NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As used in this Quarterly Report on Form 10-Q, “Company,” “we,” “us,” “our,” and “Anworth” refer to Anworth Mortgage Asset Corporation.
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Our Company
We were incorporated in Maryland on October 20, 1997 and commenced operations on March 17, 1998. Our principal business is to invest in, finance, and manage a leveraged portfolio of residential mortgage-backed securities (which we refer to as “MBS”) and residential mortgage loans, which presently include the following types of investments:
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Agency mortgage-backed securities (which we refer to as “Agency MBS”), which include residential mortgage pass-through certificates and collateralized mortgage obligations (which we refer to as “CMOs”), which are securities representing interests in pools of mortgage loans secured by residential property in which the principal and interest payments are guaranteed by a government-sponsored enterprise (which we refer to as “GSE”), such as the Federal National Mortgage Association (which we refer to as “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (which we refer to as “Freddie Mac”).
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•
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Non-agency mortgage-backed securities (which we refer to as “Non-Agency MBS”), which are securities issued by companies that are not guaranteed by federally sponsored enterprises and that are secured primarily by first-lien residential mortgage loans.
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•
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Residential mortgage loans through consolidated securitization trusts. We finance our residential mortgage loans through asset-backed securities (which we refer to as “ABS”) issued by the consolidated securitization trusts. The ABS which are held by unaffiliated third parties are non-recourse financing. The difference in the amount of the loans and the amount of the ABS represents our retained net interest in the securitization trusts.
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Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.
We have elected to be taxed as a real estate investment trust (which we refer to as “REIT”) under the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”). As long as we retain our REIT status, we generally will not be subject to federal or state income taxes to the extent that we distribute our taxable net income to our stockholders, and we routinely distribute to our stockholders substantially all of the taxable net income generated from our operations. In order to qualify as a REIT, we must meet various ongoing requirements under the tax law, including requirements relating to the composition of our assets, the nature of our gross income, minimum distribution requirements, and requirements relating to the ownership of our stock.
Our Manager
We are externally managed and advised by Anworth Management LLC (which we refer to as our “Manager”). Our Manager is supervised and directed by our board of directors (which we refer to as our “Board”). Our day-to-day operations are being conducted by our Manager through the authority delegated to it under the Management Agreement between us and our Manager (which we refer to as the “Management Agreement”) and pursuant to the policies established by our Board.
Our Manager will also perform such other services and activities relating to our assets and operations as described in the Management Agreement. In exchange for services provided, our Manager receives a management fee, paid monthly in arrears, in an amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement).
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles utilized in the United States of America (which we refer to as “GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are susceptible to change relate to the determination of the fair value of investments and derivatives, cash flow projections for and credit performance of Non-Agency MBS and residential mortgage loans held-for-investment, amortization of security and loan premiums, accretion of security and loan discounts, and accounting for derivative activities. Actual results could materially differ from these estimates. In the opinion of
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management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.
Our consolidated financial statements include the accounts of all subsidiaries. Significant intercompany accounts and transactions have been eliminated. The interim financial information in the accompanying unaudited consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Our consolidated financial statements also include the consolidation of certain securitization trusts that meet the definition of a variable interest entity (which we refer to as “VIE”), because the Company has been deemed to be the primary beneficiary of the securitization trusts. These securitization trusts hold pools of residential mortgage loans and issue series of ABS payable from the cash flows generated by the underlying pools of residential mortgage loans. These securitizations are non-recourse financing for the residential mortgage loans held-for-investment. Generally, a portion of the ABS issued by the securitization trusts are sold to unaffiliated third parties and the balance is purchased by the Company. The Company classifies the underlying residential mortgage loans owned by the securitization trusts as residential mortgage loans held-for-investment in its consolidated balance sheets. The ABS issued to third parties are recorded as liabilities on the Company’s consolidated balance sheets. The Company records interest income on the residential mortgage loans held-for-investment and interest expense on the ABS issued to third parties in the Company’s consolidated statements of operations. The Company records the initial underlying assets and liabilities of the consolidated securitization trusts at their fair value upon consolidation into the Company and, as such, no gain or loss is recorded upon consolidation. See Note 4, “Variable Interest Entities,” for additional information regarding the impact of consolidation of securitization trusts.
The consolidated securitization trusts are VIEs because the securitization trusts do not have equity that meets the definition of U.S. GAAP equity at risk. In determining if a securitization trust should be consolidated, the Company evaluates (in accordance with the Financial Accounting Standards Board (which we refer to as “FASB”) Accounting Standards Codification (which we refer to as “ASC”) 810-10) whether it has both (i) the power to direct the activities of the securitization trust that most significantly impact its economic performance and (ii) the right to receive benefits from the securitization trust or the obligation to absorb losses of the securitization trust that could be significant. The Company determined that it is the primary beneficiary of certain securitization trusts because it has certain delinquency and default oversight rights on residential mortgage loans. In addition, the Company owns the most subordinated class of ABS issued by the securitization trusts and has the obligation to absorb losses and right to receive benefits from the securitization trusts that could potentially be significant to the securitization trusts. The Company assesses modifications, if any, to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.
The following is a summary of our significant accounting policies:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.
Mortgage-Backed Securities (“MBS”)
Agency MBS are securities that are obligations (including principal and interest) guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our investment-grade Agency MBS portfolio is invested primarily in fixed-rate and adjustable-rate mortgage-backed pass-through certificates and hybrid adjustable-rate MBS. Hybrid adjustable-rate MBS have an initial interest rate that is fixed for a certain period, usually one to ten years, and then adjusts annually for the remainder of the term of the asset. We structure our investment portfolio to be diversified with a variety of prepayment characteristics, investing in mortgage assets with prepayment penalties, investing in certain mortgage security structures that have prepayment protections and purchasing mortgage assets at a premium and at a discount. A portion of our portfolio consists of Non-Agency MBS. Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.
We classify our MBS as trading investments, available-for-sale investments, or held-to-maturity investments. Our management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We currently classify most of our MBS as available-for-sale. We have designated a portion of our MBS as trading investments. All assets that are classified as available-for-sale are carried at fair value and unrealized gains or losses are generally included in “Other comprehensive income (loss)” as a component of stockholders’ equity. Losses that are credit-related on securities classified as available-for-sale, which are determined by management to be other-than-temporary in nature, are reclassified from “Other comprehensive income” to income (loss). Assets that are classified as trading investments are reported at fair value with unrealized gains and losses included in our consolidated statements of operations.
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The most significant source of our revenue is derived f
rom our investments in MBS. Interest income on Agency MBS is accrued based on the actual coupon rate and the outstanding principal amount of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income over the estimated
lives of the securities using the effective interest yield method, adjusted for the effects of actual and estimated prepayments based on ASC 320-10. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical p
erformance, street consensus prepayment speeds and current market conditions. If our estimate of prepayments is materially incorrect, as compared to the aforementioned references, we may be required to make an adjustment to the amortization or accretion of
premiums and discounts that would have an impact on future income, which could be material and adverse.
Securities transactions are recorded on the date the securities are purchased or sold. Realized gains or losses from securities transactions are determined based on the specific identified cost of the securities.
The following tables show the gross unrealized losses and fair value of those individual securities in our MBS portfolio that are in a continuous unrealized loss position at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time (dollar amounts in thousands):
March 31, 2017
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Less Than 12 Months
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12 Months or More
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Total
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Description
of
Securities
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|
Number
of
Securities
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|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Number
of
Securities
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|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
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Number
of
Securities
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|
|
Fair
Value
|
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Unrealized
Losses
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Agency MBS
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95
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|
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$
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1,371,819
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|
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$
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(22,314
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)
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196
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|
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$
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425,927
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$
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(6,234
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)
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291
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$
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1,797,746
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$
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(28,548
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)
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Non-Agency MBS
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3
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$
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8,491
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$
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(768
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)
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41
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$
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217,108
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$
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(6,830
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)
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44
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$
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225,599
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$
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(7,598
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)
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December 31, 2016
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Less Than 12 Months
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12 Months or More
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Total
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Description
of
Securities
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|
Number
of
Securities
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|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Number
of
Securities
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Number
of
Securities
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Agency MBS
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120
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$
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978,041
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|
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$
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(12,961
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)
|
|
|
261
|
|
|
$
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472,090
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|
|
$
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(8,556
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)
|
|
|
381
|
|
|
$
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1,450,131
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|
|
$
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(21,517
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)
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Non-Agency MBS
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30
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$
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163,741
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$
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(5,911
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)
|
|
|
36
|
|
|
$
|
206,516
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|
|
$
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(4,551
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)
|
|
66
|
|
|
$
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370,257
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|
|
$
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(10,462
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)
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We do not consider those Agency MBS that have been in a continuous loss position for 12 months or more to be other-than-temporarily impaired. The unrealized losses on our investments in Agency MBS were caused by fluctuations in interest rates. We purchased the Agency MBS primarily at a premium relative to their face value and the contractual cash flows of those investments are guaranteed by the U.S. government or government-sponsored agencies. Since September 2008, the government-sponsored agencies have been in the conservatorship of the U.S. government. At March 31, 2017, we did not expect to sell the Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of the Agency MBS is attributable to changes in interest rates and not the credit quality of the Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2017. At March 31, 2017, there was approximately $13.7 million in cumulative unrealized losses on Trading Agency MBS that was not included in the table above, as they were recognized on our statements of operations. At December 31, 2016, there was approximately $13.8 million in unrealized losses on Trading Agency MBS that was not included in the table above, as they were recognized on our statements of operations.
The unrealized losses on our investments in Non-Agency MBS were primarily caused by fluctuations in interest rates. We purchased the Non-Agency MBS primarily at a discount relative to their face value. At March 31, 2017, there were four bonds that were impaired for a total of approximately $0.7 million, as the cash flow projections were less favorable than previously forecasted. On the remainder of the Non-Agency bonds, at March 31, 2017, we did not expect to sell these Non-Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of these Non-Agency MBS is attributable to changes in interest rates and not the credit quality of these Non-Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2017.
Residential Mortgage Loans Held-for-Investment
Residential mortgage loans held-for-investment are residential mortgage loans held by consolidated securitization trusts. Residential mortgage loans held-for-investment are carried at unpaid principal balances net of any premiums or discounts and
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allowance for loan losses. We expect that we will be required to continue to consolidate the securitization trusts that hold t
he residential mortgage loans.
We establish an allowance for residential loan losses based on our estimate of credit losses. These estimates for the allowance for loan losses require consideration of various observable inputs including, but not limited to, historical loss experience, delinquency status, borrower credit scores, geographic concentrations, and loan-to-value ratios, and are adjusted for current economic conditions as deemed necessary by our management. Many of these factors are subjective and cannot be reduced to a mathematical formula. In addition, since we have not incurred any direct losses on our portfolio, we review national historical credit performance information from external sources to assist in our analysis. Changes in our estimates can significantly impact the allowance for loan losses and provision expense. The allowance reflects management’s best estimate of the credit losses inherent in the loan portfolio at the balance sheet date. It is also possible that we will experience credit losses that are different from our current estimates or that the time of those losses may differ from our estimates.
We recognize interest income from residential mortgage loans on an accrual basis. Any related premium or discount is amortized into interest income using the effective interest method over the weighted average life of these loans. Coupon interest is recognized as revenue when earned and deemed collectable or until a loan becomes more than 90 days past due, at which point the loan is placed on non-accrual status. Interest previously accrued for loans that have been placed on non-accrual status is reversed against interest income in the period the loan is placed in non-accrual status. Residential loans delinquent more than 90 days or in foreclosure are characterized as delinquent. Cash principal and interest that are advanced from servicers after a loan becomes greater than 90 days past due are recorded as a liability due to the servicer. When a delinquent loan previously placed on non-accrual status has cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan is placed back on accrual status. Alternatively, non-accrual loans may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.
Residential Properties
Residential properties are stated at cost and consist of land, buildings and improvements, including other costs incurred during their acquisition, possession, and renovation. Residential properties purchased that are not subject to an existing lease are treated as asset acquisitions and, as such, are recorded at their purchase price, including acquisition and renovation costs, all of which are allocated to land and building based upon their relative fair values at the date of acquisition. Residential properties acquired either subject to an existing lease or as part of a portfolio level transaction are treated as a business combination under ASC 805,
Business Combinations
, and, as such, are recorded at fair value, allocated to land, building and the existing lease, if applicable, based upon their relative fair values at the date of acquisition, with acquisition fees and other costs expensed as incurred.
Building depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We will generally use a 27.5 year estimated life with no salvage value. We will incur costs to prepare our acquired properties to be leased. These costs will be capitalized and allocated to building costs. Costs related to the restoration, renovation, or improvement of our properties that improve and extend their useful lives are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary repairs and maintenance are expensed as incurred. Costs incurred by us to lease the properties will be capitalized and amortized over the life of the lease. Escrow deposits include refundable and non-refundable cash and earnest money on deposit with independent third parties for property purchases.
Repurchase Agreements
We finance the acquisition of MBS primarily through the use of repurchase agreements. Under these repurchase agreements, we sell securities to a lender and agree to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that we receive and the repurchase price that we pay represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which we pledge our securities and accrued interest as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. Upon the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then-prevailing financing rate. These repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.
Asset-Backed Securities Issued by Securitization Trusts
Asset-backed securities issued by the securitization trusts are recorded at principal balances net of unamortized premiums or discounts. This long-term debt is collateralized only by the assets held in the trusts and is otherwise non-recourse to the Company.
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Derivative Financial Instruments
Risk Management
We primarily use short-term (less than or equal to 12 months) repurchase agreements to finance the purchase of MBS. These obligations expose us to variability in interest payments due to changes in interest rates. We actively monitor changes in interest rate exposures and evaluate various opportunities to mitigate this risk. Our objective is to limit the impact of interest rate changes on earnings and cash flows. The principal instruments we use to achieve this are interest rate swap agreements (which we refer to as “interest rate swaps”) and Eurodollar Futures Contracts. Interest rate swaps effectively convert a percentage of our repurchase agreements to fixed-rate obligations over a period of up to ten years. Under interest rate swaps, we agree to pay an amount equal to a specified fixed-rate of interest times a notional principal amount and to receive in return an amount equal to a specified variable-rate of interest times a notional amount, generally based on the London Interbank Offered Rate (which we refer to as “LIBOR”). The notional amounts are not exchanged. We do not issue nor hold the interest rate swaps and the Eurodollar Futures Contracts for speculative purposes.
We also enter into To-Be-Announced (which we refer to as “TBA”) Agency MBS as either a means of investing in and financing Agency MBS, or as a means of disposing of or reducing our exposure to agency securities. Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, Agency MBS with certain principal and interest terms and certain types of collateral, but the particular Agency MBS to be delivered are not identified until shortly before the TBA settlement date. We also may choose, prior to settlement, to move the settlement of these MBS out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired-off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date. This transaction is commonly referred to as a “dollar roll.” The Agency MBS purchased or sold for a forward settlement date are typically priced at a discount to agency securities for settlement in the current month. This difference (or discount) is referred to as the “price drop.” The price drop represents compensation to us for foregoing net interest margin (interest income less repurchase agreement financing cost). TBA Agency MBS are accounted for as derivative instruments since they do not meet the exemption allowed for a “regular way” security trade under ASC 815, as either the TBA contracts do not settle in the shortest period of time possible or we cannot assess that it is probable at inception that we will take physical delivery of the security or that we will not settle on a net basis.
Accounting for Derivatives and Hedging Activities
We account for derivative instruments in accordance with ASC 815, which requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value, which is typically based on values obtained from large financial institutions who are market makers for these types of instruments. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as hedges in accordance with ASC 815. Changes in fair value related to derivatives not designated as hedges are recorded in our consolidated statements of operations as “Gain (loss) on derivatives.” For a derivative to qualify for hedge accounting, we must anticipate that the hedge will be highly “effective” as defined by ASC 815-10. A hedge of the variability of cash flows that are to be received or paid in connection with a recognized asset or liability is known as a ”cash flow” hedge. Changes in the fair value of a derivative that is highly effective and that is designated as a cash flow hedge, to the extent the hedge is effective, are recorded in AOCI and reclassified to income when the forecasted transaction affects income (e.g. when periodic settlement interest payments are due on repurchase agreements). Hedge ineffectiveness, if any, is recorded in current period income.
When we discontinue hedge accounting, the gain or loss on the derivative remains in AOCI and is reclassified into income when the forecasted transaction affects income. In all situations where hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its fair value on our balance sheet, recognizing changes in fair value in current period income. All of our interest rate swaps had historically been accounted for as cash flow hedges under ASC 815. After August 22, 2014, none of our interest rate swaps were designated for hedge accounting. As a result of discontinuing hedge accounting for our interest rate swaps, changes in the fair value of these interest rate swaps are recorded in “Gain (loss) on derivatives, net” in our consolidated statements of operations rather than in AOCI. Also, net interest paid or received on these interest rate swaps which was previously recognized in interest expense, is instead recognized in “Gain (loss) on derivatives, net.” These interest rate swaps continue to be reported as assets or liabilities on our consolidated balance sheets at their fair value.
As long as the forecasted transactions that were being hedged (i.e. rollovers of our repurchase agreement borrowings) are still expected to occur, the balance in AOCI from the activity in these interest rate swaps through the dates of de-designation will remain in AOCI and be recognized in our consolidated statements of operations as “interest expense” over the remaining term of these interest rate swaps.
For purposes of the consolidated statements of cash flows, cash flows hedges were classified with the cash flows from the hedged item. Cash flows from derivatives that are not hedges are classified according to the underlying nature or purpose of the derivative transaction.
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For more details on the amounts and other qualitative information on all our derivative tran
sactions, see Note 14. For more information on the fair value of our derivative instruments, see Note 8.
Credit Risk
At March 31, 2017, we have attempted to limit our exposure to credit losses on our Agency MBS by purchasing securities primarily through Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae MBS are guaranteed by those respective enterprises. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the U.S. government. While it is the intent that the conservatorship will help stabilize Freddie Mac’s and Fannie Mae’s overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac and Fannie Mae will be able to satisfy its guarantees of Agency MBS. There have also been concerns as to what the U.S. government will do regarding winding down the operations of Freddie Mac and Fannie Mae. There have also been concerns over the past few years regarding the credit standing of Freddie Mac, Fannie Mae, and U.S. sovereign debt. We do not know what effect any future ratings of Freddie Mac, Fannie Mae and U.S. sovereign debt may ultimately have on the U.S. economy, the value of our securities, or the ability of Freddie Mac and Fannie Mae to satisfy its guarantees of Agency MBS, if necessary.
Our adjustable-rate MBS are subject to periodic and lifetime interest rate caps. Periodic caps can limit the amount an interest rate can increase during any given period. Some adjustable-rate MBS subject to periodic payment caps may result in a portion of the interest being deferred and added to the principal outstanding.
We also invest in Non-Agency MBS, which are securities that are secured by pools of residential mortgages which are not issued by government-sponsored enterprises and are not guaranteed by any agency of the U.S. government or any federally chartered corporation. Such investments carry a risk that the borrower on the underlying mortgage may default on their obligation to make full and timely payments of principal and interest.
Other-than-temporary losses on our available-for-sale MBS, as measured by the amount of decline in estimated fair value attributable to credit losses that are considered to be other-than-temporary, are charged against income, resulting in an adjustment of the cost basis of such securities. Based on the criteria in ASC 320-10, the determination of whether a security is other-than-temporarily impaired (which we refer to as “OTTI”) involves judgments and assumptions based on both subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover its amortized cost basis (i.e., there is a credit-related loss). The following are among, but not all of, the factors considered in determining whether and to what extent an OTTI exists and the portion that is related to credit loss: (i) the expected cash flow from the investment; (ii) whether there has been an other-than-temporary deterioration of the credit quality of the underlying mortgages; (iii) the credit protection available to the related mortgage pool for MBS; (iv) any other market information available, including analysts’ assessments and statements, public statements and filings made by the debtor or counterparty; (v) management’s internal analysis of the security, considering all known relevant information at the time of assessment; and (vi) the magnitude and duration of historical decline in market prices. Because management’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary decline exists and, if so, the amount considered impaired, is also subjective and therefore constitutes material estimates that are susceptible to significant change.
We also own residential mortgage loans held-for-investment. As the majority of these loans (the tranches of the securitization trusts senior to our interests) are collateral for the asset-backed securities issued by the trusts, our potential credit risk is on the subordinated tranches that we own, as these tranches would be the first ones to absorb any losses resulting from defaults by the borrowers on the underlying mortgage loans.
For all interest rate swaps entered into on or before September 9, 2013, we are exposed to credit losses in the event of non-performance by counterparties to interest rate swaps. In order to limit this risk, our practice was to only enter into interest rate swaps with large financial institution counterparties who were market makers for these types of instruments, limit our exposure on each interest rate swap to a single counterparty under our defined guidelines and either pay or receive collateral to or from each counterparty on a periodic basis to cover the net fair market position of the interest rate swaps held with that counterparty. For all interest rate swaps entered into on or after September 9, 2013, all interest rate swap participants are required by rules of the Commodities Futures Trading Commission, under authority granted to it pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), to clear interest rate swaps through a registered derivatives clearing organization, or “swap execution facility,” through standardized documents under which each interest rate swap counterparty transfers its position to another entity whereby a central clearinghouse effectively becomes the counterparty on each side of the interest rate swap. It is the intent of the Dodd-Frank Act that the clearing of interest rate swaps in this manner is designed to avoid concentration of risk in any single entity by spreading and centralizing the risk in the clearinghouse and its members.
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Income Taxes
We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto. Accordingly, we will not be subject to federal income tax to the extent that our distributions to our stockholders satisfy the REIT requirements and that certain asset, income, and stock ownership tests are met.
We have no unrecognized tax benefits and do not anticipate any increase in unrecognized benefits during 2017 relative to any tax positions taken prior to January 1, 2017. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income taxes accounts; and no such accruals existed at March 31, 2017. We file REIT U.S. federal and California income tax returns. These returns are generally open to examination by the IRS and the California Franchise Tax Board for all years after 2012 and 2011, respectively.
Cumulative Convertible Preferred Stock
We classify our Series B Cumulative Convertible Preferred Stock (which we refer to as “Series B Preferred Stock”) on our balance sheets using the guidance in ASC 480-10-S99. Our Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events occur, such as a change in control. As redemption under these circumstances is not solely within our control, we have classified our Series B Preferred Stock as temporary equity.
We have analyzed whether the conversion features in our Series B Preferred Stock should be bifurcated under the guidance in ASC 815-10 and have determined that bifurcation is not necessary.
Stock-Based Expense
In accordance with ASC 718-10, any expense relating to share-based payment transactions is recognized in the unaudited consolidated financial statements.
Restricted stock is expensed over the vesting period (see Note 13).
Earnings Per Share
Basic earnings per share (which we refer to as “EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents (which includes stock options and convertible preferred stock) and the adding back of the Series B Preferred Stock dividends unless the effect is to reduce a loss or increase the income per share.
The computation of EPS for the three months ended March 31, 2017 and 2016 is as follows (amounts in thousands, except per share data):
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
to Common
|
|
|
Average
|
|
|
Earnings (Loss)
|
|
|
|
Stockholders
|
|
|
Shares
|
|
|
per share
|
|
For the three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
13,646
|
|
|
|
95,705
|
|
|
$
|
0.14
|
|
Effect of dilutive securities
|
|
|
394
|
|
|
|
4,839
|
|
|
|
-
|
|
Diluted EPS
|
|
$
|
14,040
|
|
|
|
100,544
|
|
|
$
|
0.14
|
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
(21,891
|
)
|
|
|
97,704
|
|
|
$
|
(0.22
|
)
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted EPS
|
|
$
|
(21,891
|
)
|
|
|
97,704
|
|
|
$
|
(0.22
|
)
|
Accumulated Other Comprehensive Income
In accordance with ASC 220-10-55-2, total comprehensive income is comprised of net income and other comprehensive income, which includes unrealized gains and losses on marketable securities classified as available-for-sale, and unrealized gains and losses on derivative financial instruments. In accordance with ASU 2013-02, we have identified, in our consolidated statements of comprehensive income, items that are reclassified and included in our consolidated statements of operations.
12
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued a new standard on revenue recognition, ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This new standard will replace more than 200 ad hoc pronouncements on revenue recognition. This ASU requires companies to recognize revenue in a way that shows the transfer of goods or services to customers in amounts that reflect the payment that a company expects to be entitled to in exchange for those goods or services. To do that, companies will now have to go through a five-step process: (1) tie the contract to a customer; (2) identify the contract’s performance obligations; (3) determine the transaction price; (4) connect the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) a company satisfies the performance obligation. This ASU only affects an entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within other standards (for example, insurance contracts or lease contracts). This ASU is effective for a public entity for the financial statements beginning with the quarter ending March 31, 2018. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (Subtopic 825-10). The guidance in this new standard is intended to improve existing GAAP by (1) requiring equity investment (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans or receivables) on the balance sheet or the accompanying notes to the financial statements; (4) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; (5) eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (6) requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Public companies are required to apply the guidance beginning with the quarter ending March 31, 2018. We do not believe this ASU will have a material impact on our financial statements.
On February 25, 2016, the FASB issued ASU 2016-2, “Leases” (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes, and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. This ASU will become effective for public entities beginning with the quarter ending March 31, 2019. We do not believe that this ASU will have a material impact on our financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815) - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The term
novation
, as it relates to derivative instruments, refers to replacing one of the parties to a derivative instrument with a new party. This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU became effective for public companies beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.
On March 14, 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force).” This topic requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risk of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract. This ASU clarifies that when assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, entities must use the four-step decision sequence established by
13
the Derivatives Implementation Group. The four-step decision sequence requires an entity to consider whether (1) the payoff or settlement is adjuste
d based on changes in an index; (2) the payoff is indexed to an underlying other than interest rates or credit risk; (3) the debt involves a substantial premium or discount; and (4) the call (put) option is contingently exercisable. This ASU became effecti
ve for public entities
beginning with the quarter ended March 31, 2017.
T
his ASU
did not have
a material impact on our financial statements.
On March 15, 2016, the FASB issued ASU 2016-07, “Investments–Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting,” which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. This ASU requires that the equity method investor add the cost of acquiring the additional interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This ASU also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or less in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This ASU became effective for all entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.
On March 17, 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-08 will become effective for public entities beginning with the quarter ending March 31, 2018. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognized revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognized revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.
On March 31, 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies some of the aspects of accounting for share-based payment transactions, mostly related to income tax consequences. This ASU became effective for public entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing.” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-10 will become effective for public companies beginning with the quarter ending March 31, 2018. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. This ASU clarifies that (1) an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; (2) an entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service; and (3) in determining whether promises to transfer goods or services to a customer are separately identifiable, an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item to which the promised goods or services are inputs. This ASU also amends the licensing implementation guidance related to ASU 2014-09. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-12 will become effective for public companies beginning with the quarter ending March 31, 2018. One of the criterions in identifying a contract with a customer is whether it is probable that an entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. This ASU clarifies that the objective of this assessment is to determine whether a contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services that will be transferred to the customer. A new criterion was also added in this ASU to clarify when revenue would be recognized for a contract that fails to meet certain criteria. This would allow an entity to recognize revenue in the amount of consideration received when the entity has transferred control of the goods or services, the entity has stopped transferring goods or services (if applicable) and has no obligation under the contract to transfer additional goods or services, and the consideration received from the customer is
14
nonrefundable. This ASU also clarifies that the measurement date for any n
oncash consideration is contract inception. This ASU also clarifies some of the transition guidance.
Based on our revenue types, we
do not believe that this ASU will have a material impact on our financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. The scope excludes financial assets measured at fair value through net income, available-for-sale securities, loans made to participants by defined contribution employee benefit plans, policy loan receivables of an insurance company, pledge receivables of a not-for-profit entity, and receivables between entities under common control. This ASU will require entities to immediately record the full amount of credit losses that are expected in their loan portfolios and to re-evaluate at each reporting period. The income statement will reflect the credit loss provision (or expense) necessary to adjust the allowance estimate since the previous reporting date. The expected credit loss estimate should consider available information relevant to assessing the collectability of contractual cash flows including information about past events (i.e. historical loss experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU will become effective for public entities beginning with the quarter ending March 31, 2020. Although, at this time, we are not able to measure the impact that this ASU will have on our financial statements, we believe that when implemented, while not having a significant impact on the losses incurred over the life of the loans, it is likely that credit losses will be recognized through the allowance account sooner than previously required.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on the following eight specific cash flow issues where there is currently either no guidance or the guidance is unclear: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash Flows and Application of the Predominance Principle. This ASU will become effective for all public entities beginning with the quarter ending March 31, 2018. We do not believe that this ASU will have a material impact on our financial statements.
In October 2016, the FASB issued ASU 2016-17, “Interests Held Through Related Parties That Are under Common Control, Consolidation (Topic 810).” A single decision maker of a VIE is required to consider indirect economic interest in the entity held through related parties on a proportionate basis when determining whether it is the primary beneficiary of that VIE unless the single decision maker and its related parties are under common control. If a single decision maker and its related parties are under common control, the single decision maker is required to consider indirect interests in the entity held through those related parties to be the equivalent of direct interests in their entirety. This ASU amends how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and therefore consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. This ASU became effective for public entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash, Statement of Cash Flows (Topic 230).” Currently, diversity exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU will be effective for public entities beginning with the quarter ending March 31, 2018. While this ASU will affect the presentation of restricted cash and the related cash inflows and cash outflows on our statement of cash flows, we do not believe this ASU will have a material impact on our financial statements.
In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2014-09. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09), which begins with the quarter ending March 31, 2018.
Based on our revenue types, we
do not believe this ASU will have a material impact on our financial statements.
15
On January 5, 2017, the FASB issued ASU 2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business
.
” The definition of a business affects many areas of accounting including acqu
isitions, disposals, goodwill
,
and consolidations. This ASU is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by establishing a more robust framework to use in this de
termination. This ASU is effective for public companies beginning with the quarter end
ing
March 31, 2018. We do not believe this ASU will have a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investment-Equity Method and Joint Ventures (Topic 323).” This ASU applies to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”; ASU 2016-02, “Leases (Topic 842)”; and ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU relates to a SEC Staff Announcement that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M.) Consistent with Topic 11.M, if a registrant does not know, or cannot reasonably estimate, the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then, in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The part of this ASU that relates to Topic 323 does not apply to the company as it relates to the accounting for investments in qualified affordable housing projects, which our Company does not have any such projects. This ASU not only applies immediately to the disclosures of the ASUs listed above, but also applies to any subsequent amendments to guidance in the ASUs that are issued prior to a registrant’s adoption of the aforementioned ASUs. We do not believe that this ASU will have a material impact on our financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This ASU will become effective for companies beginning with the quarter ending March 31, 2019. We do not believe that this ASU will have a material impact on our financial statements.
NOTE 2. RESTRICTED CASH
This includes cash pledged as collateral for interest rate swaps. The following represents the Company’s restricted cash balances at March 31, 2017 and December 31, 2016 (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted cash - swap margin calls
|
|
$
|
9,211
|
|
|
$
|
12,390
|
|
NOTE 3. MORTGAGE-BACKED SECURITIES
The following tables summarize our Agency MBS and Non-Agency MBS at March 31, 2017 and December 31, 2016, which are carried at their fair value (in thousands):
March 31, 2017
By Agency
|
|
Freddie Mac
|
|
|
Fannie Mae
|
|
|
Total
Agency MBS
|
|
|
Non-Agency
MBS
|
|
|
Total
MBS
|
|
Amortized cost
|
|
$
|
1,619,602
|
|
|
$
|
2,020,036
|
|
|
$
|
3,639,638
|
|
|
$
|
728,222
|
|
|
$
|
4,367,860
|
|
Paydowns receivable
(2)(3)
|
|
|
17,070
|
|
|
|
-
|
|
|
|
17,070
|
|
|
|
-
|
|
|
|
17,070
|
|
Unrealized gains
|
|
|
9,671
|
|
|
|
32,949
|
|
|
|
42,620
|
|
|
|
18,886
|
|
|
|
61,506
|
|
Unrealized losses
|
|
|
(17,847
|
)
|
|
|
(10,701
|
)
|
|
|
(28,548
|
)
|
|
|
(7,598
|
)
|
|
|
(36,146
|
)
|
Fair value
|
|
$
|
1,628,496
|
|
|
$
|
2,042,284
|
|
|
$
|
3,670,780
|
|
|
$
|
739,510
|
|
|
$
|
4,410,290
|
|
16
By Security Type
|
|
ARMs
|
|
|
Hybrids
|
|
|
15-Year
Fixed-Rate
(1)
|
|
|
20-Year
and
30-Year
Fixed-Rate
|
|
|
Total
Agency MBS
|
|
|
Non-Agency
MBS
|
|
|
Total
MBS
|
|
Amortized cost
|
|
$
|
1,605,131
|
|
|
$
|
1,058,528
|
|
|
$
|
842,683
|
|
|
$
|
133,296
|
|
|
$
|
3,639,638
|
|
|
$
|
728,222
|
|
|
$
|
4,367,860
|
|
Paydowns receivable
(2)(3)
|
|
|
10,607
|
|
|
|
6,463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,070
|
|
|
|
-
|
|
|
|
17,070
|
|
Unrealized gains
|
|
|
36,242
|
|
|
|
1,427
|
|
|
|
1,099
|
|
|
|
3,852
|
|
|
|
42,620
|
|
|
|
18,886
|
|
|
|
61,506
|
|
Unrealized losses
|
|
|
(2,278
|
)
|
|
|
(8,349
|
)
|
|
|
(17,895
|
)
|
|
|
(26
|
)
|
|
|
(28,548
|
)
|
|
|
(7,598
|
)
|
|
|
(36,146
|
)
|
Fair value
|
|
$
|
1,649,702
|
|
|
$
|
1,058,069
|
|
|
$
|
825,887
|
|
|
$
|
137,122
|
|
|
$
|
3,670,780
|
|
|
$
|
739,510
|
|
|
$
|
4,410,290
|
|
(1)
|
Included in the fair value of the 15-year fixed-rate Agency MBS was approximately $471.9 million held as trading investments.
|
(2)
|
Paydowns receivable on Agency MBS are generated when the Company receives notice from Freddie Mac of prepayments but does not receive the actual cash with respect to such prepayments until the 15
th
day of the following month.
|
(3)
|
Paydowns receivable on Non-Agency MBS represent when the Company receives notice of prepayments but does not receive the actual cash until the following month.
|
During the three months ended March 31, 2017, we sold approximately $8.2 million of Agency MBS and realized gross losses of approximately $68 thousand. During the three months ended March 31, 2016, we sold approximately $317 million of Agency MBS and realized gross losses of approximately $3.4 million and realized gross gains of approximately $0.2 million.
During the three months ended March 31, 2017, we had gross unrealized gains on trading investments of $122 thousand. At March 31, 2017, the cumulative amount of gross unrealized losses outstanding on trading investments was $13.7 million. We did not have any trading investments during the three months ended March 31, 2016.
December 31, 2016
By Agency
|
|
|
|
Ginnie Mae
|
|
|
Freddie Mac
|
|
|
Fannie Mae
|
|
|
Total
Agency MBS
|
|
|
Non-Agency
MBS
|
|
|
Total
MBS
|
|
Amortized cost
|
|
|
|
$
|
8,601
|
|
|
$
|
1,709,839
|
|
|
$
|
2,164,171
|
|
|
$
|
3,882,611
|
|
|
$
|
639,703
|
|
|
$
|
4,522,314
|
|
Paydowns receivable
(1)(2)
|
|
|
|
|
-
|
|
|
|
31,130
|
|
|
|
-
|
|
|
|
31,130
|
|
|
|
6
|
|
|
|
31,136
|
|
Unrealized gains
|
|
|
|
|
3
|
|
|
|
10,652
|
|
|
|
36,069
|
|
|
|
46,724
|
|
|
|
11,999
|
|
|
|
58,723
|
|
Unrealized losses
|
|
|
|
|
(130
|
)
|
|
|
(22,301
|
)
|
|
|
(12,841
|
)
|
|
|
(35,272
|
)
|
|
|
(10,462
|
)
|
|
|
(45,734
|
)
|
Fair value
|
|
|
|
$
|
8,474
|
|
|
$
|
1,729,320
|
|
|
$
|
2,187,399
|
|
|
$
|
3,925,193
|
|
|
$
|
641,246
|
|
|
$
|
4,566,439
|
|
By Security Type
|
|
ARMs
|
|
|
Hybrids
|
|
|
15-Year
Fixed-Rate
(1)
|
|
|
20-Year
and
30-Year
Fixed-Rate
|
|
|
Total
Agency MBS
|
|
|
Non-Agency
MBS
|
|
|
Total
MBS
|
|
Amortized cost
|
|
$
|
1,762,550
|
|
|
$
|
1,106,680
|
|
|
$
|
872,741
|
|
|
$
|
140,640
|
|
|
$
|
3,882,611
|
|
|
$
|
639,703
|
|
|
$
|
4,522,314
|
|
Paydowns receivable
(2)(3)
|
|
|
16,164
|
|
|
|
14,966
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,130
|
|
|
|
6
|
|
|
|
31,136
|
|
Unrealized gains
|
|
|
40,066
|
|
|
|
1,096
|
|
|
|
1,142
|
|
|
|
4,420
|
|
|
|
46,724
|
|
|
|
11,999
|
|
|
|
58,723
|
|
Unrealized losses
|
|
|
(3,162
|
)
|
|
|
(12,156
|
)
|
|
|
(19,927
|
)
|
|
|
(27
|
)
|
|
|
(35,272
|
)
|
|
|
(10,462
|
)
|
|
|
(45,734
|
)
|
Fair value
|
|
$
|
1,815,618
|
|
|
$
|
1,110,586
|
|
|
$
|
853,956
|
|
|
$
|
145,033
|
|
|
$
|
3,925,193
|
|
|
$
|
641,246
|
|
|
$
|
4,566,439
|
|
(1)
|
Included in the fair value of the 15-year fixed-rate Agency MBS was approximately $483.2 million held as trading investments.
|
(2)
|
Paydowns receivable on Agency MBS are generated when the Company receives notice from Freddie Mac of prepayments but does not receive the actual cash with respect to such prepayments until the 15
th
day of the following month.
|
(3)
|
Paydowns receivable on Non-Agency MBS represent when the Company receives notice of prepayments but does not receive the actual cash until the following month.
|
The following table presents information regarding the estimates of the contractually required principal payments, cash flows expected to be collected, and estimated fair value of the Non-Agency MBS held at carrying value acquired by the Company for the three months ended March 31, 2017 and cumulatively at March 31, 2017 and December 31, 2016:
17
|
|
Change During the
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
At
|
|
|
At
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Non-Agency MBS acquired with credit deterioration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractually required principal
|
|
$
|
113,401
|
|
|
$
|
712,680
|
|
|
$
|
599,279
|
|
Contractual principal not expected to be collected (non-accretable yield)
|
|
|
(54,075
|
)
|
|
|
(277,366
|
)
|
|
|
(223,291
|
)
|
Expected cash flows to be collected
|
|
|
59,326
|
|
|
|
435,314
|
|
|
|
375,988
|
|
Market yield adjustment
|
|
|
36,522
|
|
|
|
120,099
|
|
|
|
83,577
|
|
Unrealized gain, net
|
|
|
7,095
|
|
|
|
10,695
|
|
|
|
3,600
|
|
Fair value
|
|
|
102,943
|
|
|
|
566,108
|
|
|
|
463,165
|
|
Fair value of other Non-Agency MBS (without credit deterioration)
|
|
|
(4,679
|
)
|
|
|
173,402
|
|
|
|
178,081
|
|
Total fair value of Non-Agency MBS
|
|
$
|
98,264
|
|
|
$
|
739,510
|
|
|
$
|
641,246
|
|
The following table presents the change for the three months ended March 31, 2017 of the components of the Company’s purchase discount on the Non-Agency MBS acquired with credit deterioration between the amount designated as the market yield adjustment and the non-accretable difference:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
|
Market Yield
|
|
|
Non-
|
|
|
|
Adjustment
|
|
|
Accretable
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$
|
83,577
|
|
|
$
|
(223,291
|
)
|
Accretion of discount
|
|
|
(1,116
|
)
|
|
|
-
|
|
Purchases
|
|
|
37,638
|
|
|
|
(59,567
|
)
|
Realized credit losses, net of recoveries
|
|
|
-
|
|
|
|
6,224
|
|
Impairment charge
|
|
|
-
|
|
|
|
(732
|
)
|
Balance, end of period
|
|
$
|
120,099
|
|
|
$
|
(277,366
|
)
|
NOTE 4. VARIABLE INTEREST ENTITIES
As discussed in Note 1, “Summary of Significant Accounting Policies,” we have determined that we are the primary beneficiary of certain securitization trusts. The following table presents a summary of the assets and liabilities of our consolidated securitization trusts as of March 31, 2017 and December 31, 2016.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Residential mortgage loans held-for-investment
|
|
$
|
723,777
|
|
|
$
|
744,462
|
|
Accrued interest receivable
|
|
|
2,364
|
|
|
|
2,468
|
|
Total assets
|
|
$
|
726,141
|
|
|
$
|
746,930
|
|
Accrued interest payable
|
|
$
|
2,317
|
|
|
$
|
2,399
|
|
Asset-backed securities issued by securitization trusts
|
|
|
714,409
|
|
|
|
728,683
|
|
Total liabilities
|
|
$
|
716,726
|
|
|
$
|
731,082
|
|
Our risk with respect to each investment in a securitization trust is limited to our direct ownership in the securitization trust. We own the most subordinated classes on all of the trusts. The residential mortgage loans held by the consolidated securitization trusts are held solely to satisfy the liabilities of the securitization trusts, and the investors in the securitization trusts have no recourse to the general credit of the Company for the ABS issued by the securitization trusts. The assets of a consolidated securitization trust can only be used to satisfy the obligations of that trust. ABS are not paid down according to any schedule but rather as payments are made on the underlying mortgages. The final distribution dates for the three trusts are all at various dates in 2045. We are not contractually required and have not provided any additional financial support to the securitization trusts for the period ended March 31, 2017.
18
Residential Mortgage Loans Held by
Consolidated Securitization Trusts
Residential mortgage loans held by consolidated securitization trusts are carried at unpaid principal balances net of any premiums or discounts and allowances for loan losses. The residential mortgage loans are secured by first liens on the underlying residential properties. During the three months ended March 31, 2017, we sold our investments in the B-4 tranches on two of the securitization trusts. As we still retain the most subordinated tranches in these trusts, we continue to be the primary beneficiary of these trusts and believe that we are still required to consolidate these trusts. We recorded a gross gain on the sale of these investments of approximately $378 thousand.
The following table details the carrying value for residential mortgage
loans held-for-investment at March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Principal balance
|
|
$
|
716,784
|
|
|
$
|
736,788
|
|
Unamortized premium, net of discount
|
|
|
7,196
|
|
|
|
7,877
|
|
Allowance for loan losses
|
|
|
(203
|
)
|
|
|
(203
|
)
|
Carrying value
|
|
$
|
723,777
|
|
|
$
|
744,462
|
|
The following table provides a reconciliation of the carrying value of residential mortgage loans held-for-investment at March 31, 2017 and December 31, 2016:
|
|
Three Months
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
744,462
|
|
|
$
|
969,172
|
|
Deductions during period:
|
|
|
|
|
|
|
|
|
Collections of principal
|
|
|
(20,004
|
)
|
|
|
(221,615
|
)
|
Amortization of premium
|
|
|
(681
|
)
|
|
|
(3,095
|
)
|
Balance at end of period
|
|
$
|
723,777
|
|
|
$
|
744,462
|
|
The following table details various portfolio characteristics of the residential mortgage loans held-for-investment at March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(dollar amounts in thousands)
|
|
Portfolio Characteristics:
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,030
|
|
|
|
1,052
|
|
Current principal balance
|
|
$
|
716,784
|
|
|
$
|
736,788
|
|
Average loan balance
|
|
$
|
696
|
|
|
$
|
700
|
|
Net weighted average coupon rate
|
|
|
3.86
|
%
|
|
|
3.86
|
%
|
Weighted average maturity (years)
|
|
|
27.0
|
|
|
|
27.3
|
|
Weighted average FICO score
|
|
|
761
|
|
|
|
764
|
|
Current Performance:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
711,522
|
|
|
$
|
735,487
|
|
30 days delinquent
|
|
|
3,139
|
|
|
|
1,301
|
|
60 days delinquent
|
|
|
1,310
|
|
|
|
-
|
|
90+ days delinquent
|
|
|
813
|
|
|
|
-
|
|
Bankruptcy/foreclosure
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
716,784
|
|
|
$
|
736,788
|
|
19
The following table summarizes the geographic concentrations of residential
mortgage
loans held-for-investment at
March 31, 2017
and December 31, 2016 based on principal balance outstanding:
|
|
March 31,
|
|
|
December 31,
|
|
State
|
|
2017
|
|
|
2016
|
|
|
|
(Percent)
|
|
California
|
|
|
44.6
|
%
|
|
|
42.9
|
%
|
Florida
|
|
|
6.3
|
|
|
|
8.4
|
|
Other states (none greater than 5%)
|
|
|
49.1
|
|
|
|
48.7
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Allowance for Loan Losses on Residential Mortgage Loans Held by Consolidated Securitization Trusts
As discussed in Note 1, “Summary of Significant Accounting Policies,” the Company establishes and maintains an allowance for loan losses on residential mortgage
loans held by consolidated securitization trusts based on the Company’s estimate of credit losses.
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2017 and for the year ended December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
203
|
|
|
$
|
203
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
-
|
|
Charge-offs, net
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
203
|
|
|
$
|
203
|
|
Asset-Backed Securities Issued by Securitization Trusts
Asset-backed securities issued by securitization trusts are recorded at principal balances net of unamortized premiums and discounts. Asset-backed securities issued by securitization trusts are issued in various tranches and have a principal balance of $714.4 million at March 31, 2017 and $728.7 million at December 31, 2016. The investors in the asset-backed securities are not affiliated with the Company and have no recourse to the general credit of the Company.
NOTE 5. RESIDENTIAL PROPERTIES
At March 31, 2017, we owned 88 single-family residential properties which are all located in Southeastern Florida and are carried at a total cost, net of accumulated depreciation, of approximately $14.2 million. At December 31, 2016, we owned 88 properties at a net cost of approximately $14.3 million. The income from these properties is included in our consolidated statements of operations as “Income on rental properties.” The expenses on these properties are included in our consolidated statements of operations in “Other expense” and the details are included in Note 16.
NOTE 6. REPURCHASE AGREEMENTS
We have entered into repurchase agreements with large financial institutions to finance most of our MBS. The repurchase agreements are short-term borrowings that are secured by the market value of our MBS and bear fixed interest rates that have historically been based upon LIBOR. For additional information about repurchase agreements, see the section in Note 1 entitled “Repurchase Agreements.”
At March 31, 2017 and December 31, 2016, the repurchase agreements had the following balances (dollar amounts in thousands), weighted average interest rates and remaining weighted average maturities:
20
March 31, 2017
|
|
Agency MBS
|
|
|
Non-Agency MBS
|
|
|
Total MBS
|
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
Overnight
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Less than 30 days
|
|
|
1,445,000
|
|
|
|
0.91
|
|
|
|
459,382
|
|
|
|
2.45
|
|
|
|
1,904,382
|
|
|
|
1.28
|
|
30 days to 90 days
|
|
|
1,850,000
|
|
|
|
0.96
|
|
|
|
10,935
|
|
|
|
2.48
|
|
|
|
1,860,935
|
|
|
|
0.97
|
|
Over 90 days
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Demand
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
3,295,000
|
|
|
|
0.94
|
%
|
|
$
|
470,317
|
|
|
|
2.45
|
%
|
|
$
|
3,765,317
|
|
|
|
1.13
|
%
|
Weighted average maturity
|
|
40 days
|
|
|
|
|
|
|
17 days
|
|
|
|
|
|
|
37 days
|
|
|
|
|
|
Weighted average interest rate after adjusting for interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.34
|
%
|
|
|
|
|
Weighted average maturity after adjusting for interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465 days
|
|
|
|
|
|
MBS pledged as collateral under the repurchase agreements and interest rate swaps
|
|
$
|
3,508,865
|
|
|
|
|
|
|
$
|
613,001
|
|
|
|
|
|
|
$
|
4,121,866
|
|
|
|
|
|
December 31, 2016
|
|
Agency MBS
|
|
|
Non-Agency MBS
|
|
|
Total MBS
|
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
Overnight
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Less than 30 days
|
|
|
1,405,000
|
|
|
|
0.85
|
|
|
|
411,015
|
|
|
|
2.27
|
|
|
|
1,816,015
|
|
|
|
1.17
|
|
30 days to 90 days
|
|
|
2,095,000
|
|
|
|
0.92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,095,000
|
|
|
|
0.92
|
|
Over 90 days
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Demand
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
3,500,000
|
|
|
|
0.89
|
%
|
|
$
|
411,015
|
|
|
|
2.27
|
%
|
|
$
|
3,911,015
|
|
|
|
1.04
|
%
|
Weighted average maturity
|
|
39 days
|
|
|
|
|
|
|
17 days
|
|
|
|
|
|
|
37 days
|
|
|
|
|
|
Weighted average interest rate after adjusting for interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.31
|
%
|
|
|
|
|
Weighted average maturity after adjusting for interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488 days
|
|
|
|
|
|
MBS pledged as collateral under the repurchase agreements and interest rate swaps
|
|
$
|
3,707,062
|
|
|
|
|
|
|
$
|
525,169
|
|
|
|
|
|
|
$
|
4,232,231
|
|
|
|
|
|
The following tables present information about certain assets and liabilities that are subject to master netting arrangements (or similar agreements) only in the event of default on a contract. See Notes 1, 8, and 14 for more information on the Company’s interest rate swaps and other derivative instruments.
|
|
|
|
|
|
|
|
|
|
Net Amounts of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
|
|
Gross Amounts
|
|
|
|
|
|
|
or Liabilities
|
|
|
in the Balance Sheets
(1)
|
|
|
|
|
|
|
|
of Recognized
|
|
|
Gross Amounts
|
|
|
Presented in
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
March 31, 2017
|
|
Assets or
|
|
|
Offset in the
|
|
|
the Balance
|
|
|
Financial
|
|
|
Collateral
|
|
|
Net
|
|
(in thousands)
|
|
Liabilities
|
|
|
Balance Sheets
|
|
|
Sheets
|
|
|
Instruments
|
|
|
Received
|
|
|
Amounts
|
|
Derivative assets at fair value
(2)
|
|
$
|
13,075
|
|
|
$
|
-
|
|
|
$
|
13,075
|
|
|
$
|
(13,075
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
13,075
|
|
|
$
|
-
|
|
|
$
|
13,075
|
|
|
$
|
(13,075
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Repurchase agreements
(3)
|
|
$
|
3,765,317
|
|
|
$
|
-
|
|
|
$
|
3,765,317
|
|
|
$
|
(3,765,317
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative liabilities at fair value
(2)
|
|
|
18,793
|
|
|
-
|
|
|
|
18,793
|
|
|
|
(18,793
|
)
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
3,784,110
|
|
|
$
|
-
|
|
|
$
|
3,784,110
|
|
|
$
|
(3,784,110
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
21
|
|
|
|
|
|
|
|
|
|
Net Amounts of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
|
|
Gross Amounts
|
|
|
|
|
|
|
or Liabilities
|
|
|
in the Balance Sheets
(1)
|
|
|
|
|
|
|
|
of Recognized
|
|
|
Gross Amounts
|
|
|
Presented in
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
December 31, 2016
|
|
Assets or
|
|
|
Offset in the
|
|
|
the Balance
|
|
|
Financial
|
|
|
Collateral
|
|
|
Net
|
|
(in thousands)
|
|
Liabilities
|
|
|
Balance Sheets
|
|
|
Sheets
|
|
|
Instruments
|
|
|
Received
|
|
|
Amounts
|
|
Derivative assets at fair value
(2)
|
|
$
|
8,192
|
|
|
$
|
-
|
|
|
$
|
8,192
|
|
|
$
|
(8,192
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
8,192
|
|
|
$
|
-
|
|
|
$
|
8,192
|
|
|
$
|
(8,192
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Repurchase agreements
(3
)
|
|
$
|
3,911,015
|
|
|
$
|
-
|
|
|
$
|
3,911,015
|
|
|
$
|
(3,911,015
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative liabilities at fair value
(2)
|
|
|
34,302
|
|
|
-
|
|
|
|
34,302
|
|
|
|
(34,302
|
)
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
3,945,317
|
|
|
$
|
-
|
|
|
$
|
3,945,317
|
|
|
$
|
(3,945,317
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Amounts presented are limited to collateral pledged sufficient to reduce the related net amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.
|
(2)
|
At March 31, 2017, we had pledged approximately $20.2 million in Agency MBS as collateral and paid another approximately $9.2 million on swap margin calls (included in “Restricted cash”) on our swap derivatives, which were approximately $8.7 million in derivative assets and approximately $18.5 million in derivative liabilities at March 31, 2017. At December 31, 2016, we had pledged approximately $22.1 million in Agency MBS as collateral and paid another approximately $12.4 million on swap margin calls on our swap derivatives, which were approximately $7.7 million in derivative assets and approximately $21 million in derivative liabilities at December 31, 2016.
|
(3)
|
At March 31, 2017, we had pledged approximately $3.51 billion in Agency MBS and approximately $613 million in Non-Agency MBS as collateral on our repurchase agreements. At December 31, 2016, we had pledged $3.7 billion in Agency MBS and approximately $525.2 million in Non-Agency MBS as collateral on our repurchase agreements.
|
NOTE 7. JUNIOR SUBORDINATED NOTES
On March 15, 2005, we issued $37,380,000 of junior subordinated notes to a newly-formed statutory trust, Anworth Capital Trust I, organized by us under Delaware law. The trust issued $36,250,000 in trust preferred securities to unrelated third party investors. Both the notes and the trust preferred securities require quarterly payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. The first interest payments were made on June 30, 2005. Both the notes and the trust preferred securities will mature in 2035 and are currently redeemable, at our option, in whole or in part, without penalty. We used the net proceeds of this private placement to invest in Agency MBS. We have reviewed the structure of the transaction under ASC 810-10 and concluded that Anworth Capital Trust I does not meet the requirements for consolidation. As of the date of this filing, we have not redeemed any of the notes or trust preferred securities.
NOTE 8. FAIR VALUES OF FINANCIAL INSTRUMENTS
As defined in ASC 820-10, fair value is the price that would be received from the sale of an asset or paid to transfer or settle a liability in an orderly transaction between market participants in the principal (or most advantageous) market for the asset or liability. ASC 820-10 establishes a fair value hierarchy that ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the three following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. This includes those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace. The valuation techniques, including the judgments or assumptions that are used by us in arriving at the fair value of our MBS and derivative instruments, are as follows:
The fair values for Agency MBS and TBA Agency MBS are based primarily on independent broker pricing quotes and independent third-party pricing service quotes, which are deemed indicative of market activity. The brokers and third-party pricing services use commonly used market pricing methodology that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, loan age, collateral type, periodic and life cap, geography, and prepayment speeds. We evaluate the pricing information we receive taking into account factors such as coupon, prepayment experience, fixed/adjustable rate, coupon index, time to reset, and issuing agency, among other factors. Based on these factors and our market knowledge and expertise, bond prices are compared to prices of similar securities and our own observations of trading activity in the marketplace.
22
The fair values for Non-Agency MBS are based primarily on prices from independent well-known major financial brokers that make markets in these instruments and pricing from independent pricing services. We u
nderstand that these market participants use pricing models that not only consider the characteristics of the type of security and its underlying collateral from observable market data but also consider the historical performance data of the underlying col
lateral of the security, including loan delinquency, loan losses
,
and credit enhancement. To validate the prices the Company obtains, we consider and review a number of observable market data points including trading activity in the marketplace, and curren
t market intelligence on all major markets, including benchmark security evaluations and bid list results from various sources. We compare the prices received from brokers against the prices received from pricing services and vice-versa and also against ou
r own internal models for reasonableness and make inquiries to the brokers and pricing services about the prices received from these parties and their methods.
For derivative instruments, the fair value is determined as follows: For all centrally cleared interest rate swaps (those entered into after September 9, 2013) pricing is provided by the central counterparty (large central clearing exchanges such as the Chicago Mercantile Exchange (which we refer to as the “CME”), and LCH). These entities use pricing models that reference the underlying rates including the overnight index swap rate and LIBOR forward rate to produce the daily settlement price. For all non-centrally cleared interest rate swaps, we obtain the pricing from independent dealers who are large financial institutions and are market makers for these types of instruments. These market participants use pricing models that incorporate the LIBOR interest swap rate curve and the overnight index swap rate. To validate the prices for all interest rate swaps, we compare to other sources such as Bloomberg. For Eurodollar futures, the pricing information is obtained from the end of business day quotation which is also provided through a central counterparty (CME).
Our MBS are valued using various market data points as described above, which management considers to be directly or indirectly observable parameters. Accordingly, our MBS are classified as Level 2 in the fair value hierarchy.
Level 3: Unobservable inputs that are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources.
In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.
At March 31, 2017, fair value measurements on a recurring basis were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
(1)
|
|
$
|
-
|
|
|
$
|
3,670,780
|
|
|
$
|
-
|
|
|
$
|
3,670,780
|
|
Non-Agency MBS
(1)
|
|
$
|
-
|
|
|
$
|
739,510
|
|
|
$
|
-
|
|
|
$
|
739,510
|
|
Derivative instruments
(2)
|
|
$
|
-
|
|
|
$
|
13,075
|
|
|
$
|
-
|
|
|
$
|
13,075
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
(2)
|
|
$
|
-
|
|
|
$
|
18,793
|
|
|
$
|
-
|
|
|
$
|
18,793
|
|
(1)
|
For more detail about the fair value of our MBS by agency and type of security, see Note 3.
|
(2)
|
Derivative instruments include discontinued hedges under ASC 815-10. For more detail about our derivative instruments, see Note 1 and Note 14.
|
At December 31, 2016, fair value measurements on a recurring basis were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
(1)
|
|
$
|
-
|
|
|
$
|
3,925,193
|
|
|
$
|
-
|
|
|
$
|
3,925,193
|
|
Non-Agency MBS
(1)
|
|
$
|
-
|
|
|
$
|
641,246
|
|
|
$
|
-
|
|
|
$
|
641,246
|
|
Derivative instruments
(2)
|
|
$
|
-
|
|
|
$
|
8,192
|
|
|
$
|
-
|
|
|
$
|
8,192
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
(2)
|
|
$
|
-
|
|
|
$
|
34,302
|
|
|
$
|
-
|
|
|
$
|
34,302
|
|
(1)
|
For more detail about the fair value of our MBS by agency and type of security, see Note 3.
|
(2)
|
Derivative instruments include discontinued hedges under ASC 815-10. For more detail about our derivative instruments, see Note 1 and Note 14.
|
23
At
March 31, 2017
and December 31, 2016, cash and cash equivalents, restricted cash, escrow deposits, interest receivable, repurchase agreements and interest payable are reflected in our consolidated financial statements at cost, which approximate fair value because of the
nature and short term of these instruments.
Junior subordinated notes are variable-rate debt and, as we believe the spread would be consistent with the expectations of market participants as of March 31, 2017 and December 31, 2016, the carrying value approximates fair value.
The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets at March 31, 2017 and December 31, 2016 (dollar amounts in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held-for-investment
|
|
$
|
723,777
|
|
|
$
|
721,142
|
|
|
$
|
744,462
|
|
|
$
|
733,759
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by securitization trusts
|
|
$
|
714,409
|
|
|
$
|
711,708
|
|
|
$
|
728,683
|
|
|
$
|
718,008
|
|
The residential mortgage loans held-for-investment are carried at unpaid principal balances net of any premiums or discounts and allowances for loan losses. Asset-backed securities issued by securitization trusts are carried at principal balances net of unamortized premiums or discounts. For both of these items, fair values are obtained by an independent broker and are considered Level 2 in the fair value hierarchy.
NOTE 9. INCOME TAXES
We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto. Accordingly, we will not be subject to federal or state income taxes to the extent that our distributions to stockholders satisfy the REIT requirements and that certain asset, gross income and stock ownership tests are met. We believe that we currently meet all REIT requirements regarding these tests. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.
NOTE 10. SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
Our Series B Preferred Stock has a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The holders of our Series B Preferred Stock must receive dividends at a rate of 6.25% per year on the $25.00 liquidation preference before holders of our common stock are entitled to receive any dividends. Our Series B Preferred Stock is senior to our common stock and on parity with our 8.625% Series A Cumulative Preferred Stock (which we refer to as “Series A Preferred Stock”) and our 7.625% Series C Cumulative Redeemable Preferred Stock (which we refer to as “Series C Preferred Stock”) with respect to the payment of distributions and amounts, upon liquidation, dissolution or winding up. So long as any shares of our Series B Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of our Series B Preferred Stock outstanding at the time, authorize or create, or increase the authorized or issued amount of, any class or series of capital stock ranking senior to our Series B Preferred Stock with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding-up.
Our Series B Preferred Stock has no maturity date, is not redeemable and is convertible at the then-current conversion rate into shares of our common stock per $25.00 liquidation preference. The conversion rate is adjusted in any fiscal quarter in which the cash dividends paid to common stockholders results in an annualized common stock dividend yield that is greater than 6.25%. The conversion ratio is also subject to adjustment upon the occurrence of certain specific events, such as a change in control. Our Series B Preferred Stock is convertible into shares of our common stock at the option of the holder(s) of Series B Preferred Stock at any time at the then-prevailing conversion rate. On or after January 25, 2012, we may, at our option, under certain circumstances, convert each share of Series B Preferred Stock into a number of shares of our common stock at the then-prevailing conversion rate. We may exercise this conversion option only if our common stock price equals or exceeds 130% of the then-prevailing conversion price of our Series B Preferred Stock for at least twenty (20) trading days in a period of thirty (30) consecutive trading days (including the last trading day of such period) ending on the trading day immediately prior to our issuance of a press release announcing the exercise of the conversion option. During the three months ended March 31, 2017, we did not, at our option, convert any shares of Series B Preferred Stock. Our Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem our Series B Preferred Stock for cash if certain events occur, such as a change in control. Our Series B Preferred Stock generally does not have voting rights, except if dividends on the Series B Preferred Stock are in arrears for six or more quarterly periods (whether or not consecutive). Under such circumstances, the holders of our Series B Preferred Stock, together with the holders of our Series A Preferred Stock and our Series C Preferred Stock, would be entitled to elect two additional directors to our Board to serve until all
24
unpaid dividends have been paid or declared and set aside for payment. In addition, certain material and adverse changes to the terms of our Series B Pre
ferred Stock may not be taken without the affirmative vote of at least two-thirds of the outstanding shares of Series B Preferred Stock, Series A Preferred Stock
,
and Series C Preferred Stock voting together as a single class. Through
March 31, 2017
, we have declared and set aside for payment the required dividends for our Series B Preferred Stock.
NOTE 11. PUBLIC OFFERINGS AND CAPITAL STOCK
At March 31, 2017, our authorized capital included 200,000,000 shares of common stock, of which 95,582,312 shares were issued and outstanding.
At March 31, 2017, our authorized capital included 20,000,000 shares of $0.01 par value preferred stock, of which 5,150,000 shares had been designated 8.625% Series A Cumulative Preferred Stock (liquidation preference $25.00 per share), 3,150,000 shares had been designated 6.25% Series B Cumulative Convertible Preferred Stock (liquidation preference $25.00 per share), and 5,000,000 shares had been designated 7.625% Series C Cumulative Redeemable Preferred Stock (liquidation preference $25.00 per share). The Series A Preferred Stock has no maturity date and we are not required to redeem it at any time. We may redeem the Series A Preferred Stock for cash, at our option, in whole or from time to time in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. To date, we have not redeemed any shares of our Series A Preferred Stock. The undesignated shares of preferred stock may be issued in one or more classes or series with such distinctive designations, rights, and preferences as determined by our Board. At March 31, 2017, there were 1,919,378 shares of Series A Preferred Stock issued and outstanding, 1,009,640 shares of Series B Preferred Stock issued and outstanding, and 683,361 shares of Series C Preferred Stock issued and outstanding.
On January 27, 2015, we completed a public offering of 300,000 shares of our Series C Preferred Stock at a public offering price of $24.50 per share and received net proceeds of approximately $7 million. The shares were sold pursuant to the Company’s effective shelf registration statement on Form S-3.The Series C Preferred Stock has no maturity date and is not subject to any sinking fund or mandatory redemption. On or after January 27, 2020, we may, at our option, redeem the Series C Preferred Stock for cash, in whole or from time to time in part, at a redemption price of $25.00 per share plus accrued and unpaid dividends, if any, to the redemption date.
On August 10, 2016, we entered into an At Market Issuance Sales Agreement (which we refer to as the “FBR Sales Agreement”) with FBR Capital Markets & Co. (which we refer to as “FBR”), pursuant to which we may offer and sell from time to time through FBR as our agent, up to $196,615,000 maximum aggregate amount of our common stock, Series B Preferred Stock, and Series C Preferred Stock, in such amounts as we may specify by notice to FBR, in accordance with the terms and conditions set forth in the FBR Sales Agreement. During the three months ended March 31, 2017, we sold an aggregate of 197,519 shares of our Series C Preferred Stock under the FBR Sales Agreement, which provided net proceeds to us of approximately $4.85 million. At March 31, 2017, there was approximately $190.5 million available for sale and issuance under the FBR Sales Agreement.
On October 3, 2011, we announced that our Board had authorized a share repurchase program which permits us to acquire up to 2,000,000 shares of our common stock. The shares are expected to be acquired at prevailing prices through open market transactions. The manner, price, number, and timing of share repurchases will be subject to market conditions and applicable rules of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). Our Board also authorized the Company to purchase an amount of our common stock up to the amount of common stock sold through our 2015 Dividend Reinvestment and Stock Purchase Plan. Subsequently, our Board authorized the Company to acquire an aggregate of an additional 45,000,000 shares (pursuant to six separate authorizations) between December 13, 2013 and January 22, 2016. During the three months ended March 31, 2017, we did not repurchase any shares of our common stock under our share repurchase program.
Our Dividend Reinvestment and Stock Purchase Plan allows stockholders and non-stockholders to purchase shares of our common stock and to reinvest dividends therefrom to acquire additional shares of our common stock. On March 13, 2015, we filed a shelf registration statement on Form S-3 with the SEC registering up to 16,397,203 shares of our common stock for our 2015 Dividend Reinvestment and Stock Purchase Plan (which we refer to as the “2015 DRP Plan”). During the three months ended March 31, 2017, we issued an aggregate of 61,272 shares of our common stock at a weighted average price of $5.23 per share under the 2015 DRP Plan, resulting in proceeds to us of approximately $320 thousand.
On August 5, 2014, we filed a registration statement on Form S-8 with the SEC to register an aggregate of up to 2,000,000 shares of our common stock to be issued pursuant to the Anworth Mortgage Asset Corporation 2014 Equity Compensation Plan (which we refer to as the “2014 Equity Plan”).
On April 1, 2016, we filed a shelf registration statement on Form S-3 with the SEC, offering up to $534,442,660 maximum offering price of our capital stock. This registration statement was declared effective on April 13, 2016. At March 31, 2017, approximately $528.3 million of our capital stock was available for future issuance under this registration statement.
25
NOTE 12. TRANSACTIONS WITH AFFILIATES
Management Agreement and Externalization
Effective as of December 31, 2011, we entered into the Management Agreement with our Manager, pursuant to which our day-to-day operations are being conducted by our Manager. Our Manager is supervised and directed by our Board and is responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services. Our Manager will also perform such other services and activities relating to our assets and operations as described in the Management Agreement. In exchange for services provided, our Manager receives a management fee, paid monthly in arrears, in an amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement).
On the effective date of the Management Agreement, the employment agreements with our executives were terminated, our employees became employees of our Manager, and we took such other actions as we believed were reasonably necessary to implement the Management Agreement and externalize our management function.
A trust controlled by Mr. Lloyd McAdams, our Chairman and Chief Executive Officer, and Ms. Heather U. Baines, an Executive Vice President of our Manager, beneficially owns 50% of the outstanding membership interests of our Manager; Mr. Joseph E. McAdams, our President and the Chief Investment Officer of our Manager, beneficially owns 45% of the outstanding membership interests of our Manager; and Mr. Thad M. Brown, our former Chief Financial Officer, beneficially owns 5% of the outstanding membership interests of our Manager.
The Management Agreement may only be terminated without cause, as defined in the agreement, after the expiration of any annual renewal term. We are required to provide 180-days’ prior notice of non-renewal of the Management Agreement and must pay a termination fee on the last day of any automatic renewal term equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. We may only not renew the Management Agreement with or without cause with the consent of the majority of our independent directors. These provisions make it difficult to terminate the Management Agreement and increase the effective cost to us of not renewing the Management Agreement.
Certain of our former officers were previously granted restricted stock and other equity awards (see Note 13), including dividend equivalent rights, in connection with their service to us, and certain of our former officers had agreements under which they would receive payments if the Company is subject to a change in control (discussed later in this Note 12). In connection with the Externalization, certain of the agreements under which our officers were granted equity awards and would be paid payments in the event of a change in control were modified so that such agreements will continue with respect to our former officers and employees after they became officers and employees of our Manager. In addition, as officers and employees of our Manager, they will continue to be eligible to receive equity awards under equity compensation plans in effect now or in the future.
Messrs. Lloyd McAdams, Joseph E. McAdams, Charles J. Siegel, John T. Hillman and Ms. Heather U. Baines and others are officers and employees of PIA Farmland, Inc. and its external manager, PIA, where they devote a portion of their time. PIA Farmland, Inc., a privately-held real estate investment trust investing in U.S. farmland properties to lease to independent farm operators, was incorporated in February 2013 and acquired its first farm property in October 2013. These officers and employees are under no contractual obligations to PIA Farmland, Inc., its external manager, PIA, or to Anworth or its external manager, Anworth Management LLC, as to their time commitment. Mr. Steven Koomar, the Chief Executive Officer of PIA Farmland, Inc., has no involvement with either Anworth or its external manager, Anworth Management LLC.
Change in Control and Arbitration Agreements
On June 27, 2006, we entered into Change in Control and Arbitration Agreements with Mr. Charles J. Siegel, our Chief Financial Officer, and with various officers of our Manager. These agreements provide that should a change in control (as defined in the agreements) occur, each of these officers will receive certain severance and other benefits valued as of December 31, 2011. Under these agreements, in the event that a change in control occurs, each of these officers will receive a lump sum payment equal to (i) 12 months annual base salary in effect on December 31, 2011, plus (ii) the average annual incentive compensation received for the two complete fiscal years prior December 31, 2011, plus (iii) the average annual bonus received for the two complete fiscal years prior to December 31, 2011, as well as other benefits. With respect to Mr. Brett Roth, a Senior Vice President and Portfolio Manager of our Manager, in the event that a change in control occurs, in addition to other benefits, he will receive a lump sum payment equal to (i) 12 months of the annual base salary (in effect on September 18, 2014) paid by our Manager plus (ii) $350,000. The Change in Control and Arbitration Agreements also provide for accelerated vesting of equity awards granted to these officers upon a change in control.
Agreements with Pacific Income Advisers, Inc.
On January 26, 2012, we entered into a sublease agreement that became effective on July 1, 2012 with PIA, a company owned by trusts controlled in part by Mr. Lloyd McAdams, our Chairman and Chief Executive Officer. Under the sublease agreement, we
26
lease, on a pass-through basis, 7,300 square feet of office space from PIA at the same location and pay rent at an annual rate equal to PIA’s obligation, which is currently $65.43 per square foot
. The base monthly rental for us is $39,807.17, which will be increased by 3% per annum on July 1, 2017. The sublease agreement runs through September 30, 2022 unless earlier terminated pursuant to the master lease. During the three months ended March 31,
2017 and 2016, we expensed $
12
6
thousand and $128 thousand, respectively, in rent and related expenses to PIA under this sublease agreement, which is included in “Other expenses” on our statements of operations.
At March 31, 2017, the future minimum lease commitment was as follows (in whole dollars):
Year
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
Commitment
|
|
Commitment
|
|
$
|
365,430
|
|
|
$
|
499,398
|
|
|
$
|
514,374
|
|
|
$
|
529,800
|
|
|
$
|
545,697
|
|
|
$
|
276,882
|
|
|
$
|
2,731,581
|
|
On July 25, 2008, we entered into an administrative services agreement with PIA, which was amended and restated on August 20, 2010. Under this agreement, PIA provides administrative services and equipment to us including human resources, operational support and information technology, and we pay an annual fee of 5 basis points on the first $225 million of stockholders’ equity and 1.00 basis point thereafter (paid quarterly in arrears) for those services. The administrative services agreement had an initial term of one year and renews for successive one-year terms thereafter unless either party gives notice of termination no less than 30 days before the expiration of the then-current annual term. We may also terminate the administrative services agreement upon 30 days prior written notice for any reason and immediately if there is a material breach by PIA. During the three months ended March 31, 2017 and 2016, we paid fees of $38 thousand and $39 thousand, respectively, to PIA in connection with this agreement.
NOTE 13. EQUITY COMPENSATION PLAN
2014 Equity Compensation Plan
At our 2014 annual meeting of stockholders held on May 22, 2014, our stockholders approved the adoption of the Anworth Mortgage Asset Corporation 2014 Equity Compensation Plan (
which we refer to as
the “2014 Equity Plan”), which replaced the Anworth Mortgage Asset Corporation 2004 Equity Compensation Plan (
which we refer to as
the “2004 Equity Plan”) due to its expiration. We filed a registration statement on Form S-8 on August 5, 2014 to register up to an aggregate of 2,000,000 shares of our common stock to be issued pursuant to the 2014 Equity Plan. The 2014 Equity Plan decreased the aggregate share reserve from 3,500,000 shares that were available under the 2004 Equity Plan to 2,000,000 shares of our registered common stock available under the 2014 Equity Plan. The 2014 Equity Plan authorizes our Board, or a committee of our Board, to grant dividend equivalent rights (
which we refer to as
“DERs”) or phantom shares, which qualify as performance-based awards under Section 162(m) of the Code. Unlike the 2004 Equity Plan, however, the 2014 Equity Plan does not provide for automatic increases in the aggregate share reserve or the number of shares remaining available for grant and only provides for the granting of DERs or phantom shares. During the three months ended March 31, 2017, we did not issue any equity-based awards under the 2014 Equity Plan.
Certain of our former officers have previously been granted restricted stock and other equity incentive awards, including DERs, in connection with their service to us. In connection with the Externalization, certain of the agreements under which our former officers have been granted equity awards were modified so that such agreements will continue with respect to our former officers after they became officers and employees of our Manager. As a result, these awards and any future grants will be accounted for as non-employee awards. In addition, as officers and employees of our Manager, they will continue to be eligible to receive equity incentive awards under equity incentive plans in effect now or in the future. In accordance with the Externalization effective December 31, 2011, the DERs previously granted to all of our officers, with the exception of our Chief Executive Officer, were terminated under the Anworth Mortgage Asset Corporation 2007 Dividend Equivalent Rights Plan (
which we refer to as
the “2007 DER Plan”) and were reissued under the 2014 Equity Plan with the same amounts, terms, and conditions. The 2004 Equity Plan was subsequently replaced by the 2014 Equity Plan. The DERs granted to our Chief Executive Officer are accounted for under the 2007 DER Plan.
In October 2006, our Board approved grants of an aggregate of 197,362 shares of performance-based restricted stock to various officers under the 2004 Equity Plan. Such grants were made effective on October 18, 2006. The closing stock price on the effective date of such grant was $9.12.
The shares subject to such grants were to vest in equal annual installments over a three-year period provided that the annually compounded rate of return on our common stock, including dividends, exceeded 12% measured on an annual basis as of the anniversary date of the grant. If the annually compounded rate of return did not exceed 12%, then the shares would vest on the anniversary date thereafter when the annually compounded rate of return exceeded 12%. If the annually compounded rate of return did not exceed 12% within ten years after the effective date of such grants, then the shares subject to such grants would not vest. Accordingly, these shares were terminated effective January 3, 2017.
In August 2016, we granted to various officers and employees an aggregate of 146,552 performance-based restricted stock units (or phantom shares) with no associated grants of DERs. During the period commencing on the day immediately following the three-
27
year
anniversary of the g
rant
d
at
e and ending on the ten-year anniversary of the
g
rant
d
ate, the restricted stock units
will
vest on the last day of any month when the total return to stockholders (meaning the aggregate of our common stock price appreciation and dividends declared, assumi
ng full reinvestment of such dividends) exceeds 10% per annum. During the period commencing on the
g
rant
d
ate and ending on the last day of the calendar month after the three-year anniversary of the
g
rant
d
ate, the restricted stock units will vest immediately upon the Grantee’s involuntary termination of service for any reason other than for
c
ause. The closing price of the Company’s common stock on the grant date was $4.96.
During the three months ended Marc
h 31, 2017, the amount expensed on
these
grant
s
was approximately $
2
0
thousand.
The unrecognized stock compensation expense at
March
31, 201
7
was approximately $
20
6
thousand.
During the three months ended March 31, 201
6
, the amount expensed related to prio
r grants was approximately $79 thousand.
Under the 2007 DER Plan and the 2014 Equity Plan, a DER is a right to receive amounts equal in value to the dividend distributions paid on a share of our common stock. DERs are paid in either cash or shares of our common stock, whichever is specified by our Compensation Committee at the time of grant, at such times as dividends are paid on shares of our common stock during the period between the date a DER is issued and the date the DER expires or earlier terminates. These DERs are not attached to any stock and only have the right to receive the same cash distribution per common share distributed to our common stockholders during the term of the grant. All of these grants have a five-year term from the date of the grant. During the three months ended March 31, 2017 and 2016, we paid or accrued $104 thousand and $101 thousand, respectively, related to DERs granted.
NOTE 14. DERIVATIVE INSTRUMENTS
The table below presents the fair value of our derivative instruments as well as their classification in our consolidated balance sheets as of March 31, 2017 and December 31, 2016:
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
2017
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
De-designated interest rate swaps
|
|
Derivative Assets
|
|
$
|
8,665
|
|
|
$
|
7,668
|
|
TBA Agency MBS
|
|
Derivative Assets
|
|
|
4,006
|
|
|
|
-
|
|
Eurodollar Futures Contracts
|
|
Derivative Assets
|
|
|
404
|
|
|
|
524
|
|
|
|
|
|
$
|
13,075
|
|
|
$
|
8,192
|
|
De-designated interest rate swaps
|
|
Derivative Liabilities
|
|
$
|
18,541
|
|
|
$
|
20,976
|
|
TBA Agency MBS
|
|
Derivative Liabilities
|
|
|
-
|
|
|
|
13,103
|
|
Eurodollar Futures Contracts
|
|
Derivative Liabilities
|
|
|
252
|
|
|
|
223
|
|
|
|
|
|
$
|
18,793
|
|
|
$
|
34,302
|
|
Interest Rate Swap Agreements
At March 31, 2017, we were a counterparty to interest rate swaps, which are derivative instruments as defined by ASC 815-10, with an aggregate notional amount of $1.671 billion and a weighted average maturity of approximately 34 months. We utilize interest rate swaps to manage interest rate risk relating to our repurchase agreements and do not anticipate entering into derivative transactions for speculative or trading purposes. In accordance with the swap agreements, we will pay a fixed-rate of interest during the term of the swap agreements (ranging from 0.722% to 3.06%) and receive a payment that varies with the three-month LIBOR rate.
During the three months ended March 31, 2017, we did not add any new interest rate swap agreements. During the three months ended March 31, 2017, one interest rate
swap with a notional amount of $100 million matured.
At March 31, 2017, the amount in AOCI relating to interest rate swaps was approximately $17.1 million. The estimated net amount of the existing losses that were reported in AOCI at March 31, 2017 that is expected to be reclassified into earnings within the next twelve months is approximately $2.5 million.
At March 31, 2017 and March 31, 2016, we had a gain on interest rate swaps of approximately $0.5 million and a loss of $50.2 million, respectively.
At March 31, 2017 and December 31, 2016, our interest rate swaps had the following notional amounts (dollar amounts in thousands), weighted average fixed rates and remaining terms (in months):
28
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Maturity
|
|
Notional
Amount
|
|
|
Weighted
Average
Fixed
Rate
|
|
|
Remaining
Term in
Months
|
|
|
Notional
Amount
|
|
|
Weighted
Average
Fixed
Rate
|
|
|
Remaining
Term in
Months
|
|
Less than 1 year
|
|
$
|
575,000
|
|
|
|
0.87
|
%
|
|
|
6
|
|
|
$
|
500,000
|
|
|
|
0.79
|
%
|
|
|
6
|
|
1 year to 2 years
|
|
|
235,000
|
|
|
|
0.98
|
|
|
|
15
|
|
|
|
410,000
|
|
|
|
0.96
|
|
|
|
16
|
|
2 years to 3 years
|
|
|
150,000
|
|
|
|
1.29
|
|
|
|
31
|
|
|
|
150,000
|
|
|
|
1.29
|
|
|
|
34
|
|
3 years to 4 years
|
|
|
166,000
|
|
|
|
1.45
|
|
|
|
43
|
|
|
|
166,000
|
|
|
|
1.45
|
|
|
|
46
|
|
4 years to 5 years
|
|
|
125,000
|
|
|
|
2.44
|
|
|
|
54
|
|
|
|
125,000
|
|
|
|
2.44
|
|
|
|
57
|
|
5 years to 7 years
|
|
|
420,000
|
|
|
|
2.73
|
|
|
|
72
|
|
|
|
420,000
|
|
|
|
2.73
|
|
|
|
75
|
|
|
|
$
|
1,671,000
|
|
|
|
1.56
|
%
|
|
|
34
|
|
|
$
|
1,771,000
|
|
|
|
1.51
|
%
|
|
|
34
|
|
Swap Agreements by Counterparty
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Chicago Mercantile Exchange
(1)
|
|
$
|
686,000
|
|
|
$
|
786,000
|
|
JPMorgan Securities
|
|
|
425,000
|
|
|
|
425,000
|
|
Deutsche Bank Securities
|
|
|
325,000
|
|
|
|
325,000
|
|
RBS Greenwich Capital
|
|
|
115,000
|
|
|
|
115,000
|
|
Nomura Securities International
|
|
|
100,000
|
|
|
|
100,000
|
|
Bank of New York
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
$
|
1,671,000
|
|
|
$
|
1,771,000
|
|
(1)
|
For all interest rate swap agreements entered into after September 9, 2013, the counterparty will be the Chicago Mercantile Exchange regardless of who the trading party is. See the section entitled “Derivative Financial Instruments – Interest Rate Risk Management” in Note 1 for additional details.
|
Eurodollar Futures Contracts
Each Eurodollar Futures Contract embodies $1 million of notional value and is effective for a term of approximately three months. We do not designate these contracts as hedges for accounting purposes. As a result, realized and unrealized changes in fair value are recognized in earnings in the period in which the changes occur.
At March 31, 2017, we had 550 Eurodollar Futures Contracts representing $550 million in notional amount. At December 31, 2016, we had 1,250 Eurodollar Futures Contracts representing $1.25 billion in notional amount. For the three months ended March 31, 2017, we had a gain on Eurodollar Futures Contracts of approximately $0.3 million. For the three months ended March 31, 2016, we had a gain on Eurodollar Futures Contracts of approximately $22 thousand.
TBA Agency MBS
We also enter into TBA contracts and will recognize a gain or loss on the sale of the contracts or dollar roll income. See the section in Note 1 on “Derivative Financial Instruments – TBA Agency MBS” for more information on TBA Agency MBS. During the three months ended March 31, 2017, we recognized a gain on derivatives-TBA Agency MBS (including derivative income) of approximately $1.6 million. During the three months ended March 31, 2016, we recognized a gain on derivatives-TBA Agency MBS (including derivative income) of approximately $15.4 million. The types of securities involved in these TBA contracts are Fannie Mae and Freddie Mac 15-year fixed-rate securities with coupons ranging from 2.5% to 3.0%. At March 31, 2017, the net notional amount of the TBA Agency MBS was approximately $605 million.
For more information on our accounting policies, the objectives and risk exposures relating to derivatives and hedging agreements, see the section on “Derivative Financial Instruments” in Note 1. For more information on the fair value of our swap agreements, see Note 8.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Lease Commitment and Administrative Services Commitment — We sublease office space and use administrative services from PIA as more fully described in Note 12.
29
NOTE 16. OTHER EXPENSES
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Legal and professional fees
|
|
$
|
180
|
|
|
$
|
168
|
|
Printing and stockholder communications
|
|
|
63
|
|
|
|
10
|
|
Directors and Officers insurance
|
|
|
125
|
|
|
|
129
|
|
DERs expense
|
|
|
104
|
|
|
|
101
|
|
Amortization of restricted stock
|
|
|
20
|
|
|
|
79
|
|
Software implementation and maintenance
|
|
|
121
|
|
|
|
187
|
|
Administrative service fees
|
|
|
38
|
|
|
|
39
|
|
Rent
|
|
|
126
|
|
|
|
128
|
|
Stock exchange and filing fees
|
|
|
40
|
|
|
|
48
|
|
Custodian and clearing fees
|
|
|
70
|
|
|
|
59
|
|
Sarbanes-Oxley consulting fees
|
|
|
30
|
|
|
|
30
|
|
Commissions - Eurodollar Futures Contracts
|
|
|
-
|
|
|
|
29
|
|
Board of directors fees and expenses
|
|
|
78
|
|
|
|
77
|
|
Securities data services
|
|
|
120
|
|
|
|
100
|
|
Leasing commissions on rental properties
|
|
|
15
|
|
|
|
16
|
|
Other expenses on rental properties
|
|
|
51
|
|
|
|
76
|
|
Depreciation expense on rental properties
|
|
|
115
|
|
|
|
112
|
|
Property insurance on rental properties
|
|
|
28
|
|
|
|
28
|
|
Management fee for rental properties
|
|
|
44
|
|
|
|
42
|
|
Property taxes on rental properties
|
|
|
77
|
|
|
|
77
|
|
Other
|
|
|
39
|
|
|
|
33
|
|
Total of other expenses
|
|
$
|
1,484
|
|
|
$
|
1,568
|
|
NOTE 17. SUBSEQUENT EVENTS
Effective April 3, 2017, the conversion rate of our Series B Preferred Stock increased from 4.7932 shares of our common stock to 4.8469 shares of our common stock based upon the common stock dividend of $0.15 that was declared on March 15, 2017.
From April 1, 2017 through May 3, 2017, we issued an aggregate of 49,286 shares of common stock at a weighted average price of $5.86 per share under our 2015 Dividend Reinvestment and Stock Purchase Plan, resulting in proceeds to us of approximately $289 thousand.
From April 1, 2017 through May 3, 2017, we issued an aggregate of 156,132 shares of Series C Preferred Stock at a weighted average price of $24.74 per share under the FBR Sales Agreement, resulting in net proceeds to us of approximately $3.8 million.