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, 2016

¨	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 4 , 2016
Common Shares of Beneficial Interest, $0.01 par value		68,587,094

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

March 31, 2016

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements			1
PART I. FINANCIAL INFORMATION			4
Item 1.	Financial Statements (Unaudited):		4
	Consolidated Balance Sheets		4
	Consolidated Statements of Income		6
	Consolidated Statements of Changes in Shareholders’ Equity		7
	Consolidated Statements of Cash Flows		8
	Notes to Consolidated Financial Statements		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		53
	Observations on Current Market Conditions		54
	Results of Operations		56
	Net Investment Income		57
	Expenses		71
	Balance Sheet Analysis		74
	Asset Acquisitions		75
	Investment Portfolio Composition		76
	Cash Flows		82
	Liquidity and Capital Resources		83
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		85
	Quantitative and Qualitative Disclosures About Market Risk		92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		94
Item 4.	Controls and Procedures		94
PART II. OTHER INFORMATION			95
Item 1.	Legal Proceedings		95
Item 1A.	Risk Factors		95
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		95
Item 3.	Defaults Upon Senior Securities		95
Item 4.	Mine Safety Disclosures		95
Item 5.	Other Information		95
Item 6.	Exhibits		96

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, 2015, filed with the SEC on February 29, 2016.

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 mortgage 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;

•

our indemnification and repurchase obligations in connection with mortgage loans we purchase and later sell or securitize;

•

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”) or the Veterans Administration (the “VA”), 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 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 exclusion from 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,		December 31,
	2016		2015
	(in thousands, except share amounts)
ASSETS
Cash	$	66,972	$	58,108
Short-term investments		47,500		41,865
Mortgage-backed securities at fair value pledged to creditors		364,439		322,473
Mortgage loans acquired for sale at fair value (includes $1,310,418 and $1,268,455 pledged to creditors, respectively)		1,339,633		1,283,795
Mortgage loans at fair value (includes $2,014,446 and $2,201,513 pledged to creditors, respectively)		2,496,778		2,555,788
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure note payable to PennyMac Financial Services, Inc.		321,976		412,425
Derivative assets		18,462		10,085
Real estate acquired in settlement of loans (includes $257,294 and $283,343 pledged to creditors, respectively)		327,212		341,846
Real estate held for investment		12,758		8,796
Mortgage servicing rights pledged to creditors (includes $61,071 and $66,584 carried at fair value, respectively)		455,097		459,741
Servicing advances		76,881		88,010
Due from PennyMac Financial Services, Inc.		6,531		8,806
Other (includes restricted cash of $180,992 pledged to creditors at March 31, 2016)		286,201		235,186

Total assets	$	5,820,440	$	5,826,924

LIABILITIES
Assets sold under agreements to repurchase	$	3,245,014	$	3,128,780
Mortgage loan participation and sale agreements		62,400		—
Federal Home Loan Bank advances		—		183,000
Notes payable		206,191		236,015
Asset-backed financing of a variable interest entity at fair value		344,693		247,690
Exchangeable senior notes		245,307		245,054
Interest-only security payable at fair value		675		—
Note payable to PennyMac Financial Services, Inc.		150,000		150,000
Derivative liabilities		13,488		3,157
Accounts payable and accrued liabilities		71,932		64,474
Due to PennyMac Financial Services, Inc.		17,647		18,965
Income taxes payable		29,878		33,505
Liability for losses under representations and warranties		18,712		20,171

Total liabilities		4,405,937		4,330,811

SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 68,687,094 and 73,767,435 common shares		687		738
Additional paid-in capital		1,406,350		1,469,722
Retained earnings		7,466		25,653

Total shareholders’ equity		1,414,503		1,496,113

Total liabilities and shareholders’ equity	$	5,820,440	$	5,826,924

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 entities (“VIEs”) included in total assets and liabilities (the assets of each VIE can only be used to settle liabilities of that VIE):


	March 31,		December 31,
	2016		2015
	(in thousands)
ASSETS
Mortgage loans at fair value	$	449,215	$	455,394
Derivative assets		—		593
Other assets
Interest receivable		1,407		1,447
Restricted cash		213,536		147,000

	$	664,158	$	604,434

LIABILITIES
Asset-backed financing at fair value	$	344,693	$	247,690
Interest-only security payable at fair value		675		—
Derivative liabilities		4,218		—
Accounts payable and accrued liabilities—interest payable		990		724

	$	350,576	$	248,414

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,
	2016			2015
	(in thousands, except per share amounts)
Net investment income
Interest income
From nonaffiliates	$	47,351		$	36,933
From PennyMac Financial Services, Inc.		7,015			3,752

		54,366			40,685

Interest expense
To nonaffiliates		30,402			25,746
To PennyMac Financial Services, Inc.		1,602			—

		32,004			25,746

Net interest income		22,362			14,939
Net gain on mortgage loans acquired for sale		15,049			10,160
Mortgage loan origination fees		6,901			5,287
Net (loss) gain on investments:
From nonaffiliates		13,729			9,694
From PennyMac Financial Services, Inc.		(17,627	)		(6,247	)

		(3,898	)		3,447
Net mortgage loan servicing fees		15,554			8,001
Results of real estate acquired in settlement of loans		(6,036	)		(5,832	)
Other		2,284			1,655

Net investment income		52,216			37,657

Expenses
Earned by PennyMac Financial Services, Inc.:
Mortgage loan fulfillment fees		12,935			12,866
Mortgage loan servicing fees		11,453			10,670
Management fees		5,352			7,003
Professional services		2,293			1,828
Mortgage loan collection and liquidation		2,214			1,445
Compensation		1,289			2,808
Other		5,636			4,857

Total expenses		41,172			41,477

Income (loss) before benefit from income taxes		11,044			(3,820	)
Benefit from income taxes		(3,452	)		(11,328	)

Net income	$	14,496		$	7,508

Earnings per share
Basic	$	0.20		$	0.09
Diluted	$	0.20		$	0.09
Weighted-average shares outstanding
Basic		71,884			74,528
Diluted		71,884			74,956
Dividends declared per share	$	0.47		$	0.61

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
	Number						Additional
	of			Par			paid-in			Retained
	shares			value			capital			earnings			Total
	(in thousands, except per share amounts)
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
Common share dividends, $0.61 per share		—			—			—			(46,073	)		(46,073	)
Issuance of common shares		—			—			8			—			8

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

Balance at December 31, 2015		73,767		$	738		$	1,469,722		$	25,653		$	1,496,113
Net income		—			—			—			14,496			14,496
Share-based compensation		76			1			1,047			—			1,048
Common share dividends, $0.47 per share		—			—			—			(32,683	)		(32,683	)
Repurchase of common shares		(5,156	)		(52	)		(64,419	)		—			(64,471	)

Balance at March 31, 2016		68,687		$	687		$	1,406,350		$	7,466		$	1,414,503

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,
	2016			2015
	(in thousands)
Cash flows from operating activities
Net income	$	14,496		$	7,508
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 financing of a variable interest entity		(6,060	)		(402	)
Capitalization of interest on mortgage loans at fair value		(23,294	)		(10,209	)
Capitalization of interest on excess servicing spread		(7,015	)		(3,752	)
Amortization of debt issuance costs		3,201			2,581
Net gain on mortgage loans acquired for sale		(15,049	)		(10,160	)
Net loss (gain) on investments		3,898			(3,447	)
Change in fair value, amortization and impairment of mortgage servicing rights		13,448			14,628
Results of real estate acquired in settlement of loans		6,036			5,832
Share-based compensation expense		1,048			2,544
Purchase of mortgage loans acquired for sale at fair value from nonaffiliates		(10,149,221	)		(8,366,569	)
Purchase of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.		(4,715	)		(8,405	)
Repurchase of mortgage loans subject to representation and warranties		(3,844	)		(7,708	)
Sale and repayment of mortgage loans acquired for sale at fair value to nonaffiliates		3,233,779			2,644,244
Sale of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		6,853,542			4,990,358
Decrease (increase) in servicing advances		9,080			(5,804	)
Decrease in due from PennyMac Financial Services, Inc.		2,186			886
Decrease in other assets		24,088			7,164
Increase in accounts payable and accrued liabilities		9,771			4,163
Decrease in payable to PennyMac Financial Services, Inc.		(1,318	)		(5,067	)
Decrease in income taxes payable		(3,627	)		(11,514	)

Net cash used in operating activities		(39,570	)		(753,129	)

Cash flows from investing activities
Net (increase) decrease in short-term investments		(5,635	)		94,951
Purchase of mortgage-backed securities at fair value		(50,702	)		(25,129	)
Sale and repayment of mortgage-backed securities at fair value		13,848			17,802
Purchase of mortgage loans at fair value		—			(241,981	)
Sale and repayment of mortgage loans at fair value		47,865			59,596
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		—			(46,412	)
Repayment of excess servicing spread by PennyMac Financial Services, Inc.		20,881			12,731
Sale of excess servicing spread to PennyMac Financial Services, Inc.		59,045			—
Net settlement of derivative financial instruments		(2	)		(13,466	)
Sale of real estate acquired in settlement of loans		64,908			65,976
Purchase of mortgage servicing rights		(2,602	)		—
Sale of mortgage servicing rights		—			376
Deposit of cash collateral securing credit risk transfer agreements		(66,706	)		—
Distribution from credit risk transfer agreements		2,706			—
Decrease (increase) in margin deposits and restricted cash		2,368			(15,792	)
Purchase of Federal Home Loan Bank capital stock		(225	)		—
Redemption of Federal Home Loan Bank capital stock		7,320			—

Net cash provided by (used in) investing activities		93,069			(91,348	)

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,
	2016			2015
	(in thousands)
Cash flows from financing activities
Sale of assets under agreements to repurchase		11,058,933			9,744,632
Repurchase of assets sold under agreements to repurchase		(10,943,166	)		(8,911,469	)
Sale of mortgage loan participation certificates		1,567,101			1,014,727
Repayment of mortgage loan participation certificates		(1,504,700	)		(963,134	)
Federal Home Loan Bank advances		28,000			—
Repayment of Federal Home Loan Bank advances		(211,000	)		—
Advance under notes payable		17,057			—
Repayment under notes payable		(46,936	)		—
Issuance of asset-backed financing of a variable interest entity at fair value		100,301			—
Repayment of asset-backed financing of a variable interest entity at fair value		(8,334	)		(4,641	)
Payment of debt issuance costs		(2,427	)		—
Issuance of common shares		—			8
Repurchase of common shares		(64,471	)		—
Payment of contingent underwriting fees payable		—			(470	)
Payment of dividends		(34,993	)		(45,894	)

Net cash (used in) provided by financing activities		(44,635	)		833,759

Net increase (decrease) in cash		8,864			(10,718	)
Cash at beginning of period		58,108			76,386

Cash at end of period	$	66,972		$	65,668

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-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, LLC (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS”), both indirect controlled 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 the 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 mortgage-backed securities (“MBS”), distressed mortgage loans, excess servicing spread (“ESS”), credit risk transfer agreements (“CRT Agreements”), real estate acquired in settlement of loans (“REO”), real estate held for investment, mortgage servicing rights (“MSRs”), and small balance commercial real estate loans.

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, 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 (“ASC”) for interim financial information and with the Securities and Exchange Commission’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 fiscal year ended December 31, 2015.

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 that may be anticipated for the full year. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires the Manager to make estimates and judgments 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. The mortgage loans at fair value not acquired for sale or held in a Variable Interest Entity (“VIE”) are generally purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies.

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

•

changes in the overall economy, unemployment 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 PLS’ ability to execute optimal resolutions of certain 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 inputs that properly anticipate, future outcomes;

•

the level of government support for resolution of certain mortgage loans 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., as presented in the following summary:


	March 31, 2016		December 31, 2015
	(in thousands)
Mortgage loans at fair value	$	845,154	$	855,691
REO		76,316		88,088

	$	921,470	$	943,779

Total carrying value of mortgage loans at fair value and REO	$	2,823,990	$	2,897,634

Note 3—Transactions with Related Parties

Operating Activities

Correspondent Production Activities

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


	Quarter ended March 31,
	2016		2015
	(in thousands)
Fulfillment fees earned by PLS	$	12,935	$	12,866
UPB of mortgage loans fulfilled by PLS	$	3,259,363	$	2,890,132
Sourcing fees received from PLS included in Net gain on mortgage loans acquired for sale	$	1,950	$	1,421
Unpaid principal balance (“UPB”) of mortgage loans sold to PLS	$	6,495,722	$	4,735,374
Purchases of mortgage loans acquired for sale at fair value from PLS	$	4,715	$	8,405
Tax service fee paid to PLS included in Other expense	$	1,007	$	889
Mortgage banking and warehouse services fees paid to PLS	$	1	$	—

	March 31, 2016		December 31, 2015
	(in thousands)
Mortgage loans included in Mortgage loans acquired for sale at fair value pending sale to PLS	$	596,166	$	669,288

Mortgage Loan Servicing Activities

Following is a summary of mortgage loan servicing fees earned by PLS and MSR recapture income earned from PLS:


	Quarter ended March 31,
	2016		2015
	(in thousands)
Mortgage loan servicing fees
Mortgage loans acquired for sale at fair value:
Base	$	56	$	26
Activity-based		115		31

		171		57

Mortgage loans at fair value:
Distressed mortgage loans
Base		3,359		4,032
Activity-based		3,449		2,894

		6,808		6,926

Mortgage loans held in VIE:
Base		41		30
Activity-based		—		—

		41		30

MSRs:
Base		4,344		3,626
Activity-based		89		31

		4,433		3,657

	$	11,453	$	10,670

MSR recapture income recognized included in Net mortgage loan servicing fees	$	130	$	—
Average investment in:
Mortgage loans acquired for sale at fair value	$	918,741	$	756,646
Mortgage loans at fair value:
Distressed mortgage loans	$	2,064,101	$	2,309,282
Mortgage loans held in a VIE	$	454,538	$	526,220
Average mortgage loan servicing portfolio	$	43,253,977	$	34,599,043

Management Fees

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


	Quarter ended March 31,
	2016		2015
	(in thousands)
Base	$	5,352	$	5,730
Performance incentive		—		1,273

	$	5,352	$	7,003

Expense Reimbursement and Amounts Payable to and Receivable from PFSI

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,
	2016		2015
	(in thousands)
Reimbursement of:
Common overhead incurred by PCM and its affiliates (1)	$	2,561	$	2,729
Expenses incurred on the Company’s behalf		55		379

	$	2,616	$	3,108

Payments and settlements during the year (2)	$	27,661	$	22,752

(1)

On December 15, 2015, the Operating Partnership amended its management agreement to provide that the total costs and expenses incurred by PFSI in any quarter and reimbursable by the Operating Partnership is capped at an amount equal to the product of (A) 70 basis points (0.0070), multiplied by (B) PMT’s shareholders’ equity (as defined in the management agreement) as of the last day of the month preceding quarter end, divided by four.

(2)	Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the Company and PFSI for operating, investment and financing activities itemized in this Note.

Amounts receivable and payable to PFSI are summarized below:


	March 31,		December 31,
	2016		2015
	(in thousands)
Receivable from PFSI
MSR recapture receivable	$	691	$	781
Other		5,840		8,025

	$	6,531	$	8,806

Payable to PFSI
Management fees	$	5,352	$	5,670
Servicing fees		4,601		3,682
Correspondent production fees		2,898		2,729
Fulfillment fees		1,631		1,082
Allocated expenses		1,254		390
Conditional Reimbursement		900		900
Expenses paid by PFSI on PMT’s behalf		576		4,100
Interest on Note payable to PFSI		435		412

	$	17,647	$	18,965

Investing Activities

On February 29, 2016, the Company and PLS terminated that certain master spread acquisition and MSR servicing agreement that the parties entered into effective February 1, 2013 (the “2/1/13 Spread Acquisition Agreement”) and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, PLS reacquired from the Company all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by PLS to the Company under the 2/1/13 Spread Acquisition Agreement and then subject to such 2/1/13 Spread Acquisition Agreement. On February 29, 2016, PLS also reacquired from the Company all of its right, title and interest in and to all of the Freddie Mac ESS previously sold to the Company by PLS. During the quarter ended March 31, 2016, the amount of ESS sold by the Company to PLS under these reacquisitions was $59.0 million.

Following is a summary of investing activities between the Company and PFSI:


	Quarter ended March 31,
	2016			2015
	(in thousands)
ESS:
Purchases	$	—		$	46,412
Received pursuant to a recapture agreement	$	1,911		$	1,246
Repayments and sales	$	79,926		$	12,731
Interest income	$	7,015		$	3,752
Net loss included in Net (loss) gain on investments :
Valuation changes	$	(19,449	)	$	(7,536	)
Recapture income		1,822			1,289

	$	(17,627	)	$	(6,247	)

Financing Activities

PFSI held 75,000 of the Company’s common shares at both March 31, 2016 and December 31, 2015.

Note Payable to PLS

PLS is a party to a repurchase agreement between it and Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which PLS finances Ginnie Mae MSRs and servicing advance receivables and pledges to CSFB all of its rights and interests in any Ginnie Mae MSRs it owns or acquires, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and PLS.

In connection with the MSR Repo described above, the Company, through a wholly-owned subsidiary, entered into an underlying loan and security agreement with PLS, dated as of April 30, 2015, pursuant to which the Company may borrow up to $150 million from PLS for the purpose of financing its investment in ESS (the “Underlying LSA”). The principal amount of the borrowings under the Underlying LSA is based upon a percentage of the market value of the ESS pledged to PLS, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, the Company granted to PLS a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings, and PLS, in turn, re-pledged such ESS to CSFB under the MSR Repo.

The Company agreed with PLS in connection with the Underlying LSA that the Company is required to repay PLS the principal amount of borrowings plus accrued interest to the date of such repayment, and PLS, in turn, is required to repay CSFB the corresponding amount under the MSR Repo. Interest accrues on the Company’s note relating to the Underlying LSA at a rate based on CSFB’s cost of funds under the MSR Repo. The Company was also required to pay PLS a fee for the structuring of the Underlying LSA in an amount equal to the portion of the corresponding fee paid by PLS to CSFB allocable to $150 million relating to the ESS financing.

Conditional Reimbursement and Contingent Underwriting Fees

In connection with its initial public offering of common shares on August 4, 2009 (“IPO”), the Company conditionally agreed to reimburse PCM up to $2.9 million for underwriting fees paid to the IPO underwriters by PCM on the Company’s behalf (the “Conditional Reimbursement”). Also in connection with its IPO, the Company agreed to pay the IPO underwriters up to $5.9 million in contingent underwriting fees.

Following is a summary of financing activities between the Company and PFSI:


	Quarter ended March 31,
	2016		2015
	(in thousands)
Note payable—Interest expense	$	1,602	$	—
Conditional Reimbursements paid to PCM	$	—	$	157

Note 4—Earnings Per Share

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.

Under the two-class method, 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 by dividing net income, reduced by income attributable to the participating securities, by the weighted-average common shares outstanding during the period.

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 “Exchangeable 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,
	2016			2015
	(in thousands except per share amounts)
Basic earnings per share:
Net income	$	14,496		$	7,508
Effect of participating securities—share-based compensation awards		(412	)		(576	)

Net income attributable to common shareholders	$	14,084		$	6,932

Diluted earnings per share:
Net income attributable to common shareholders	$	14,084		$	7,508
Effect of participating securities—share-based compensation awards		—			(576	)
Interest on Exchangeable Notes, net of income taxes		—			—

Net income attributable to diluted shareholders	$	14,084		$	6,932

Weighted-average basic shares outstanding		71,884			74,528
Potentially dilutive securities:
Shares issuable under share-based compensation plan		—			428
Shares issuable pursuant to exchange of the Exchangeable Notes		—			—

Diluted weighted-average number of shares outstanding		71,884			74,956

Basic earnings per share	$	0.20		$	0.09

Diluted earnings per share	$	0.20		$	0.09

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.

The following table summarizes the common shares excluded from the diluted earnings per share calculation for the periods as inclusion of such shares would have been antidilutive:


	Quarter ended March 31,
	2016		2015
	(in thousands)
Shares issuable under share-based compensation awards		1,171		—
Shares issuable pursuant to exchange of the Exchangeable Notes		8,467		8,433

Note 5—Loan Sales and Variable Interest Entities

The Company is a variable interest holder in various special purpose entities that relate to its mortgage 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 of mortgage loans that are accounted for as sales where the Company maintains continuing involvement with the mortgage loans, as well as UPB information at period end:


	Quarter ended March 31,
	2016		2015
	(in thousands)
Cash flows:
Proceeds from sales	$	3,233,779	$	2,644,244
Mortgage loan servicing fees received (1)	$	27,559	$	15,732

	March 31, 2016		December 31, 2015
	(in thousands)
UPB of mortgage loans outstanding	$	44,207,616	$	42,300,338
Delinquent mortgage loans:
30-89 days delinquent	$	162,415	$	175,599
90 or more days delinquent
Not in foreclosure or bankruptcy		40,304		38,669
In foreclosure or bankruptcy		38,934		31,386

		79,238		70,055

	$	241,653	$	245,654

(1)	Net of guarantee fees.

Consolidated VIEs

Credit Risk Transfer Agreements

The Company, through its wholly-owned subsidiary, PennyMac Corp. (“PMC”), entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through subsidiary trust entities, sells pools of mortgage loans into Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans in exchange for a portion of the contractual guarantee fee normally charged by Fannie Mae. The mortgage loans subject to the CRT Agreements are transferred by PMC to subsidiary trust entities which sell the mortgage loans into Fannie Mae mortgage loan securitizations and issue the credit guarantees to Fannie Mae. Transfers of mortgage loans subject to CRT Agreements receive sale accounting treatment upon fulfillment of the criteria for sale recognition contained in the Transfers and Servicing topic of the FASB’s ASC.

The Manager has concluded that the Company’s subsidiary trust entities are VIEs and the Company is the primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results of operations. Consolidation of the VIEs results in the inclusion on the Company’s consolidated balance sheet of the cash pledged to fulfill the guarantee obligation and a credit derivative comprised of the fair values of the credit guarantees and the Company’s right to the related guarantee fees. The pledged cash represents the Company’s maximum contractual exposure to claims under its credit guarantee; is the sole source of settlement of losses under the CRT Agreements and is included in Other assets on the consolidated balance sheet. Gains and losses on net derivatives related to CRT Agreements, including realized gains received, are included in Net gain on investments in the consolidated statements of income.

Following is a summary of the CRT Agreements:


	Quarter ended March 31, 2016
	(in thousands)
During the period:
UPB of mortgage loans transferred and sold under CRT Agreements	$	1,923,113
Deposits of restricted cash	$	66,706
Gains (losses) recognized on CRT agreements included in Net gain on investments
Realized	$	2,536
Resulting from valuation changes		(6,679	)

	$	(4,143	)

Payments made to settle losses	$	—


	March 31, 2016		December 31, 2015
	(in thousands)
UPB of mortgage loans subject to credit guarantee obligation	$	5,931,409	$	4,546,265
Delinquency (in UPB)
Current—89 days delinquent	$	5,930,936	$	4,546,265
90 or more days delinquent	$	473	$	—
Carrying value of CRT Agreements:
Net derivative asset included in Derivative assets	$	—	$	593
Restricted cash included in Other assets	$	213,536	$	147,000
Net derivative liability included in Derivative liabilities	$	4,218	$	—

Jumbo Mortgage Loan Financing

On September 30, 2013, the Company completed a securitization transaction in which PMT Loan Trust 2013-J1, a VIE, issued $537.0 million in UPB of certificates backed by fixed-rate prime jumbo mortgage loans, at a 3.9% weighted yield. The Company retained $366.8 million in fair value of such certificates. During the year ended December 31, 2015, the Company sold an additional $111.0 million in UPB of those certificates and $100.6 million in UPB of those certificates were sold during the quarter ended March 31, 2016, which reduced the fair value of the certificates retained by the Company to $104.5 million as of March 31, 2016.

The VIE is consolidated by the Company as PMT determined it is the primary beneficiary of the VIE as it had the power, through PLS, in its role as servicer of the mortgage loans, to direct the activities of the trust that most significantly impact the trust’s economic performance. Further, the retained subordinated and residual interest trust certificates expose the Company to losses that could potentially be significant to the Company.

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 held in VIE, ESS and MSRs. All derivative financial instruments are recorded on the consolidated balance sheets at fair value. The Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) from (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 and the net derivatives related to CRT Agreements. As of March 31, 2016 and December 31, 2015, 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 and CRT Agreements are subject to master netting arrangements.


	March 31, 2016								December 31, 2015
	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)
Derivative assets
Not subject to master netting arrangements:
Interest rate lock commitments	$	9,372	$	—		$	9,372		$	4,983	$	—		$	4,983
CRT Agreements		—		—			—			593		—			593

		9,372		—			9,372			5,576		—			5,576
Subject to master netting arrangements:
MBS put options		64		—			64			93		—			93
Forward purchase contracts		20,795		—			20,795			2,444		—			2,444
Forward sale contracts		138		—			138			2,604		—			2,604
Put options on interest rate futures		414		—			414			1,512		—			1,512
Call options on interest rate futures		3,949		—			3,949			1,156		—			1,156
Netting		—		(16,270	)		(16,270	)		—		(3,300	)		(3,300	)

		25,360		(16,270	)		9,090			7,809		(3,300	)		4,509

	$	34,732	$	(16,270	)	$	18,462		$	13,385	$	(3,300	)	$	10,085

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, 2016								December 31, 2015
			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	$	9,372	$	—	$	—	$	9,372	$	4,983	$	—	$	—	$	4,983
RJ O’Brien & Associates, LLC		2,805		—		—		2,805		1,672		—		—		1,672
Fannie Mae Capital Markets		2,466		—		—		2,466		—		—		—		—
Bank of America, N.A.		1,220		—		—		1,220		—		—		—		—
Jefferies Group, LLC		726		—		—		726		541		—		—		541
BNP Paribas		682		—		—		682		59		—		—		59
Wells Fargo		468		—		—		468		99		—		—		99
Nomura Securities International, Inc		395		—		—		395		119		—		—		119
Barclays Capital		—		—		—		—		796		—		—		796
Morgan Stanley Bank, N.A.		—		—		—		—		464		—		—		464
Royal Bank of Canada		—		—		—		—		400		—		—		400
Ally Financial		—		—		—		—		209		—		—		209
Other		328		—		—		328		743		—		—		743

	$	18,462	$	—	$	—	$	18,462	$	10,085	$	—	$	—	$	10,085

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 derivative liabilities with the exception of IRLCs and CRT Agreements are subject to master netting arrangements. Assets sold under agreements to repurchase do not qualify for setoff accounting.


	March 31, 2016									December 31, 2015
	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)
Derivative liabilities
Not subject to master netting arrangements:
Interest rate lock commitments	$	37		$	—		$	37		$	337		$	—		$	337
CRT Agreements		4,218			—			4,218			—			—			—

		4,255			—			4,255			337			—			337
Subject to master netting arrangements:
Forward purchase contracts		15			—			15			3,774			—			3,774
Forward sales contracts		19,884			—			19,884			2,680			—			2,680
Put options on interest rate futures		—			—			—			39			—			39
Call options on interest rate futures		895			—			895			305			—			305
Netting		—			(11,561	)		(11,561	)		—			(3,978	)		(3,978	)

		20,794			(11,561	)		9,233			6,798			(3,978	)		2,820

Assets sold under agreements to repurchase:
UPB		3,246,095			—			3,246,095			3,130,328			—			3,130,328
Unamortized debt issuance costs		(1,081	)		—			(1,081	)		(1,548	)		—			(1,548	)

		3,245,014			—			3,245,014			3,128,780			—			3,128,780

	$	3,270,063		$	(11,561	)	$	3,258,502		$	3,135,915		$	(3,978	)	$	3,131,937

Derivative Liabilities, Financial Liabilities and Collateral Pledged 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, 2016										December 31, 2015
				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	$	37		$	—		$	—	$	37	$	337		$	—		$	—	$	337
CRT Agreements		4,218			—			—		4,218		—			—			—		—
Credit Suisse First Boston Mortgage Capital LLC		858,021			(857,269	)		—		752		893,947			(893,854	)		—		93
Citibank		824,003			(824,003	)		—		—		817,089			(816,699	)		—		390
Bank of America, N.A.		568,850			(568,850	)		—		—		538,755			(538,515	)		—		240
JPMorgan Chase & Co.		543,313			(543,177	)		—		136		467,427			(467,145	)		—		282
Morgan Stanley Bank, N.A.		252,082			(251,620	)		—		462		214,086			(214,086	)		—		—
Daiwa Capital Markets		178,994			(178,914	)		—		80		165,480			(165,480	)		—		—
Barclays Capital		12,379			(12,140	)		—		239		24,346			(24,346	)		—		—
BNP Paribas		10,122			(10,122	)		—		—		10,203			(10,203	)		—		—
Fannie Mae Capital Markets		5,863			—			—		5,863		924			—			—		924
Deutsche Bank		784			—			—		784		—			—			—		—
Goldman Sachs		262			—			—		262		819			—			—		819
Other		655			—			—		655		72			—			—		72
Unamortized debt issuance costs		(1,081	)		1,081			—		—		(1,548	)		1,548			—		—

Total	$	3,258,502		$	(3,245,014	)	$	—	$	13,488	$	3,131,937		$	(3,128,780	)	$	—	$	3,157

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.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

•

Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period) unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value financial statement items, the Manager is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these financial statement items and their fair values. Likewise, due to the general illiquidity of some of these financial statement items, subsequent transactions may be at values significantly different from those reported.

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. 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.

The Manager has also identified the Company’s CRT financing and asset-backed financing of a 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 these financings.

For assets sold under agreements to repurchase and the Exchangeable 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, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	47,500	$	—	$	—	$	47,500
Mortgage-backed securities at fair value		—		364,439		—		364,439
Mortgage loans acquired for sale at fair value		—		1,339,633		—		1,339,633
Mortgage loans at fair value		—		449,215		2,047,563		2,496,778
Excess servicing spread purchased from PFSI		—		—		321,976		321,976
Derivative assets:
Interest rate lock commitments		—		—		9,372		9,372
MBS put options		—		64		—		64
Forward purchase contracts		—		20,795		—		20,795
Forward sales contracts		—		138		—		138
Put options on interest rate futures		414		—		—		414
Call options on interest rate futures		3,949		—		—		3,949

Total derivative assets before netting		4,363		20,997		9,372		34,732
Netting		—		—		—		(16,270	)

Total derivative assets after netting		4,363		20,997		9,372		18,462
Mortgage servicing rights at fair value		—		—		61,071		61,071

	$	51,863	$	2,174,284	$	2,439,982	$	4,649,859

Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	344,693	$	—	$	344,693
Interest-only security payable at fair value		—		—		675		675
Derivative liabilities:
Interest rate lock commitments		—		—		37		37
CRT Agreements		—		—		4,218		4,218
Call options on interest rate futures		895		—		—		895
Forward purchase contracts		—		15		—		15
Forward sales contracts		—		19,884		—		19,884

Total derivative liabilities before netting		895		19,899		4,255		25,049
Netting		—		—		—		(11,561	)

Total derivative liabilities after netting		895		19,899		4,255		13,488

	$	895	$	364,592	$	4,930	$	358,856


	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	41,865	$	—	$	—	$	41,865
Mortgage-backed securities at fair value		—		322,473		—		322,473
Mortgage loans acquired for sale at fair value		—		1,283,795		—		1,283,795
Mortgage loans at fair value		—		455,394		2,100,394		2,555,788
Excess servicing spread purchased from PFSI		—		—		412,425		412,425
Derivative assets:
Interest rate lock commitments		—		—		4,983		4,983
CRT Agreements		—		—		593		593
MBS put options		—		93		—		93
Forward purchase contracts		—		2,444		—		2,444
Forward sales contracts		—		2,604		—		2,604
Put options on interest rate futures		1,512		—		—		1,512
Call options on interest rate futures		1,156		—		—		1,156

Total derivative assets		2,668		5,141		5,576		13,385
Netting		—		—		—		(3,300	)

Total derivative assets after netting		2,668		5,141		5,576		10,085

Mortgage servicing rights at fair value		—		—		66,584		66,584

	$	44,533	$	2,066,803	$	2,584,979	$	4,693,015

Liabilities:
Asset-backed financing of the VIE at fair value	$	—	$	247,690	$	—	$	247,690
Derivative liabilities:
Interest rate lock commitments		—		—		337		337
Put options on interest rate futures		39		—		—		39
Call options on interest rate futures		305		—		—		305
Forward purchase contracts		—		3,774		—		3,774
Forward sales contracts		—		2,680		—		2,680

Total derivative liabilities		344		6,454		337		7,135
Netting		—		—		—		(3,978	)

Total derivative liabilities after netting		344		6,454		337		3,157

	$	344	$	254,144	$	337	$	250,847

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


	Quarter ended March 31, 2016
	Mortgage			Excess			Interest			Net derivative			Mortgage			Interest- only security payable
	loans			servicing			rate lock			related to CRT			servicing
	at fair value			spread			commitments (1)			Agreements (1)			rights						Total
	(in thousands)
Balance, December 31, 2015	$	2,100,394		$	412,425		$	4,646		$	593		$	66,584		$	—		$	2,584,642
Purchases and issuances		—			—			—			—			2,602			682			3,284
Repayments and sales		(32,065	)		(79,926	)		—			(668	)		—			—			(112,659	)
Capitalization of interest		23,294			7,015			—			—			—			—			30,309
ESS received pursuant to a recapture agreement with PFSI		—			1,911			—			—			—			—			1,911
Interest rate lock commitments issued, net		—			—			10,698			—			—			—			10,698
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			3,300			—			3,300
Proceeds from CRT Agreements		—			—			—			2,536			—			—			2,536
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		12,466			—			—			—			—			—			12,466
Other factors		1,929			(19,449	)		20,666			(6,679	)		(11,415	)		(7	)		(14,955	)

		14,395			(19,449	)		20,666			(6,679	)		(11,415	)		(7	)		(2,489	)

Transfers of mortgage loans to REO and real estate held for investment		(58,455	)		—			—			—			—			—			(58,455	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(26,675	)		—			—			—			(26,675	)

Balance, March 31, 2016	$	2,047,563		$	321,976		$	9,335		$	(4,218	)	$	61,071			675		$	2,436,402

Changes in fair value recognized during the period relating to assets still held at March 31, 2016	$	17,676		$	(12,239	)	$	9,335		$	(6,679	)	$	(11,415	)		(7	)	$	(3,329	)

(1)	For the purpose of this table, the IRLC and CRT Agreement asset and liability positions are shown net.


	Quarter ended March 31, 2015
	Mortgage			Excess			Interest			Mortgage
	loans			servicing			rate lock			servicing
	at fair value			spread			commitments (1)			rights			Total
	(in thousands)
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 IRLC 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, 2016							December 31, 2015
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale at fair value:
Current through 89 days delinquent	$	1,338,755	$	1,277,319	$	61,436		$	1,283,275	$	1,235,433	$	47,842
90 or more days delinquent
Not in foreclosure		878		1,096		(218	)		304		333		(29	)
In foreclosure		—		—		—			216		253		(37	)

		878		1,096		(218	)		520		586		(66	)

	$	1,339,633	$	1,278,415	$	61,218		$	1,283,795	$	1,236,019	$	47,776

Mortgage loans at fair value:
Mortgage loans held in a consolidated VIE
Current through 89 days delinquent	$	449,215	$	442,637	$	6,578		$	455,394	$	454,935	$	459
90 or more days delinquent
Not in foreclosure		—		—		—			—		—		—
In foreclosure		—		—		—			—		—		—

		—		—		—			—		—		—

		449,215		442,637		6,578			455,394		454,935		459

Other mortgage loans at fair value:
Current through 89 days delinquent		960,473		1,228,550		(268,077	)		877,438		1,134,560		(257,122	)
90 or more days delinquent
Not in foreclosure		422,152		583,026		(160,874	)		459,060		640,343		(181,283	)
In foreclosure		664,938		919,221		(254,283	)		763,896		1,062,205		(298,309	)

		1,087,090		1,502,247		(415,157	)		1,222,956		1,702,548		(479,592	)

		2,047,563		2,730,797		(683,234	)		2,100,394		2,837,108		(736,714	)

	$	2,496,778	$	3,173,434	$	(676,656	)	$	2,555,788	$	3,292,043	$	(736,255	)

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, 2016
	Net gain on								Net
	mortgage								mortgage
	loans		Net			Net gain			loan
	acquired		interest			on			servicing
	for sale		income			investments			fees			Total
	(in thousands)
Assets:
Short-term investments	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—		13			5,099			—			5,112
Mortgage loans acquired for sale at fair value		42,005		—			—			—			42,005
Mortgage loans at fair value		—		1,229			22,789			—			24,018
ESS at fair value		—		—			(19,449	)		—			(19,449	)
MSRs at fair value		—		—			—			(11,415	)		(11,415	)

	$	42,005	$	1,242		$	8,439		$	(11,415	)	$	40,271

Liabilities:
Asset-backed financing of a VIE at fair value	$	—	$	(1,317	)	$	(9,854	)	$	—		$	(11,171	)

	$	—	$	(1,317	)	$	(9,854	)	$	—		$	(11,171	)


	Quarter ended March 31, 2015
	Net gain on								Net
	mortgage								mortgage
	loans		Net			Net gain			loan
	acquired		interest			on			servicing
	for sale		income			investments			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
ESS at fair value		—		—			(6,247	)		—			(6,247	)
MSRs at fair value		—		—			—			(9,816	)		(9,816	)

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

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

	$	—	$	(173	)	$	(770	)	$	—		$	(943	)

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that were re-measured at fair value on a nonrecurring basis during the periods presented:


	March 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate acquired in settlement of loans	$	—	$	—	$	142,602	$	142,602
MSRs at lower of amortized cost or fair value		—		—		144,050		144,050

	$	—	$	—	$	286,652	$	286,652


	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate acquired in settlement of loans	$	—	$	—	$	173,662	$	173,662
MSRs at lower of amortized cost or fair value		—		—		145,187		145,187

	$	—	$	—	$	318,849	$	318,849

The following table summarizes the fair value changes recognized during the period on assets held at period end that were measured at fair value on a nonrecurring basis:


	Quarter ended March 31,
	2016			2015
	(in thousands)
Real estate asset acquired in settlement of loans	$	(9,116	)	$	(10,615	)
MSRs at lower of amortized cost or fair value		(17,706	)		(6,379	)

	$	(26,822	)	$	(16,994	)

Real Estate Acquired in Settlement of Loans

The Company evaluates its REO for impairment with reference to the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured at 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 REO 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 Company’s 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 asset’s 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 3.0% and 4.5% and a single pool for mortgage loans with interest rates below 3.0%. 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, 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 fair 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 as well as certain of its borrowings are carried at amortized cost. Cash is measured using a “Level 1” fair value input. The Company’s assets sold under agreements to repurchase and mortgage loan participation and sale agreement are classified as “Level 3” fair value financial statement items due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Manager has concluded that the fair values of Cash, Assets sold under agreements to repurchase, Mortgage loan participation and sale agreements, Federal Home Loan Bank advances and Notes payable 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.

The Exchangeable Notes are carried at amortized cost. The fair value of the Exchangeable Notes at March 31, 2016 and December 31, 2015 was $224.4 million and $230.0 million, respectively. The fair value of the Exchangeable Notes is estimated using a broker indication of value. The Company has classified the Exchangeable Notes as “Level 3” fair value financial statement items as of March 31, 2016 due to the lack of current market activity.

Valuation Techniques and Inputs

Most of the Company’s assets, its Derivative liabilities, the Asset-backed financing of a VIE and the Interest-only security payable are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” fair value 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 judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value financial statement items, the Manager has assigned responsibility for estimating fair value of these items to specialized staff and subjects the valuation process to significant executive management oversight. The Manager’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value financial statement items other than IRLCs and maintaining its valuation policies and procedures.

With respect to its Level 3 valuations, the FAV group reports to PCM’s valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s non-IRLC “Level 3” fair value financial statement items, including the models’ performance versus actual results, and reports those results to PCM’s valuation committee. PCM’s valuation committee includes PFSI’s chief executive, financial, operating, risk and asset/liability management officers.

The FAV group is responsible for reporting to PCM’s valuation committee on a monthly basis on the changes in the valuation of the financial statement items, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

The fair value of the Company’s IRLCs is developed by the Manager’s Capital Markets Risk Management staff and is reviewed by the Manager’s Capital Markets Operations group.

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

Mortgage-Backed Securities

The Company’s MBS include Agency and senior non-agency MBS. The Company categorizes its current holdings of MBS as “Level 2” fair value financial statement items. Fair value of these MBS is established 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” fair value financial statement items. The fair values of mortgage loans acquired for sale at fair value are established 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. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using pricing models and inputs the Manager believes are similar to the models and inputs used by other market participants.

•

Mortgage loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value held outside the VIE are categorized as “Level 3” fair value 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, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds, loss severities and contracted selling price where applicable.

The valuation process includes the computation by stratum of the mortgage 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 inputs such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the mortgage loan valuation.

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 mortgage loan’s delinquency status and history 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 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 mortgage 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:


Key inputs	March 31, 2016	December 31, 2015
Discount rate
Range	2.5% – 15.0%	2.5% – 15.0%
Weighted average	6.8%	7.1%
Twelve-month projected housing price index change
Range	1.7% – 5.9%	1.5% – 5.1%
Weighted average	3.7%	3.6%
Prepayment speed (1)
Range	0.1% – 10.6%	0.1% – 9.6%
Weighted average	3.8%	3.7%
Total prepayment speed (2)
Range	0.6% – 25.9%	0.5% – 27.2%
Weighted average	20.0%	19.6%

(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 PFSI

The Company categorizes ESS as a “Level 3” fair value 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 mortgage 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.

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


Key inputs	March 31, 2016		December 31, 2015
UPB of underlying mortgage loans (in thousands)		$38,076,993		$51,966,405
Average servicing fee rate (in basis points)		34		32
Average ESS rate (in basis points)		19		17
Pricing spread (1)
Range		4.8% - 6.5%		4.8% - 6.5%
Weighted average		5.8%		5.7%
Life (in years)
Range		1.8 - 9.3		1.4 - 9.0
Weighted average		6.8		6.9
Annual total prepayment speed (2)
Range		6.2% - 44.5%		5.2% - 52.4%
Weighted average		11.0%		9.6%

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

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these inputs 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 mortgage loan principal and interest payment cash flows 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, 2016	December 31, 2015
Pull-through rate
Range	52.4% - 100.0%	60.2% - 100.0%
Weighted average	89.9%	92.4%
MSR value expressed as:
Servicing fee multiple
Range	1.9 - 6.1	2.1 - 6.2
Weighted average	4.9	4.9
Percentage of UPB
Range	0.5% - 1.5%	0.5% - 3.8%
Weighted average	1.2%	1.2%

The Company estimates the fair value of commitments to sell mortgage loans based on quoted MBS prices. The Company estimates the fair value of the interest rate options and futures it uses as hedging derivatives based on observed interest rate volatilities in the MBS market. These derivative financial instruments are categorized by the Company as “Level 2” fair value financial statement items.

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” fair value financial statement item. Fair value of REO is established by using a current estimate of fair value from a broker’s price opinion or a full appraisal, or the price given in a current contract of sale.

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

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread, prepayment and default rates of the underlying mortgage loans, 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.

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 underlying mortgage loans, thereby reducing MSR fair value. Reductions in the fair value of MSRs affect income primarily through change in fair value and change in impairment. 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,
	2016		2015
	Amortized cost	Fair value	Amortized cost	Fair value
	(MSR recognized and UPB of underlying mortgage loan amounts in thousands)
MSR recognized	$32,862	$3,300	$25,554	$1,906
Key inputs
UPB of underlying mortgage loans	$2,759,545	$327,025	$2,282,756	$223,653
Weighted-average annual servicing fee rate (in basis points)	25	26	26	26
Pricing spread (1)
Range	7.2% – 10.2%	7.2% – 7.2%	6.8% –17.5%	10.3% – 14.3%
Weighted average	7.2%	7.2%	8.6%	11.0%
Life (in years)
Range	1.4 – 12.3	2.3 – 9.4	1.3 – 7.7	2.6 – 7.2
Weighted average	7.0	5.6	6.5	5.9
Annual total prepayment speed (2)
Range	3.6% – 49.2%	7.2% – 34.8%	7.6% – 51.0%	8.6% – 33.3%
Weighted average	10.4%	15.7%	9.3%	13.8%
Annual per-loan cost of servicing
Range	$68 – $68	$68 – $68	$62 – $134	$62 – $62
Weighted average	$68	$68	$63	$62

(1)	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 inputs:


	March 31, 2016		December 31, 2015
	Amortized cost	Fair value	Amortized cost	Fair value
	(Carrying value, UPB of underlying mortgage loan and effect on fair value amounts in thousands)
Carrying value	$394,026	$61,071	$393,157	$66,584
Key inputs:
UPB of underlying mortgage loans	$37,479,123	$6,728,493	$35,841,654	$6,458,684
Weighted-average annual servicing fee rate (in basis points)	26	25	26	25
Weighted-average note interest rate	3.9%	4.7%	3.9%	4.7%
Pricing spread (1)
Range	7.2% – 10.7%	7.2% – 10.2%	7.2% – 10.7%	7.2% – 10.2%
Weighted average	7.2%	7.2%	7.3%	7.2%
Effect on fair value of (2):
5% adverse change	$(5,953)	$(849)	$(6,411)	$(944)
10% adverse change	$(11,736)	$(1,675)	$(12,635)	$(1,862)
20% adverse change	$(22,815)	$(3,257)	$(24,553)	$(3,621)
Weighted average life (in years)
Range	1.4 - 6.9	2.0 - 5.4	1.3 - 7.7	2.5 - 6.1
Weighted average	6.5	5.4	7.2	6.1
Prepayment speed (3)
Range	9.8% – 50.6%	10.4% – 37.6%	8.1% – 51.5%	9.2% – 32.5%
Weighted average	11.5%	15.7%	9.6%	13.2%
Effect on fair value of (2):
5% adverse change	$(9,184)	$(1,939)	$(8,159)	$(1,793)
10% adverse change	$(17,998)	$(3,779)	$(16,024)	$(3,502)
20% adverse change	$(34,602)	$(7,186)	$(30,938)	$(6,692)
Annual per-loan cost of servicing
Range	$68 – $68	$68 – $68	$68 – $68	$68 – $68
Weighted average	$68	$68	$68	$68
Effect on fair value of (2):
5% adverse change	$(2,718)	$(452)	$(2,742)	$(470)
10% adverse change	$(5,435)	$(904)	$(5,484)	$(940)
20% adverse change	$(10,870)	$(1,807)	$(10,968)	$(1,880)

(1)	The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs.

(2)

For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in a reduction in fair value which will be recognized in income. For MSRs carried at lower of amortized cost or fair value, an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of the recognized MSR impairment will depend on the relationship of fair value to the carrying value of such 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 account for the estimated effect of 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, 2016				December 31, 2015
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Conventional:
Agency-eligible	$	705,089	$	674,703	$	540,947	$	525,192
Jumbo		13,621		13,426		54,613		54,096
Held for sale to PLS — Government insured or guaranteed		596,166		565,086		669,288		637,666
Commercial real estate		18,985		18,989		14,590		14,461
Mortgage loans repurchased pursuant to representations and warranties		5,772		6,212		4,357		4,604

	$	1,339,633	$	1,278,416	$	1,283,795	$	1,236,019

Mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	1,245,625			$	1,204,462
Mortgage loan participation and sale agreements	$	64,794			$	—
Federal Home Loan Bank (“FHLB”) advances	$	—			$	63,993

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

Note 9—Derivative Financial Instruments

The Company enters into CRT Agreements whereby it retains a portion of the credit risk relating to mortgage loans it sells into Fannie Mae guaranteed securitizations in exchange for a portion of the contractual guarantee fee related to such securitizations. The fair values of the credit guarantees and the Company’s right to the related guarantee fee are accounted for as a derivative financial instrument. IRLCs are generated in the normal course of business when the Company commits to purchase mortgage loans acquired for sale. The Company’s remaining derivative financial instrument transactions are in support of its interest rate risk management activities.

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, inventory of mortgage loans acquired for sale, mortgage loans held by VIE, ESS, IRLCs and MSRs. 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 the IRLCs it issues to correspondent lenders and to the mortgage loans it purchases as a result of issuing the IRLCs. 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 interest rate increases generally cause the fair value of the purchase commitment or mortgage loan acquired for sale to decrease.

The Company is also exposed to risk relative to the fair value of its MSRs and ESS. The Company is exposed to loss in fair value of its MSRs and ESS when interest rates decrease. The Company includes MSRs and ESS in its hedging activities.

The Company uses Eurodollar futures, which settle daily, with the intention of moderating the risk of changing market interest rates that will result in unfavorable changes in the fair value of the Company’s fixed-rate assets and economic performance of its LIBOR-indexed variable interest rate repurchase agreement liabilities.

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, 2016								December 31, 2015
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount		assets			liabilities			amount		assets			liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Free-standing derivatives:
Interest rate lock commitments		1,234,894	$	9,372		$	37			970,067	$	4,983		$	337
Used for hedging purposes:
Forward sales contracts		3,466,697		138			19,884			2,450,642		2,604			2,680
Forward purchase contracts		2,981,134		20,795			15			2,469,550		2,444			3,774
MBS put options		425,000		64			—			375,000		93			—
Swap futures		12,500		—			—			—		—			—
Eurodollar future sales contracts		1,734,000		—			—			1,755,000		—			—
Call options on interest rate futures		1,250,000		3,949			895			50,000		1,156			305
Put options on interest rate futures		1,525,000		414			—			1,600,000		1,512			39
CRT Agreements		5,931,409		—			4,218			4,546,265		593			—

Total derivative instruments before netting				34,732			25,049					13,385			7,135
Netting				(16,270	)		(11,561	)				(3,300	)		(3,978	)

			$	18,462		$	13,488				$	10,085		$	3,157

(Collateral received from) margin deposits with derivatives counterparties			$	(4,709	)						$	678

The following tables summarize the notional amount activity for derivative arising from CRT Agreements and 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, 2016
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
Forward sales contracts		2,450,642		14,153,873		(13,137,818	)		3,466,697
Forward purchase contracts		2,469,550		10,068,440		(9,556,856	)		2,981,134
MBS call options		375,000		750,000		(700,000	)		425,000
Swap futures		—		12,500		—			12,500
Eurodollar future sale contracts		1,755,000		80,000		(101,000	)		1,734,000
Call options on interest rate futures		50,000		1,300,000		(100,000	)		1,250,000
Put options on interest rate futures		1,600,000		2,050,000		(2,125,000	)		1,525,000
CRT Agreements		4,546,265		1,923,113		(537,969	)		5,931,409


	Quarter ended March 31, 2015
	Balance,							Balance,
	beginning				Dispositions/			end
Instrument	of period		Additions		expirations			of period
	(in thousands)
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 option		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 options 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

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:


	Income statement line	Quarter ended March 31,
	Income statement line	2016			2015
		(in thousands)
Interest rate lock commitments	Net gain on mortgage loans acquired for sale	$	31,364		$	19,412
Hedged item:
Interest rate lock commitments and mortgage loans acquired for sale	Net gain on mortgage loans acquired for sale	$	(30,672	)	$	(15,111	)
Mortgage servicing rights	Net loan servicing fees	$	29,960		$	11,076
Fixed-rate assets and LIBOR- indexed repurchase agreements	Net gain on investments	$	(162	)	$	(10,038	)
CRT agreements	Net gain on investments	$	(4,143	)	$	—

Note 10—Mortgage Loans at Fair Value

Mortgage loans at fair value are comprised of mortgage loans that are not acquired for sale and, to the extent they are not held in a VIE securing an asset-backed financing, may be sold at a later date pursuant to a management determination that such a sale represents the most advantageous liquidation strategy for the identified mortgage loan.

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


	March 31, 2016				December 31, 2015
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Distressed mortgage loans
Nonperforming mortgage loans	$	1,087,089	$	1,502,248	$	1,222,956	$	1,702,548
Performing mortgage loans:
Fixed interest rate		458,662		578,951		417,658		535,610
Interest rate step-up		341,111		463,396		299,569		412,749
Adjustable-rate/hybrid		160,519		186,000		160,051		185,997
Balloon		182		202		160		204

		960,474		1,228,549		877,438		1,134,560
Fixed interest rate jumbo mortgage loans held in a VIE		449,215		442,637		455,394		454,935

	$	2,496,778	$	3,173,434	$	2,555,788	$	3,292,043

Mortgage loans at fair value pledged to secure:
Assets sold under agreements to repurchase	$	2,014,446			$	2,067,341
FHLB advances	$	—			$	134,172
Asset-backed financing of the VIE at fair value	$	449,215			$	455,394

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


Concentration	March 31, 2016	December 31, 2015
	(percentages are of fair value)
Portion of mortgage loans originated between 2005 and 2007	72%	72%
Percentage of fair value of mortgage loans with unpaid-principal balance-to-current-property-value in excess of 100%	42%	48%
Percentage of mortgage loans secured by California real estate	22%	22%
Additional states contributing 5% or more of mortgage loans	New York New Jersey Florida Maryland	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,
	2016			2015
	(in thousands)
Balance at beginning of period	$	341,846		$	303,228
Transfers from mortgage loans at fair value and advances		60,494			86,117
Transfer of real estate acquired in settlement of mortgage loans to real estate held for investment		(4,184	)		—
Results of REO:
Valuation adjustments, net		(10,645	)		(11,400	)
Gain on sale, net		4,609			5,568

		(6,036	)		(5,832	)
Proceeds from sales		(64,908	)		(65,977	)

Balance at end of period	$	327,212		$	317,536

At period end:
REO pledged to secure assets sold under agreements to repurchase	$	200,766		$	71,716

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties	$	56,528		$	128,788

Note 12—Mortgage Servicing Rights

Carried at Fair Value:

Following is a summary of MSRs carried at fair value:


	Quarter ended March 31,
	2016			2015
	(in thousands)
Balance at beginning of period	$	66,584		$	57,358
Purchases		2,602			—
MSRs resulting from mortgage loan sales		3,300			1,906
Changes in fair value:
Due to changes in valuation inputs used in valuation model (1)		(8,952	)		(8,194	)
Other changes in fair value (2)		(2,463	)		(1,622	)

		(11,415	)		(9,816	)

Balance at end of period	$	61,071		$	49,448

MSRs pledged to secure notes payable at period end	$	61,071		$	—

(1)	Principally reflects changes in pricing spread (discount rate) and prepayment speed inputs, primarily due to changes in market 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,
	2016			2015
	(in thousands)
Amortized Cost:
Balance at beginning of period	$	404,101		$	308,137
MSRs resulting from mortgage loan sales		32,862			25,554
Amortization		(14,287	)		(9,592	)
Sales		—			(293	)

Balance at end of period		422,676			323,806

Valuation Allowance:
Balance at beginning of period		(10,944	)		(7,715	)
Additions		(17,706	)		(6,379	)

Balance at end of period		(28,650	)		(14,094	)

MSRs, net	$	394,026		$	309,712

Fair value at beginning of period	$	424,154		$	322,230
Fair value at end of period	$	405,635		$	327,703
MSRs pledged to secure notes payable	$	394,026		$	—

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This estimate was developed with the inputs used in the March 31, 2016 valuation of MSRs. The inputs 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.


	Estimated MSR
12 months ended March 31,	amortization
	(in thousands)
2017	$	59,226
2018		50,401
2019		43,243
2020		37,530
2021		32,801
Thereafter		199,475

Total	$	422,676

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


	Quarter ended March 31,
	2016		2015
	(in thousands)
Contractually-specified servicing fees	$	27,779	$	21,588

Note 13—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,
	2016			2015
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		2.23	%		2.33	%
Average balance	$	2,797,301		$	2,847,915
Total interest expense	$	20,412		$	18,912
Maximum daily amount outstanding	$	3,577,236		$	3,860,671

(1)	Excludes the effect of amortization of debt issuance costs of $2.1 million and $2.3 million for the quarters ended March 31, 2016 and 2015, respectively.


	March 31, 2016			December 31, 2015
	(dollars in thousands)
Carrying value:
Amount outstanding	$	3,246,095		$	3,130,328
Unamortized debt issuance costs		(1,081	)		(1,548	)

	$	3,245,014		$	3,128,780

Weighted-average interest rate		2.46	%		2.33	%
Available borrowing capacity:
Committed	$	176,033		$	231,913
Uncommitted		1,059,224			661,756

	$	1,235,257		$	893,669

Margin deposits placed with counterparties included in Other assets	$	6,939		$	7,268
Fair value of assets securing agreements to repurchase:
Mortgage-backed securities	$	364,439		$	313,753
Mortgage loans acquired for sale at fair value		1,245,625			1,204,462
Mortgage loans at fair value		2,014,446			2,067,341
Real estate acquired in settlement of loans		257,294			283,343
Restricted cash included in Other assets		180,992			—

	$	4,062,796		$	3,868,899

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


Remaining Maturity at March 31, 2016	Contractual balance
	(in thousands)
Within 30 days	$	245,478
Over 30 to 90 days		305,775
Over 90 days to 180 days		250,396
Over 180 days to 1 year		2,444,446
Over 1 year to 2 years		—

	$	3,246,095

Weighted average maturity (in months)		8

The Company is subject to margin calls during the period the agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases. 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, 2016:

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


			Weighted-average
Counterparty	Amount at risk		repurchase agreement maturity	Facility maturity
	(in thousands)
Citibank, N.A.	$	352,362	May 15, 2016	October 20, 2016
Credit Suisse First Boston Mortgage Capital LLC	$	278,944	June 24, 2016	March 30, 2017
JPMorgan Chase & Co.	$	151,873	-	January 26, 2017
Bank of America, N.A.	$	37,910	June 22, 2016	March 29, 2017
Morgan Stanley	$	17,903	May 23, 2016	December 16, 2016
Barclays	$	970	June 12, 2016	September 13, 2016

Securities sold under agreements to repurchase


Counterparty	Amount at risk		Weighted average maturity
	(in thousands)
JPMorgan Chase & Co.	$	52,898	April 8, 2016
Bank of America, N.A.	$	16,153	April 21, 2016
Daiwa Capital Markets America Inc.	$	9,370	May 9, 2016
BNP Paribas Corporate & Institutional Banking	$	3,469	April 18, 2019
Citibank, N.A.	$	527	June 30, 2016

The following is a summary of the tangible net worth, as defined in the respective borrowing agreements, and minimum required amounts for the Company and certain of its subsidiaries at March 31, 2016 to comply with the debt covenants contained in the borrowing agreements:


	Tangible net worth as of March 31, 2016
			Minimum
Entity	Balance		required
	(in thousands)
PennyMac Mortgage Investment Trust	$	1,414,503	$	860,000
Operating Partnership	$	1,453,675	$	700,000
PennyMac Holdings, LLC	$	878,764	$	250,000
PennyMac Corp.	$	403,394	$	150,000

Note 14—Mortgage Loan Participation and Sale Agreements

Two of the borrowing facilities secured by mortgage loans acquired for sale are in the form of mortgage loan participation and sale agreements. 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 nonaffiliate 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.

Mortgage loan participation and sale agreements are summarized below:


	Quarter ended March 31,
	2016			2015
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		1.68	%		1.42	%
Average balance	$	68,598		$	43,547
Total interest expense	$	327		$	207
Maximum daily amount outstanding	$	97,672		$	92,940

(1)	Excludes the effect of amortization of debt issuance costs of $36,000 and $52,000 for the quarters ended March 31, 2016 and 2015.


	March 31, 2016
	(dollars in thousands)
Carrying value:
Amount outstanding	$	62,400
Unamortized debt issuance costs		—

	$	62,400

Weighted-average interest rate		1.69	%
Mortgage loans acquired for sale pledged to secure mortgage loan participation and sale agreements	$	64,794

Note 15—Federal Home Loan Bank Advances

In June 2015, the Company entered into a collateral, pledge, and security agreement with the Federal Home Loan Bank of Des Moines with no specified termination date. The Company was able to request advances up to a maximum of $400.0 million.

On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) issued a final rule establishing new requirements for membership in the Federal Home Loan Banks. The final rule excludes captive insurance companies such as the Company’s insurance subsidiary, Copper Insurance, LLC, from membership.

For captive insurance companies that became members since the rule was proposed in 2014, including Copper Insurance, LLC, membership must be terminated within one year, and no additional advances may be made. Accordingly, the Company has repaid all of the advances outstanding as of March 31, 2016.

The FHLB advances are summarized below:


	Quarter ended March 31, 2016
	(dollars in thousands)
During the period:
Weighted-average interest rate		0.49	%
Average balance	$	98,038
Total interest expense	$	122
Maximum daily amount outstanding	$	201,130

	December 31, 2015
	(dollars in thousands)
Carrying value	$	183,000
Weighted-average interest rate		0.30	%
Fair value of assets securing FHLB advances:
Mortgage-backed securities	$	8,720
Mortgage loans acquired for sale at fair value		63,993
Mortgage loans at fair value		134,172

	$	206,885

Note 16—Notes Payable

On March 31, 2015, the Company, through PMC, entered into a Loan and Security Agreement with Citibank, N.A., pursuant to which PMC may finance certain of its MSRs relating to mortgage loans pooled into Freddie Mac MBS in an aggregate loan amount not to exceed $125 million. The note matures on October 20, 2016.

On September 14, 2015, the Company, through PMC, entered into a Loan and Security Agreement with Barclays Bank PLC (“Barclays”), pursuant to which PMC may finance certain of its MSRs relating to mortgage loans pooled into Fannie Mae MBS in an aggregate loan amount not to exceed $200 million. The note matures on September 13, 2016, subject to a wind down period of up to one year following such maturity date.

Following is a summary of financial information relating to the notes payable:


	Quarter ended March 31, 2016
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		4.59	%
Average balance	$	213,616
Total interest expense	$	3,344
Maximum daily amount outstanding	$	234,476

(1)	Excludes the effect of amortization of debt issuance costs of $825,000 for the quarter ended March 31, 2016.


	March 31, 2016			December 31, 2015
	(dollars in thousands)
Carrying value:
Amount outstanding	$	206,228		$	236,107
Unamortized debt issuance costs		(37	)		(92	)

	$	206,191		$	236,015

Weighted-average interest rate		4.59	%		4.53	%
MSRs pledged to secure notes payable	$	455,097		$	459,741

Note 17—Asset-Backed Financing of a Variable Interest Entity at Fair Value

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


	Quarter ended March 31,
	2016			2015
	(dollars in thousands)
During the period:
Weighted-average fair value	$	315,991		$	165,522
Interest expense	$	1,352		$	1,583
Weighted-average effective interest rate		3.34	%		3.83	%

	March 31, 2016			December 31, 2015
	(dollars in thousands)
Carrying value	$	344,693		$	247,690
UPB	$	339,449		$	248,284
Weighted-average interest rate		3.50	%		3.50	%

The asset-backed financing of a VIE is a non-recourse liability and secured solely by the assets of a 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 18—Exchangeable Senior Notes

PMC issued in a private offering $250 million aggregate principal amount of the Exchangeable Notes due May 1, 2020. The Exchangeable Notes bear interest at a rate of 5.375% per year, payable semiannually. The Exchangeable Notes are exchangeable into common shares of the Company at a rate of 33.8667 common shares per $1,000 principal amount of the Exchangeable Notes as of December 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 cumulative cash dividends exceeding the quarterly dividend threshold amount of $0.57 per share as provided in the related indenture.

Following is financial information relating to the Exchangeable Notes:


	Quarter ended March 31,
	2016		2015
	(in thousands)
During the period:
Weighted-average UPB	$	250,000	$	250,000
Interest expense (1)	$	3,612	$	3,597

(1)	Total interest expense includes amortization of debt issuance costs of $253,000 and $239,000 during the quarters ended March 31, 2016 and 2015, respectively.


	March 31, 2016			December 31, 2015
	(in thousands)
Carrying value:
UPB	$	250,000		$	250,000
Unamortized debt issuance costs		(4,693	)		(4,946	)

	$	245,307		$	245,054

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,
	2016			2015
	(in thousands)
Balance, beginning of period	$	20,171		$	14,242
Provision for losses
Pursuant to mortgage loan sales		571			925
Adjustment to previously recorded amount due to change in estimate		(1,724	)		—
Losses incurred		(306	)		(53	)
Recoveries		—			265

Balance, end of period	$	18,712		$	15,379

UPB of mortgage loans subject to representations and warranties at period end	$	43,464,887		$	35,573,237

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, 2016, 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, 2016
	(in thousands)
Commitments to purchase mortgage loans:
Mortgage loans acquired for sale at fair value	$	1,234,894

Note 21—Shareholders’ Equity

Common Share Repurchases

During August 2015, the Company’s board of trustees authorized a common share repurchase program under which the Company may repurchase up to $150 million of its outstanding common shares. During February 2016, the Company’s board of trustees approved an increase to its share repurchase program pursuant to which the Company is now authorized to repurchase up to $200 million of its common shares. During the quarter ended March 31, 2016, the Company repurchased 5.2 million common shares at a cost of $64.5 million for a cumulative total of 6.2 million common shares repurchased at a cost of $80.8 million under the program. The repurchased common shares were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued share pool.

Common Share Issuances

The Company has entered into an ATM Equity Offering Sales Agreement^SM. During the quarters ended March 31, 2016 and 2015, the Company did not sell any common shares under the agreement.

At March 31, 2016, the Company had approximately $106.9 million of common shares available for issuance under its ATM Equity Offering Sales Agreement^SM.

Note 22—Net Interest Income

Net interest income is summarized below:


	Quarter ended March 31,
	2016		2015
	(in thousands)
Interest income:
From nonaffiliates:
Short-term investments	$	376	$	220
Mortgage-backed securities		2,712		2,633
Mortgage loans acquired for sale at fair value		9,264		7,101
Mortgage loans at fair value		29,186		21,554
Mortgage loans at fair value held by a VIE		5,529		5,413
Other		284		12

		47,351		36,933
From PFSI: