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Invesco Mortgage Capital Inc. Reports Fourth Quarter 2016 Financial Results

ATLANTA, Feb. 21, 2017 /PRNewswire/ -- Invesco Mortgage Capital Inc. (IVR) (the "Company") today announced financial results for the quarter ended December 31, 2016, reporting basic earnings of $2.42 per common share, core earnings* of $0.36 per common share and book value per diluted common share** of $17.48.

Interest rates rose sharply and credit spreads tightened during the fourth quarter as risk appetite improved following the U.S. Presidential election and subsequent action taken by the Federal Reserve to raise the Federal Funds rate. While tighter credit spreads benefited the Company's high quality credit portfolio during the quarter, the impact of higher rates on the Company's Agency RMBS portfolio resulted in book value per diluted common share** declining by 3.3% for the quarter. "During the fourth quarter and throughout 2016 we increased our allocation to lower duration Agency RMBS, reduced leverage, and held higher levels of cash in order to reduce book value volatility and protect the future earnings stream.  The reduction in risk led to lower core earnings in the fourth quarter, but positions us well to capitalize on future improvements in investment returns and improve core earnings," said Richard King, President and CEO.

The Company delivered an 11.3% economic return*** for the year ended December 31, 2016 to its shareholders.

Highlights

  • Q4 2016 net income attributable to common stockholders of $270.1 million or $2.42 basic earnings per common share or $2.15 diluted earnings per common share
  • Q4 2016 core earnings* of $39.8 million, core earnings per common share* of $0.36, and a common stock dividend of $0.40 per share
  • Q4 2016 book value per diluted common share** of $17.48 vs. $18.08 at 9/30/2016 and $17.14 at 12/31/2015
  • Economic return*** for the three months and year ended December 31, 2016 of -1.1% and 11.3%, respectively
  • Q4 2016 comprehensive loss attributable to common stockholders was ($22.7) million or ($0.20) basic comprehensive loss per common share vs. comprehensive income attributable to common stockholders of $155.8 million or $1.40 basic comprehensive income per common share for Q3 2016
  • YTD 2016 comprehensive income attributable to common stockholders was $205.7 million or $1.84 basic comprehensive income per common share vs. comprehensive loss attributable to common stockholders of ($40.4) million or ($0.33) basic comprehensive loss per common share for 2015

* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.

**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

***Economic return for the quarter ended December 31, 2016 is defined as the change in book value per diluted common share from September 30, 2016 to December 31, 2016 of ($0.60); plus dividends declared of $0.40 per common share; divided by the September 30, 2016 book value per diluted common share of $18.08. Economic return for the twelve months ended December 31, 2016 is defined as the change in book value per diluted common share from December 31, 2015 to December 31, 2016 of $0.34; plus dividends declared of $1.60 per common share; divided by the December 31, 2015 book value per diluted common share of $17.14.

Key performance indicators for the quarters ended December 31, 2016 and September 30, 2016 are summarized in the table below.

($ in millions, except share amounts)

Q4 '16

Q3 '16


(unaudited)

(unaudited)

Average earning assets (at amortized costs)

$15,462.6


$16,088.5


Average borrowed funds

13,612.5


14,222.7


Average equity

$2,088.6


$2,130.1





Total interest income

$114.6


$118.1


Total interest expense

34.4


33.3


Net interest income

80.2


84.9


Total other income (loss)

209.9


60.3


Total expenses

10.7


8.6


Net income (loss)

279.3


136.7


Net income (loss) attributable to non-controlling interest

3.5


1.7


Dividends to preferred stockholders

5.7


5.7


Net income (loss) attributable to common stockholders

$270.1


$129.2


Comprehensive income (loss) attributable to common shareholders

($22.7)


$155.8





Average earning asset yield

2.96

%

2.94

%

Cost of funds

1.01

%

0.94

%

Net interest rate margin

1.95

%

2.00

%

Debt-to-equity ratio

5.8

x

6.0

x

Book value per common share (diluted)**

$17.48


$18.08


Earnings (loss) per common share (basic)

$2.42


$1.16


Earnings (loss) per common share (diluted)

$2.15


$1.05


Comprehensive income (loss) attributable to common stockholders per common share (basic)

($0.20)


$1.40


Dividends declared per common share

$0.40


$0.40


Dividends declared per preferred share on Series A Preferred Stock

$0.4844


$0.4844


Dividends declared per preferred share on Series B Preferred Stock

$0.4844


$0.4844





Non-GAAP Financial Measures*:



Core earnings

$39.8


$46.2


Core earnings per common share

$0.36


$0.41


Effective interest income

$120.5


$124.1


Effective yield

3.12

%

3.09

%

Effective interest expense

$64.9


$64.5


Effective cost of funds

1.91

%

1.82

%

Effective net interest income

$55.6


$59.6


Effective interest rate margin

1.21

%

1.27

%

Repurchase agreement debt-to-equity ratio

5.4

x

5.7

x

 

* Core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin), and repurchase agreement debt-to-equity ratio are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

Financial Summary

Net income attributable to common stockholders for the fourth quarter of 2016 was $270.1 million, compared to  $129.2 million for the third quarter. The improvement in fourth quarter net income attributable to common stockholders was primarily due to a $230.7 million net gain on interest rate hedges versus a $35.4 million net gain in the third quarter. Book value per diluted common share as of December 31, 2016 decreased to $17.48 compared to $18.08 as of September 30, 2016 due to higher interest rates and larger declines in the value of the Company's residential mortgage-backed securities ("RMBS") versus increases in the value of the corresponding hedges.

The Company reduced its leverage to 5.8x as of December 31, 2016 and held higher levels of cash contributing to lower core earnings for the fourth quarter of 2016.  During the fourth quarter, the Company generated $39.8 million in core earnings compared to $46.2 million in the third quarter. The decrease in core earnings was primarily driven by lower net interest income during the fourth quarter and a one-time reduction of management fees in the third quarter.  The Company's net interest rate margin decreased from 2.00% in the third quarter to 1.95% in the fourth quarter.

For the quarter ended December 31, 2016, the Company had average earning assets of $15.5 billion, compared to $16.1 billion for the third quarter and interest income of $114.6 million for the fourth quarter compared to $118.1 million during the third quarter.  During the fourth quarter, the Company primarily used proceeds from paydowns and sales of investments to purchase 15 year fixed-rate Agency RMBS and GSE CRTs and to repay debt. Average earning asset yield rose from 2.94% in the third quarter to 2.96% in the fourth quarter reflecting the change in asset mix.  The Company shifted its equity allocation slightly toward residential credit assets following the December increase in the Federal Funds rate and U.S. Presidential election.  As of December 31, 2016, equity was allocated 59% to residential and commercial credit assets and 41% to Agency RMBS.

For the quarter ended December 31, 2016, the Company had average borrowed funds of approximately $13.6 billion compared to $14.2 billion for the third quarter and interest expense of $34.4 million compared to $33.3 million during the third quarter. The Company's cost of funds was 1.01% and 0.94% for the fourth quarter and third quarter, respectively.  The Company's total interest expense and cost of funds rose during the fourth quarter primarily due to higher market pricing of repurchase agreement borrowings in anticipation of the December increase in the Federal Funds borrowing rate. The Company's fourth quarter repurchase agreement interest expense benefited from higher amortization of net deferred gains on the Company's de-designated interest rate swaps totaling $6.2 million compared to $4.8 million in the third quarter.   Amortization of net deferred gains on the Company's de-designated interest rate swaps is recorded as a reduction in repurchase agreement interest expense under U.S. GAAP.  During the next 12 months, the Company estimates that $25.5 million of net deferred gains on de-designated interest rate swaps currently included in other comprehensive income will be reclassified as a reduction to repurchase agreement interest expense.

Total expenses for the fourth quarter were approximately $10.7 million compared to $8.6 million for the third quarter. Total expenses were higher in the fourth quarter primarily due to a cumulative one-time reduction of management fees in the third quarter totaling $2.3 million that related to a prior accounting adjustment for the amortization of premiums and discounts associated with non-Agency RMBS not of high credit quality. The ratio of annualized total expenses to average equity* for the fourth quarter was 2.06%. Excluding the cumulative one-time adjustment to management fees, the ratio of annualized total expenses to average equity* was 2.03% for the third quarter.

The Company declared the following dividends during the fourth quarter: a common stock dividend of $0.40 per share paid on January 26, 2017; a Series A preferred stock dividend of $0.4844 per share paid on January 25, 2017; and a Series B preferred stock dividend of $0.4844 per share that will be paid on March 27, 2017.

*The ratio of annualized total expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on weighted month-end balances.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Wednesday, February 22, 2017, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:  

800-857-7465

International:                      

1-312-470-0052

Passcode:                             

Invesco

An audio replay will be available until 5:00 pm ET on March 8, 2017 by calling:

866-480-3545 (North America) or 1-203-369-1549 (International)

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



Three Months Ended


Years Ended

$ in thousands, except share amounts

December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015


(unaudited)


(unaudited)


(unaudited)





Interest Income










Mortgage-backed and credit risk transfer securities

108,871



112,467



128,049



456,444



523,893


Residential loans (1)





22,907





110,908


Commercial loans

5,718



5,680



3,982



22,238



15,331


Total interest income

114,589



118,147



154,938



478,682



650,132


Interest Expense










Repurchase agreements

26,048



24,892



41,348



124,000



166,892


Secured loans

2,738



2,746



1,940



10,887



6,579


Exchangeable senior notes

5,620



5,620



5,621



22,467



22,461


Asset-backed securities (1)





17,128





82,041


Total interest expense

34,406



33,258



66,037



157,354



277,973


Net interest income

80,183



84,889



88,901



321,328



372,159


Reduction in provision for loan losses









(213)


Net interest income after reduction in provision for loan losses

80,183



84,889



88,901



321,328



372,372


Other Income (loss)










Gain (loss) on investments, net

(23,402)



(7,155)



(29,024)



(17,542)



(18,005)


Equity in earnings of unconsolidated ventures

400



729



3,499



2,392



12,630


Gain (loss) on derivative instruments, net

230,713



35,378



68,296



(62,815)



(219,048)


Realized and unrealized credit derivative income (loss), net

3,579



31,926



(5,122)



61,143



19,782


Other investment income (loss), net

(1,385)



(554)



(574)



(5,002)



944


Total other income (loss)

209,905



60,324



37,075



(21,824)



(203,697)


Expenses










Management fee – related party

9,249



6,719



9,816



34,541



38,632


General and administrative

1,496



1,836



1,583



7,265



7,769


Consolidated securitization trusts (1)





1,675





8,219


Total expenses

10,745



8,555



13,074



41,806



54,620


Net income (loss)

279,343



136,658



112,902



257,698



114,055


Net income (loss) attributable to non-controlling interest

3,522



1,723



1,354



3,287



1,344


Net income (loss) attributable to Invesco Mortgage Capital Inc.

275,821



134,935



111,548



254,411



112,711


Dividends to preferred stockholders

5,716



5,716



5,716



22,864



22,864


Net income (loss) attributable to common stockholders

270,105



129,219



105,832



231,547



89,847


Earnings (loss) per share:










Net income (loss) attributable to common stockholders










Basic

2.42



1.16



0.90



2.07



0.74


Diluted

2.15



1.05



0.83



1.98



0.74


Dividends declared per common share

0.40



0.40



0.40



1.60



1.70




(1)

The condensed consolidated statements of operations include income and expenses of consolidated variable interest entities ("VIEs"). The Company deconsolidated these VIEs in 2015.

 

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



Three Months Ended


Years Ended

In thousands

December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015


(unaudited)


(unaudited)


(unaudited)





Net income (loss)

279,343



136,658



112,902



257,698



114,055


Other comprehensive income (loss):










Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net

(308,223)



32,015



(160,443)



(37,632)



(191,053)


Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net

17,715





(3,333)



6,134



(7,484)


Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense

(6,177)



(4,831)



15,576



5,154



66,757


Currency translation adjustments on investment in unconsolidated venture

138



(235)





128



(32)


Total other comprehensive income (loss)

(296,547)



26,949



(148,200)



(26,216)



(131,812)


Comprehensive income (loss)

(17,204)



163,607



(35,298)



231,482



(17,757)


Less: Comprehensive income (loss) attributable to non-controlling interest

216



(2,063)



435



(2,939)



245


Less: Dividends to preferred stockholders

(5,716)



(5,716)



(5,716)



(22,864)



(22,864)


Comprehensive income (loss) attributable to common stockholders

(22,704)



155,828



(40,579)



205,679



(40,376)


 

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



As of


December 31, 2016


December 31, 2015

In thousands except share amounts


ASSETS




Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $14,422,198 and $15,553,934, respectively)

14,981,331



16,065,935


Commercial loans, held-for-investment

273,355



209,062


Cash and cash equivalents

161,788



53,199


Due from counterparties

86,450



110,009


Investment related receivable

43,886



154,594


Accrued interest receivable

46,945



50,779


Derivative assets, at fair value

3,186



8,659


Other assets

109,297



115,072


Total assets

15,706,238



16,767,309


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

11,160,669



12,126,048


Secured loans

1,650,000



1,650,000


Exchangeable senior notes

397,041



394,573


Derivative liabilities, at fair value

134,228



238,148


Dividends and distributions payable

50,924



51,734


Investment related payable

9,232



167


Accrued interest payable

21,066



21,604


Collateral held payable

1,700



4,900


Accounts payable and accrued expenses

1,534



2,376


Due to affiliate

9,660



10,851


Total liabilities

13,436,054



14,500,401


Commitments and contingencies (See Note 16)




Equity:




Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:




7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)

135,356



135,356


7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)

149,860



149,860


Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 111,594,595 and 113,619,471 shares issued and outstanding, respectively

1,116



1,136


Additional paid in capital

2,379,863



2,407,372


Accumulated other comprehensive income

293,668



318,624


Retained earnings (distributions in excess of earnings)

(718,303)



(771,313)


Total stockholders' equity

2,241,560



2,241,035


Non-controlling interest

28,624



25,873


Total equity

2,270,184



2,266,908


Total liabilities and equity

15,706,238



16,767,309


 

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin), and repurchase agreement debt-to-equity ratio. The Company's management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income (loss) attributable to common stockholders (and by calculation basic earnings (loss) per common share), total interest income (and by calculation, earning asset yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio. Certain prior period U.S. GAAP and non-GAAP financial measures have been revised to correct immaterial errors in accounting for premiums and discounts on non-Agency RMBS not of high credit quality.  For further information, see Note 17 of the Company's consolidated financial statements filed in Item 15 of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and cumulative adjustments attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities, excluding securities for which the Company elected the fair value option and the valuation assigned to the debt host contract associated with its GSE CRTs, in other comprehensive income on its consolidated balance sheets.

The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results. The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

 

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:


Three Months Ended


Years Ended


December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015

$ in thousands, except per share data





Net income (loss) attributable to common stockholders

270,105



129,219



105,832



231,547



89,847


Adjustments:










(Gain) loss on investments, net

23,402



7,155



29,024



17,542



18,005


Realized (gain) loss on derivative instruments, net (1)

(4,279)



(1,347)



(122)



57,943



44,272


Unrealized (gain) loss on derivative instruments, net (1)

(250,774)



(60,419)



(114,143)



(99,932)



(9,597)


Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)

2,376



(25,963)



11,502



(36,800)



6,411


(Gain) loss on foreign currency transactions,

net (3)

2,180



1,340



1,345



8,187



1,875


Amortization of net deferred (gain) loss on de-designated interest rate swaps (4)

(6,177)



(4,831)



15,576



5,154



66,757


Subtotal

(233,272)



(84,065)



(56,818)



(47,906)



127,723


Cumulative adjustments attributable to non-controlling interest

2,942



1,060



680



653



(1,461)


Core earnings

39,775



46,214



49,694



184,294



216,109


Basic earnings (loss) per common share

2.42



1.16



0.90



2.07



0.74


Core earnings per share attributable to common stockholders (5)

0.36



0.41



0.42



1.65



1.78


 

(1) U.S. GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components:


Three Months Ended


Years Ended


December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015

$ in thousands





Realized gain (loss) on derivative instruments, net

4,279



1,347



122



(57,943)



(44,272)


Unrealized gain (loss) on derivative instruments, net

250,774



60,419



114,143



99,932



9,597


Contractual net interest expense

(24,340)



(26,388)



(45,969)



(104,804)



(184,373)


Gain (loss) on derivative instruments, net

230,713



35,378



68,296



(62,815)



(219,048)


 

(2) U.S. GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components:


Three Months Ended


Years Ended


December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015

$ in thousands





Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net

(2,376)



25,963



(11,502)



36,800



(6,411)


GSE CRT embedded derivative coupon interest

5,955



5,963



6,379



24,343



24,822


Realized and unrealized gain (loss) on CDS contract





1





648


CDS premium fee income









723


Realized and unrealized credit derivative income (loss), net

3,579



31,926



(5,122)



61,143



19,782


 

(3) U.S. GAAP other investment income (loss), net on the consolidated statements of operations includes the following components:


Three Months Ended


Years Ended


December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015

$ in thousands





FHLBI dividend income

795



786



771



3,185



2,819


Gain (loss) on foreign currency transactions, net

(2,180)



(1,340)



(1,345)



(8,187)



(1,875)


Other investment income (loss), net

(1,385)



(554)



(574)



(5,002)



944


 

(4) U.S. GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components:


Three Months Ended


Years Ended


December 31, 2016


September 30, 2016


December 31, 2015


December 31, 2016


December 31, 2015

$ in thousands





Interest expense on repurchase agreements outstanding

32,225



29,723



25,772



118,846



100,135


Amortization of net deferred (gain) loss on de-designated interest rate swaps

(6,177)



(4,831)



15,576



5,154



66,757


Repurchase agreements interest expense

26,048



24,892



41,348



124,000



166,892


 

(5) Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense because the Company does not consider the amortization a current component of its borrowing costs.

The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:


Three Months Ended December 31, 2016


Three Months Ended
 September 30, 2016


Three Months Ended December 31, 2015

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

114,589



2.96

%


118,147



2.94

%


154,938



3.26

%

Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

5,955



0.16

%


5,963



0.15

%


6,379



0.13

%

Effective interest income

120,544



3.12

%


124,110



3.09

%


161,317



3.39

%

 


Years Ended December 31,


2016


2015

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

478,682



3.07

%


650,132



3.25

%

Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

24,343



0.15

%


24,822



0.12

%

Effective interest income

503,025



3.22

%


674,954



3.37

%

 

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:


Three Months Ended December 31, 2016


Three Months Ended
 September 30, 2016


Three Months Ended December 31, 2015

$ in thousands

Reconciliation


Cost of Funds / Effective Cost of Funds


Reconciliation


Cost of Funds / Effective Cost of Funds


Reconciliation


Cost of Funds / Effective Cost of Funds

Total interest expense

34,406



1.01

%


33,258



0.94

%


66,037



1.56

%

Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps

6,177



0.18

%


4,831



0.14

%


(15,576)



(0.37)

%

Add: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net

24,340



0.72

%


26,388



0.74

%


45,969



1.08

%

Effective interest expense

64,923



1.91

%


64,477



1.82

%


96,430



2.27

%

 


Years Ended December 31,


2016


2015

$ in thousands

Reconciliation


Cost of Funds / Effective Cost of Funds


Reconciliation


Cost of Funds / Effective Cost of Funds

Total interest expense

157,354



1.15

%


277,973



1.56

%

Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps

(5,154)



(0.04)

%


(66,757)



(0.37)

%

Add: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net

104,804



0.76

%


184,373



1.03

%

Effective interest expense

257,004



1.87

%


395,589



2.22

%

 

 

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:


Three Months Ended December 31, 2016


Three Months Ended
 September 30, 2016


Three Months Ended December 31, 2015

$ in thousands

Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin


Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin


Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin

Net interest income

80,183



1.95

%


84,889



2.00

%


88,901



1.70

%

Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps

(6,177)



(0.18)

%


(4,831)



(0.14)

%


15,576



0.37

%

Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

5,955



0.16

%


5,963



0.15

%


6,379



0.13

%

Less: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net

(24,340)



(0.72)

%


(26,388)



(0.74)

%


(45,969)



(1.08)

%

Effective net interest income

55,621



1.21

%


59,633



1.27

%


64,887



1.12

%

 


Years Ended December 31,


2016


2015

$ in thousands

Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin


Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin

Net interest income

321,328



1.92

%


372,159



1.69

%

Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps

5,154



0.04

%


66,757



0.37

%

Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

24,343



0.15

%


24,822



0.12

%

Less: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net

(104,804)



(0.76)

%


(184,373)



(1.03)

%

Effective net interest income

246,021



1.35

%


279,365



1.15

%

 

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of December 31, 2016 and September 30, 2016.  The Company presents a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes presenting the Company's repurchase agreement debt-to-equity ratio when considered together with its U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

December 31, 2016

$ in thousands

Agency RMBS

Residential Credit (1)

Commercial Credit (2)

Exchangeable Senior Notes and Other

Total

Investments

9,665,860


2,763,751


2,858,376



15,287,987


Cash and cash equivalents (3)

76,067


49,582


36,139



161,788


Derivative assets, at fair value (4)

3,085



101



3,186


Other assets

179,931


9,381


63,465


500


253,277


Total assets

9,924,943


2,822,714


2,958,081


500


15,706,238








Repurchase agreements

8,148,220


2,067,731


944,718



11,160,669


Secured loans (5)

500,150



1,149,850



1,650,000


Exchangeable senior notes




397,041


397,041


Derivative liabilities, at fair value

133,832



396



134,228


Other liabilities

52,047


21,389


14,791


5,889


94,116


Total liabilities

8,834,249


2,089,120


2,109,755


402,930


13,436,054








Total equity (allocated)

1,090,694


733,594


848,326


(402,430)


2,270,184


Adjustments to calculate repurchase agreement debt-to-equity ratio:






Net equity in unsecured assets and exchangeable senior notes (6)



(306,656)


402,430


95,774


Collateral pledged against secured loans

(585,504)



(1,346,078)



(1,931,582)


Secured loans

500,150



1,149,850



1,650,000


Equity related to repurchase agreement debt

1,005,340


733,594


345,442



2,084,376


Debt-to-equity ratio (7)

7.9


2.8


2.5


NA


5.8


Repurchase agreement debt-to-equity ratio (8)

8.1


2.8


2.7


NA


5.4




(1)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(2)

Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

 

September 30, 2016

$ in thousands

Agency

RMBS

Residential Credit (1)

Commercial Credit (2)

Exchangeable Senior Notes

Total

Investments

10,653,615


2,752,173


2,974,343



16,380,131


Cash and cash equivalents (3)

23,907


13,164


10,211



47,282


Derivative assets, at fair value (4)



505



505


Other assets

413,516


7,404


65,326



486,246


Total assets

11,091,038


2,772,741


3,050,385



16,914,164








Repurchase agreements

9,002,003


2,061,035


997,464



12,060,502


Secured loans (5)

461,908



1,188,092



1,650,000


Exchangeable senior notes




396,420


396,420


Derivative liabilities, at fair value

382,237



84



382,321


Other liabilities

51,625


19,577


14,534


889


86,625


Total liabilities

9,897,773


2,080,612


2,200,174


397,309


14,575,868








Total equity (allocated)

1,193,265


692,129


850,211


(397,309)


2,338,296


Adjustments to calculate repurchase agreement debt-to-equity ratio:






Net equity in unsecured assets and exchangeable senior notes (6)



(306,054)


397,309


91,255


Collateral pledged against secured loans

(554,125)



(1,425,287)



(1,979,412)


Secured loans

461,908



1,188,092



1,650,000


Equity related to repurchase agreement debt

1,101,048


692,129


306,962



2,100,139


Debt-to-equity ratio (7)

7.9


3.0


2.6


NA


6.0


Repurchase agreement debt-to-equity ratio (8)

8.2


3.0


3.2


NA


5.7




(1)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(2)

Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures and exchangeable senior notes.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

 

 

Average Balances

The table below presents certain information for the Company's portfolio for the following periods.


Three Months Ended
 December 31,


Three Months Ended
 September 30,


Three Months Ended
 December 31,


Years Ended
 December 31,

$ in thousands

2016


2016


2015


2016


2015

Average Balances*:










Agency RMBS:










15 year fixed-rate, at amortized cost

3,654,738



3,409,739



1,625,689



2,722,301



1,698,573


30 year fixed-rate, at amortized cost

3,234,641



3,613,116



4,269,697



3,646,480



4,368,662


ARM, at amortized cost

310,835



332,801



429,087



353,937



446,714


Hybrid ARM, at amortized cost

2,523,691



2,703,529



3,330,564



2,800,812



3,219,463


Agency - CMO, at amortized cost

351,746



362,825



395,197



375,888



423,409


Non-Agency RMBS, at amortized cost

1,940,551



2,079,681



2,438,278



2,167,679



2,660,689


GSE CRT, at amortized cost

676,232



612,531



680,350



650,189



665,471


CMBS, at amortized cost

2,498,012



2,532,667



3,030,482



2,582,003



3,173,737


U.S. Treasury securities, at amortized cost



169,041





45,375




Residential loans, at amortized cost





2,602,506





3,198,666


Commercial loans, at amortized cost

272,190



272,614



182,829



265,708



166,150


Average earning assets

15,462,636



16,088,544



18,984,679



15,610,372



20,021,534


Average Earning Asset Yields (1):










Agency RMBS:










15 year fixed-rate

1.99

%


1.86

%


2.40

%


1.98

%


2.23

%

30 year fixed-rate

2.57

%


2.55

%


2.82

%


2.72

%


2.80

%

ARM

2.16

%


2.18

%


2.26

%


2.28

%


2.30

%

Hybrid ARM

2.02

%


2.06

%


2.22

%


2.12

%


2.13

%

Agency - CMO

2.07

%


2.42

%


3.42

%


2.47

%


3.16

%

Non-Agency RMBS

5.22

%


5.06

%


4.90

%


4.97

%


4.85

%

GSE CRT (2)

1.24

%


0.98

%


0.62

%


0.98

%


0.54

%

CMBS

4.17

%


4.28

%


4.35

%


4.30

%


4.37

%

U.S. Treasury securities

%


1.09

%


%


1.15

%


%

Residential loans

%


%


3.52

%


%


3.47

%

Commercial loans

8.33

%


8.27

%


8.16

%


8.35

%


8.36

%

Average earning asset yield

2.96

%


2.94

%


3.26

%


3.07

%


3.25

%

Average Borrowings*:










Agency RMBS (3)

9,018,802



9,334,305



9,101,071



8,872,694



9,118,307


Non-Agency RMBS

1,566,717



1,681,136



2,184,489



1,750,730



2,439,849


GSE CRT

485,692



428,798



485,989



459,738



484,414


CMBS (3)

2,144,486



2,213,541



2,514,693



2,176,963



2,632,338


U.S. Treasury securities



168,689





54,882




Exchangeable senior notes

396,834



396,213



394,366



395,910



393,440


Asset-backed securities issued by securitization trusts





2,260,565





2,774,833


Total borrowed funds

13,612,531



14,222,682



16,941,173



13,710,917



17,843,181


Maximum borrowings during the period (4)

14,023,429



14,381,178



17,945,795



14,381,178



18,416,608


 

 

Average Cost of Funds (5):










Agency RMBS (3)

0.80

%


0.67

%


0.45

%


0.69

%


0.39

%

Non-Agency RMBS

2.03

%


1.94

%


1.65

%


1.90

%


1.58

%

GSE CRT

2.15

%


2.16

%


1.83

%


2.14

%


1.73

%

CMBS (3)

1.18

%


1.14

%


0.98

%


1.14

%


0.93

%

U.S. Treasury securities

%


0.26

%


%


0.25

%


%

Exchangeable senior notes

5.66

%


5.67

%


5.70

%


5.67

%


5.71

%

Asset-backed securities issued by securitization trusts

%


%


3.03

%


%


2.96

%

Cost of funds

1.01

%


0.94

%


1.56

%


1.15

%


1.56

%

Interest rate swaps average fixed pay rate (6)

2.12

%


2.13

%


2.06

%


2.11

%


2.05

%

Interest rate swaps average floating receive rate (7)

(0.66)

%


(0.56)

%


(0.24)

%


(0.53)

%


(0.20)

%

Effective cost of funds (non-GAAP measure) (8)

1.91

%


1.82

%


2.27

%


1.87

%


2.22

%

Average Equity (9):

2,088,628



2,130,097



2,128,074



2,046,710



2,331,796


Average debt-to-equity ratio (average during period)

6.5

x


6.7

x


8.0

x


6.7

x


7.7

x

Debt-to-equity ratio (as of period end)

5.8

x


6.0

x


6.3

x


5.8

x


6.3

x



*       

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.



(1)

Average earning asset yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.

(2)

GSE CRT average earning asset yield excludes coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.

(3)

Agency RMBS and CMBS average borrowings and cost of funds include borrowings under repurchase agreements and secured loans.

(4)

Amount represents the maximum borrowings at month-end during each of the respective periods.

(5)

Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by the Company's average borrowings.

(6)

Interest rate swaps average fixed pay rate is calculated by dividing annualized contractual swap interest expense by the Company's average notional balance of interest rate swaps.

(7)

Interest rate swaps average floating receive rate is calculated by dividing annualized contractual swap interest income by the Company's average notional balance of interest rate swap.

(8)

For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."

(9)

Average equity is calculated based on weighted month-end balances.

 

 

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