,657		$	76,595

Pre-tax (loss) income by segment:
Correspondent production	$	4,419		$	3,148
Investment activities		(8,239	)		33,141

	$	(3,820	)	$	36,289

Net income	$	7,508		$	37,873
Earnings per share:
Basic	$	0.09		$	0.52
Diluted	$	0.09		$	0.50
Dividends per share:
Declared	$	0.61		$	0.59
Paid	$	0.61		$	0.59

Investment activities:
Distressed mortgage loans and REO:
Purchases	$	241,981		$	260,287
Cash proceeds from liquidation activities	$	111,858		$	285,560
MBS:
Purchases	$	25,129		$	—
Cash proceeds from repayment and sales	$	17,802		$	1,978
ESS:
Purchases from PFSI	$	46,412		$	20,526
Cash proceeds from repayments	$	12,731		$	7,413
Per share prices during the period:
High	$	22.99		$	24.44
Low	$	20.57		$	22.86
At period end	$	21.29		$	23.90
At period end:
Total assets	$	5,737,410		$	4,227,537
Book value per share	$	20.68		$	20.88

During the quarter ended March 31, 2015, we recorded net income of $7.5 million, or $0.09 per diluted share. Our net income for the quarter ended March 31, 2015 reflects net interest income of $14.9 million, supplemented by net gains on our investments in financial instruments totaling $13.6 million (comprised of net gain on investments and net gain on mortgage loans acquired for sale), including $19.0 million of valuation gains on mortgage loans at fair value and mortgage loans at fair value held by variable interest entity (“VIE”). During the quarter ended March 31, 2015, we purchased $8.4 billion in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $10.2 million, including $27.5 million of MSRs retained upon securitization or sale of such loans. At March 31, 2015, we held mortgage loans acquired for sale with fair values totaling $1.4 billion, including $599.4 million that were pending sale to PLS.

During the quarter ended March 31, 2014, we recorded net income of $37.9 million, or $0.50 per diluted share. Our net income for the quarter ended March 31, 2014 reflects net gains on our investments in financial instruments totaling $52.6 million (comprised of net gain on investments and net gain on mortgage loans acquired for sale), including $51.2 million of valuation gains on mortgage loans at fair value, mortgage loans under forward purchase agreements at fair value and mortgage loans at fair value held by VIE. These gains were supplemented by $19.6 million of net interest income. During the quarter ended March 31, 2014, we purchased $5.0 billion in fair value of newly originated mortgage loans. We recognized gains on such loans totaling approximately $10.0 million. At March 31, 2014, we held mortgage loans acquired for sale with fair values totaling $344.7 million, including $48.9 million that were pending sale to PLS.

Our net income decreased during the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014 primarily due to a decrease in pretax income in our investment activities segment. During the quarter ended March 31, 2015, we recognized net investment income totaling approximately $18.9 million in our investment activities segment, a decrease of $45.4 million, or 71%, from $64.3 million during the quarter ended March 31, 2014. In our investment activities, our average investment portfolio was approximately $3.2 billion during the quarter ended March 31, 2015, an increase of $237.5 million, or 8%, over the quarter ended March 31, 2014.

In our correspondent production activities, we received proceeds of $2.6 billion and $2.0 billion during the quarters ended March 31, 2015 and March 31, 2014, respectively, from the sale of mortgage loans to non-affiliates. We issued $3.5 billion of IRLCs relating to Agency and jumbo mortgage loans during the quarter ended March 31, 2015, an increase of $1.3 billion, or 57% as compared to the quarter ended March 31, 2014. During the quarter ended March 31, 2015, thirty-year fixed mortgage interest rates declined to their lowest quarterly average levels since mid-2013. In addition to declining interest rates, the FHA’s 50 basis point reduction in its annual insurance premiums paid by borrowers on new FHA loans increased the incentive for many FHA borrowers to refinance. As a result, we sold approximately 30% more loans to nonaffiliates during the three months ended March 31, 2015 as compared to the same period in 2014 but our net gain on mortgage loans acquired for sale increased by only $189,000, or 2%. The increased demand for mortgage loans notwithstanding, continuing competition in the mortgage market has decreased margins in our net gain on mortgage loans acquired for sale.

Net Investment Income

During the quarter ended March 31, 2015, we recorded net investment income of $37.7 million, comprised primarily of net interest income of $14.9 million, $10.2 million of net gain on mortgage loans acquired for sale, $8.0 million of net loan servicing fees, $5.3 million of loan origination fees, and $3.4 million of net gain on investments, partially offset by $5.8 million of losses from results of REO. During the quarter ended March 31, 2014, we recorded net investment income of $76.6 million, comprised primarily of net gain on investments of $42.6 million, supplemented by $19.6 million of net interest income, $10.0 million of net gain on mortgage loans acquired for sale, $7.4 million of net loan servicing fees, and $2.4 million of loan origination fees, partially offset by $6.6 million of losses from results of REO.

Net investment income includes non-cash fair value adjustments. Because we have elected to record our financial assets (comprised of MBS, mortgage loans acquired for sale at fair value, mortgage loans at fair value and ESS) at fair value, a substantial portion of the income we record with respect to such assets results from non-cash changes in fair value. Net investment income also includes non-cash fair value adjustments related to IRLCs and the derivatives we use to hedge our financial assets and liabilities and MSRs, non-cash interest income arising from capitalization of delinquent interest on mortgage loans upon completion of the modification of such loans, accrual of unearned discounts relating to mortgage loans held in a consolidated VIE and amortization of issuance costs and premiums relating to our asset-backed financings.

The amounts of non-cash fair value and interest income adjustments are as follows:


	Quarter ended March 31,
	2015			2014
	(in thousands)
Net gain on mortgage loans acquired for sale
Mortgage loans acquired for sale	$	3,726		$	1,411
IRLCs		2,554			2,022
Hedging derivatives		(2,584	)		(7,152	)

		3,696			(3,719	)

Net interest income
Capitalization of interest pursuant to mortgage loan modifications		10,209			12,470
Accrual of unearned discounts and amortization of premiums on MBS, mortgage loans and asset-backed financing		402			240

		10,611			12,710

Net gain (loss) on investments
Mortgage-backed securities:
Agency		1,108			2,652
Non Agency		407			—
Mortgage loans:
at fair value		15,427			34,552
at fair value held by in a variable interest entity		1,801			11,307
at fair value under forward purchase agreements		—			(1,379	)
Excess servicing spread		(6,247	)		(2,901	)
Asset-backed secured financing		(770	)		(2,780	)

		12,496			41,451
Net loan servicing fees - MSR valuation adjustments		(14,490	)		(1,859	)

	$	12,486		$	48,583

Cash is generated when mortgage loan investments are monetized through payoffs or sales, when payment of principal and interest occurs on such loans, generally after they are modified, or when the property securing a mortgage loan that has been settled through acquisition of the property securing the loan has been sold. We receive proceeds on the sale of mortgage loans acquired for sale that include both cash and our estimate of the fair value of MSRs and we recognize a liability for potential losses relating to representations and warranties created in the loan sales transactions. Cash flows relating to hedging instruments are generally produced when the instruments mature or when we effectively cancel the transactions through an offsetting trade. With respect to MSRs and ESS, negative valuation adjustments generally arise from increased prepayment expectations. To the extent that such expectations result from decreasing interest rates, increased loan production and recapture of MSRs and ESS may occur.

The following table illustrates the net gain in value that we accumulated over the period during which we owned the liquidated mortgage loan investments and REO, as compared to the proceeds actually received and the additional net gain realized upon liquidation of such assets:


	Quarter ended March 31,
	2015						2014
			Accumulated		Gain on				Accumulated		Gain on
	Proceeds		gains (2)		liquidation (3)		Proceeds		gains (2)		liquidation (3)
	(in thousands)
Mortgage loans (1)	$	45,882	$	5,621	$	1,758	$	252,168	$	53,241	$	6,746
REO		65,976		962		5,568		33,392		2,974		2,267