Anworth Mortgage Asset Corporation (NYSE: ANH) (the “Company” or “Anworth”) today reported its financial results for the fourth quarter ended December 31, 2018.

Earnings

The following table summarizes the Company’s core earnings, GAAP net loss to common stockholders, and comprehensive loss for the three months ended December 31, 2018:

  Three Months Ended

December 31, 2018

(unaudited) Earnings   Per

Weighted

Share

Core Earnings $ 10,704 $ 0.11 GAAP net loss to common stockholders $ (38,230 ) $ (0.39 ) Comprehensive loss $ (25,628 ) $ (0.27 )  

Core earnings is a non-GAAP financial measure, which is explained and reconciled to GAAP net loss to common stockholders in the section entitled “Non-GAAP Financial Measures Related to Operating Results” near the end of this earnings release. Comprehensive loss is shown on the consolidated statements of comprehensive income, which is included in this earnings release. Comprehensive loss consists of the net loss to all stockholders (including the amounts paid to preferred stockholders) and the change in other comprehensive income.

Portfolio

At December 31, 2018 and September 30, 2018, the composition of the Company’s portfolio at fair value was as follows:

  December 31, 2018   September 30, 2018 Dollar Amount   Percentage Dollar Amount   Percentage (unaudited) Agency MBS: ARMS and hybrid ARMs $ 1,547,405 26.6 % $ 1,676,433 28.2 % Fixed-rate Agency MBS 2,001,314 34.3 % 2,148,536 36.2 % TBA Agency MBS   906,016 15.6 %   756,470 12.7 % Total Agency MBS $ 4,454,735 76.5 % $ 4,581,439 77.1 % Non-Agency MBS 795,203 13.7 % 783,902 13.2 % Residential mortgage loans(1) 549,016 9.4 % 562,484 9.5 % Residential mortgage loans held-for-securitization 11,660 0.2 %

-

-

Residential real estate   13,782 0.2 %   13,905 0.2 % Total Portfolio $ 5,824,396 100.0 % $ 5,941,730 100.0 % Total Assets(2) $ 5,937,906 $ 6,050,034 ____________________ (1)     Residential mortgage loans owned by consolidated variable interest entities (“VIEs”) can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. (2) Includes TBA Agency MBS.  

Agency MBS

At December 31, 2018, the allocation of the Company’s agency mortgage-backed securities (“Agency MBS”) was approximately 35% adjustable-rate and hybrid adjustable-rate Agency MBS, 45% fixed-rate Agency MBS, and 20% fixed-rate TBA Agency MBS. At September 30, 2018, the allocation of the Company’s Agency MBS was approximately 37% adjustable-rate and hybrid adjustable-rate Agency MBS, 47% fixed-rate Agency MBS, and 16% fixed-rate TBA Agency MBS, both periods of which are detailed below (dollar amounts in thousands):

  December 31,   September 30, 2018 2018 (unaudited) Fair value of Agency MBS and TBA Agency MBS $ 4,454,735 $ 4,581,439 Adjustable-rate Agency MBS coupon reset (less than 1 year) 20 % 21 % Hybrid adjustable-rate Agency MBS coupon reset (1-2 years) 4 5 Hybrid adjustable-rate Agency MBS coupon reset (2-3 years) 1 1 Hybrid adjustable-rate Agency MBS coupon reset (3-4 years) 3 1 Hybrid adjustable-rate Agency MBS coupon reset (4-5 years) 4 6 Hybrid adjustable-rate Agency MBS coupon reset (5-7 years) - - Hybrid adjustable-rate Agency MBS coupon reset (greater than 7 years)   3   3 Total adjustable-rate Agency MBS   35 %   37 % 15-year fixed-rate TBA Agency MBS 10 16 15-year fixed-rate Agency MBS 20 23 20-year and 30-year fixed-rate Agency MBS 25 24 30-year fixed-rate TBA Agency MBS   10   - Total MBS   100 %   100 %  

At December 31, 2018 and September 30, 2018, the summary statistics of the Company’s Agency MBS portfolio were as follows:

  December 31,   September 30, 2018 2018 (unaudited) Weighted Average Agency MBS Coupon: Adjustable-rate Agency MBS 4.09 % 3.88 % Hybrid adjustable-rate Agency MBS 2.52 2.47 15-year fixed-rate Agency MBS 2.90 2.91 15-year fixed-rate TBA Agency MBS 3.57 3.57 20-year and 30-year fixed-rate Agency MBS 3.93 3.90 30-year fixed-rate TBA Agency MBS 4.35 - Total Agency MBS: 3.54 % 3.39 % Average Amortized Cost: Adjustable-rate Agency MBS 102.65 % 102.73 % Hybrid adjustable-rate Agency MBS 102.49 102.59 15-year fixed-rate Agency MBS 102.28 102.24 15-year fixed-rate TBA Agency MBS 100.47 100.86 20-year and 30-year fixed-rate Agency MBS 103.29 103.37 30-year fixed-rate TBA Agency MBS 102.49 - Total Agency MBS: 102.47 % 102.44 % Average asset yield (weighted average coupon divided by average amortized cost) 3.45 % 3.31 % Unamortized premium $95.2 million $104.0 million Unamortized premium as a percentage of par value 2.47 % 2.44 % Premium amortization expense on Agency MBS for the respective quarter $7.4 million $7.5 million  

At December 31, 2018 and September 30, 2018, the constant prepayment rate (“CPR”) and weighted average term to next interest rate reset of our Agency MBS were as follows:

  December 31,

2018

  September 30,

2018

(unaudited) Constant prepayment rate (CPR) of Agency MBS 14% 16% Constant prepayment rate (CPR) of adjustable-rate and hybrid adjustable-rate Agency MBS 21% 23% Weighted average term to next interest rate reset on Agency MBS 24 months 25 months  

Non-Agency MBS

Our Non-Agency MBS were either issued before 2008 or were recently issued and are collateralized by currently non-performing residential mortgage loans that were originated before 2008. The following tables summarize the Company’s Non-Agency MBS at December 31, 2018 and September 30, 2018:

  December 31, 2018       Weighted Average Portfolio Type Fair

Value

Amortized

Cost

Current

Principal

Amortized

Cost

  Coupon   Yield (in thousands) (unaudited) Legacy Non-Agency MBS $ 561,940 $ 553,292 $ 738,210 74.95 % 5.56 % 5.57 % Non-performing 101,744 102,450 102,760 99.70 5.14 5.42 Credit Risk Transfer   131,519   129,898   141,839 91.58 4.30 5.72 Total Non-Agency MBS $ 795,203 $ 785,640 $ 982,809 79.94 % 5.34 % 5.58 %       September 30, 2018 Weighted Average Portfolio Type Fair

Value

Amortized

Cost

Current

Principal

Amortized

Cost

Coupon Yield (in thousands)

(unaudited)

Legacy Non-Agency MBS $ 593,255 $ 571,212 $ 759,960 75.16 % 5.61 % 5.50 % Non-performing 116,651 116,737 116,995 99.78 5.17 5.38 Credit Risk Transfer   73,996   72,606   79,882 90.89 4.20 5.62 Total Non-Agency MBS $ 783,902 $ 760,555 $ 956,837 79.49 % 5.44 % 5.49 %  

Residential Mortgage Loans

The following table summarizes the Company’s residential mortgage loans held-for-investment at December 31, 2018 and September 30, 2018:

  December 31,   September 30, 2018 2018 (unaudited) Residential mortgage loans held-for-investment $ 549,016 $ 562,484 Asset-backed securities issued by securitization trusts   539,651   553,118

Retained interest in loans held in securitization trusts

$ 9,365 $ 9,366  

Residential Properties Portfolio

At December 31, 2018 and September 30, 2018, Anworth Properties Inc. owned 86 and 87 single-family residential rental properties, respectively, located in Southeastern Florida that were carried at a total cost, net of accumulated depreciation, of $13.8 million and $13.9 million, respectively.

MBS Portfolio Financing

  December 31, 2018 Agency

MBS

  Non-Agency

MBS

    Total

MBS

(dollar amounts in thousands)

(unaudited)

Repurchase Agreements: Outstanding repurchase agreement balance $ 3,235,000 $ 576,627 $ 3,811,627 Average interest rate 2.52 % 3.55 % 2.67 % Average maturity 35 days 13 days 32 days Average interest rate after adjusting for interest rate swaps 2.23 % Average maturity after adjusting for interest rate swaps 1,217 days       September 30, 2018 Agency

MBS

Non-Agency

MBS

  Total

MBS

(dollar amounts in thousands)

(unaudited)

Repurchase Agreements: Outstanding repurchase agreement balance $ 3,465,000 $ 548,820 $ 4,013,820 Average interest rate 2.22 % 3.38 % 2.38 % Average maturity 33 days 16 days 31 days Average interest rate after adjusting for interest rate swaps 2.14 % Average maturity after adjusting for interest rate swaps 1,167 days  

Portfolio Leverage

At December 31, 2018, the Company’s leverage multiple was 6.16x. The leverage multiple is calculated by dividing the Company’s repurchase agreements outstanding by the aggregate of common stockholders’ equity plus preferred stock and junior subordinated notes. The Company’s effective leverage, which includes the effect of TBA dollar roll financing, was 7.63x at December 31, 2018. At September 30, 2018, the Company’s leverage multiple was 6.09x and the effective leverage was 7.24x.

Interest Rate Swaps

At December 31, 2018 and September 30, 2018, the Company’s interest rate swap agreements (“Swaps”) had the following notional amounts, weighted average fixed rates, and remaining terms:

  December 31, 2018 Maturity Notional

Amount

  Weighted

Average

Fixed

Rate

  Remaining

Term in

Months

  Remaining

Term in

Years

(unaudited) Less than 12 months $ 725,000 1.60 % 7 0.6 1 year to 2 years 591,000 1.70 19 1.6 2 years to 3 years 400,000 1.96 30 2.5 3 years to 4 years 220,000 1.92 43 3.6 4 years to 5 years 205,000 2.27 57 4.8 5 years to 7 years 475,000 2.41 73 6.1 7 years to 10 years   690,000 2.83 104 8.7 $ 3,306,000 2.10 % 47 3.9         September 30, 2018 Maturity Notional

Amount

Weighted

Average

Fixed

Rate

Remaining

Term in

Months

Remaining

Term in

Years

(unaudited) Less than 12 months $ 625,000 1.57 % 7 0.6 1 year to 2 years 591,000 4.65 18 1.5 2 years to 3 years 550,000 1.83 30 2.5 3 years to 4 years 150,000 1.95 42 3.5 4 years to 5 years 325,000 2.11 56 4.7 5 years to 7 years 450,000 2.43 75 6.3 7 years to 10 years   640,000 2.76 104 8.7 $ 3,331,000 2.04 % 47 3.9  

Effective Net Interest Rate Spread

  December 31,

2018

  September 30,

2018

(unaudited) Average asset yield, including TBA dollar roll income 3.56 % 3.40 % Effective cost of funds 2.52 2.34 Effective net interest rate spread 1.04 % 1.06 %  

Certain components of the effective net interest rate spread are non-GAAP financial measures, which are explained and reconciled to the nearest comparable GAAP financial measures in the section entitled “Non-GAAP Financial Measures Related to Operating Results” at the end of this earnings release.

Dividend

On December 14, 2018, the Company declared a quarterly common stock dividend of $0.13 per share for the fourth quarter ended December 31, 2018. Based upon the closing price of $4.04 on December 31, 2018, the annualized dividend yield on the Company’s common stock at December 31, 2018 was 12.9%.

Book Value per Common Share

At December 31, 2018, the Company’s book value was $4.71 per share of common stock, which was a decrease of $0.41 from $5.12 in the prior quarter.

The $0.13 quarterly dividend less the $0.41 decrease in book value per common share from the prior quarter resulted in a negative return on book value per common share of (5.5%) for the quarter ended December 31, 2018 and a negative (12.1%) for the year ended December 31, 2018.

Subsequent Events

On January 2, 2019, the conversion rate of our Series B Preferred Stock increased from 5.1740 to 5.2588 shares of our common stock based upon the common stock dividend of $0.13 per share that was declared on December 14, 2018.

On January 18, 2019, we settled in the amount of $11.7 million on the loans we acquired in the fourth quarter of 2018. Approximately $10.1 million was taken down on the credit line facility to fund this transaction.

On February 12, 2019, we acquired an aggregate of approximately $90 million of Non-QM residential mortgage loans that are scheduled to close on March 15, 2019.

Conference Call

The Company will host a conference call on Friday, February 15, 2019 at 1:00 PM Eastern Time, 10:00 AM Pacific Time, to discuss its fourth quarter 2018 results. The dial-in number for the conference call is 877-504-2731 for U.S. callers (international callers should dial 412-902-6640 and Canadian callers should dial 855-669-9657). When dialing in, participants should ask to be connected to the Anworth Mortgage earnings call. Replays of the call will be available for a 7-day period commencing at 3:00 PM Eastern Time on February 15, 2019. The dial-in number for the replay is 877-344-7529 for U.S. callers (Canadian callers should dial 855-669-9658 and international callers should dial 412-317-0088) and the conference number is 10128726. The conference call will also be webcast live over the Internet, which can be accessed on the Company’s website at http://www.anworth.com through the corresponding link located at the top of the home page.

Investors interested in participating in the Company’s Dividend Reinvestment and Stock Purchase Plan (the “DRP Plan”) or receiving a copy of the DRP Plan’s prospectus may do so by contacting the Plan Administrator, American Stock Transfer & Trust Company, at 877-248-6410. For more information about the Plan, interested investors may also visit the Plan Administrator’s website at http://www.amstock.com/investpower/new_dp.asp or the Company’s website at http://www.anworth.com.

About Anworth Mortgage Asset Corporation

Anworth is an externally-managed mortgage real estate investment trust. We invest primarily in mortgage-backed securities that are either rated “investment grade” or are guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. We seek to generate income for distribution to our shareholders primarily based on the difference between the yield on our mortgage assets and the cost of our borrowings. We are managed by Anworth Management LLC, or the Manager, pursuant to a management agreement. The Manager is subject to the supervision and direction of our Board of Directors 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 and other services and activities relating to our assets and operations as may be appropriate. Our common stock is traded on the New York Stock Exchange under the symbol “ANH.” Anworth is a component of the Russell 2000® Index.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This news release may contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current expectations and speak only as of the date hereof. Forward-looking statements, which are based on various assumptions (some of which are beyond our control) may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “assume,” “estimate,” “intend,” “continue,” or other similar terms or variations on those terms or the negative of those terms. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including but not limited to, changes in interest rates; changes in the market value of our mortgage-backed securities; changes in the yield curve; the availability of mortgage-backed securities for purchase; increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities; our ability to use borrowings to finance our assets and, if available, the terms of any financing; risks associated with investing in mortgage-related assets; changes in business conditions and the general economy; implementation of or changes in government regulations affecting our business; our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; our ability to maintain an exemption from the Investment Company Act of 1940, as amended; risks associated with our home rental business; and the Manager’s ability to manage our growth. Our Annual Report on Form 10-K and other SEC filings discuss the most significant risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

   

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

  December 31, December 31,   2018     2017   ASSETS (unaudited) Agency MBS pledged to counterparties at fair value (including $3,433,252 and $4,073,852

pledged to counterparties at December 31, 2018 and December 31, 2017, respectively

$ 3,548,719 $ 4,278,797 Non-Agency MBS at fair value (including $726,428 and $661,445 pledged to counterparties

at December 31, 2018 and December 31, 2017, respectively)

795,203 760,825 Residential mortgage loans held-for-securitization 11,660 - Residential mortgage loans held-for-investment(1) 549,016 639,351 Residential real estate 13,782 14,143 Cash and cash equivalents 3,165 12,273 Reverse repurchase agreements 20,000 - Restricted cash 30,296 11,157 Interest and dividends receivable 16,872 18,091 Derivative instruments at fair value 46,207 27,793 Prepaid expenses and other   2,986     3,111   Total Assets $ 5,037,906   $ 5,765,541   LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued interest payable $ 24,828 $ 15,835 Repurchase agreements 3,811,627 4,365,695 Asset-backed securities issued by securitization trusts(1) 539,651 629,984 Junior subordinated notes 37,380 37,380 Derivative instruments at fair value 15,901 1,335 Dividends payable on preferred stock 2,297 2,272 Dividends payable on common stock 12,803 14,721 Payable for purchased loans 11,660 - Accrued expenses and other   654     897   Total Liabilities $ 4,456,801   $ 5,068,119   Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating

preference $25.00 per share ($19,494 and $19,494, respectively); 780 and 780

shares issued and outstanding at December 31, 2018 and December 31, 2017,

respectively

$ 19,455 $ 19,455 Stockholders' Equity: Series A Cumulative Preferred Stock: par value $0.01 per share; liquidating

preference $25.00 per share ($47,984 and $47,984, respectively); 1,919 and 1,919

shares issued and outstanding at December 31, 2018 and December 31, 2017,

respectively

$ 46,537 $ 46,537 Series C Cumulative Preferred Stock: par value $0.01 per share; liquidating

preference $25.00 per share ($50,257 and $49,725, respectively); 2,010 and 1,989

shares issued and outstanding at December 31, 2018 and December 31, 2017,

respectively

48,944 48,420 Common Stock: par value $0.01 per share; authorized 200,000 shares, 98,483 shares

and 98,137 shares issued and outstanding at December 31, 2018 and

December 31, 2017, respectively

985 981 Additional paid-in capital 981,964 980,243 Accumulated other comprehensive income consisting of unrealized gains and losses (30,792 ) 17,021 Accumulated deficit   (485,988 )   (415,235 ) Total Stockholders' Equity: $ 561,650   $ 677,967   Total Liabilities and Stockholders' Equity $ 5,037,906   $ 5,765,541   ____________________ (1)    

The consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. At December 31, 2018 and December 31, 2017, total assets of the consolidated VIEs were $551 million and $641 million (including accrued interest receivable of $1.8 million and $2.1 million), respectively (which is recorded above in the line item “Interest and dividends receivable”), and total liabilities were $541 million and $632 million (including accrued interest payable of $1.7 million and $2.0 million), respectively (which is recorded above in the line item “Accrued interest payable”). Please refer to Note 5, “Variable Interest Entities,” for further discussion.

       

 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

  Three

Months

Ended

  Year

Ended

  Three

Months

Ended

  Year

Ended

December 31, 2018 December 31, 2017 (unaudited) (unaudited) Interest and other income: Interest-Agency MBS $ 23,208 $ 95,656 $ 23,891 $ 76,657 Interest-Non-Agency MBS 10,445 40,733 9,607 38,266 Interest-residential mortgage loans 5,519 23,463 6,515 27,720 Other interest income   29     120     22     105     39,201     159,972     40,035     142,748   Interest Expense: Interest expense on repurchase agreements 25,362 90,511 16,881 53,954 Interest expense on asset-backed securities 5,351 22,800 6,346 26,939 Interest expense on junior subordinated notes   526     1,996     423     1,626     31,239     115,307     23,650     82,519   Net interest income   7,962     44,665     16,385     60,229   Operating expenses: Management fee to related party (2,060 ) (7,098 ) (1,871 ) (7,503 ) Rental properties depreciation and expense (367 ) (1,525 ) - (1,372 ) General and administrative expenses   (1,248 )   (4,880 )   (1,565 )   (4,430 ) Total operating expenses   (3,675 )   (13,503 )   (3,436 )   (13,305 ) Other income: Income-rental properties 428 1,761 413 1,710 Realized net (loss) on sales of available-for-sale MBS (999 ) (12,186 ) - (2,168 ) Realized (loss) on Agency MBS held as trading investments (3,871 ) (11,429 ) - - Impairment charge on Non-Agency MBS (971 ) (2,869 ) (7,279 ) (2,399 ) Unrealized gain (loss) on Agency MBS held as trading investments 9,674 (4,911 ) - 2,793 Gain on sales of residential mortgage loans held-for-investment - - - 378 Gain on sales of residential properties 23 54 - - (Loss) gain on derivatives, net (44,504 ) (8,071 ) 10,121 7,132 Recovery on Non-Agency MBS   -     1     -     2   Total other income   (40,220 )   (37,650 )   3,255     7,448   Net (loss) income $ (35,933 ) $ (6,488 ) $ 16,204   $ 54,372   Dividend on preferred stock   (2,297 )   (9,189 )   (2,278 )   (8,173 ) Net (loss) income to common stockholders $ (38,230 ) $ (15,677 ) $ 13,926   $ 46,199   Basic (loss) earnings per common share $ (0.39 ) $ (0.16 ) $ 0.14 $ 0.48 Diluted (loss) earnings per common share $ (0.39 ) $ (0.16 ) $ 0.14 $ 0.47 Basic weighted average number of shares outstanding 98,444 98,314 98,074 96,764 Diluted weighted average number of shares outstanding 98,444 98,314 101,909 100,479          

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except for per share amounts)

  Three

Months

Ended

  Year

Ended

Three

Months

Ended

  Year

Ended

December 31, 2018 December 31, 2017 (unaudited) (unaudited) Net (loss) income $ (35,933 ) $ (6,488 ) $ 16,204   $ 54,372   Available-for-sale Agency MBS, fair value adjustment 22,071 (43,348 ) (16,177 ) (24,939 ) Reclassification adjustment for loss on sales of Agency MBS included

in net (loss) income

999 12,361 - 2,233 Available-for-sale Non-Agency MBS, fair value adjustment (13,784 ) (20,463 ) 3,283 28,730 Reclassification adjustment for (gain) loss on sales of Non-Agency MBS

included in net (loss) income

- (175 ) - (65 ) Amortization of unrealized gain on derivatives remaining in other

comprehensive income

1,019 4,025 949 2,334 Reclassification adjustment for interest expense on swap agreements

included in net (loss) income

  -     (212 )   (292 )   79   Other comprehensive (loss) income   10,305     (47,812 )   (12,237 )   8,372   Comprehensive (loss) income $ (25,628 ) $ (54,300 ) $ 3,967   $ 62,744    

Non-GAAP Financial Measures Related to Operating Results

In addition to the Company’s operating results presented in accordance with GAAP, the following tables include the following non-GAAP financial measures: Core Earnings (including per common share), total interest income and average asset yield, including TBA dollar roll income, paydown expense on Agency MBS and effective total interest expense and effective cost of funds. The first table below reconciles the Company’s “net loss to common stockholders” for the three months ended December 31, 2018 to “Core Earnings” for the same period. Core Earnings represents “net loss to common stockholders” (which is the nearest comparable GAAP measure), adjusted for the items shown in the table below. The second table below reconciles the Company’s total interest and other income for the three months ended December 31, 2018 (which is the nearest comparable GAAP measure) to the total interest income and average asset yield, including TBA dollar roll income, and shows the annualized amounts as a percentage of the Company’s average earning assets and also reconciles the Company’s total interest expense (which is the nearest comparable GAAP measure) to the effective total interest expense and effective cost of funds and shows the annualized amounts as a percentage of the Company’s average borrowings.

The Company’s management believes that:

  • these non-GAAP financial measures are useful because they provide investors with greater transparency to the information that the Company uses in its financial and operational decision-making process;
  • the inclusion of paydown expense on Agency MBS is more indicative of the current earnings potential of the Company’s investment portfolio, as it reflects the actual principal paydowns which occurred during the period. Paydown expense on Agency MBS is not dependent on future assumptions on prepayments or the cumulative effect from prior periods of any current changes to those assumptions, as is the case with the GAAP measure, “Premium amortization on Agency MBS”;
  • the adjustment for an impairment charge on Non-Agency MBS is more reflective of current Core Earnings, as this charge represents future loss expectations;
  • the adjustment for depreciation expense on residential rental properties, as this is a non-cash item and is added back by other companies to derive funds from operations; and
  • the presentation of these measures, when analyzed in conjunction with the Company’s GAAP operating results, allows investors to more effectively evaluate the Company’s performance to that of its peers, particularly those that have discontinued hedge accounting and those that have used similar portfolio and derivative strategies.

These non-GAAP financial measures should not be used as a substitute for the Company’s operating results for the three months ended December 31, 2018. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

 

Core Earnings

  Three Months Ended

December 31, 2018

Amount   Per Share (in thousands) (unaudited) Net income to common stockholders $ (38,230 ) $ (0.39 ) Adjustments to derive core earnings: Loss on sales of MBS 4,870 0.05 Impairment charge on Non-Agency MBS(1) 971 0.01 Unrealized (gain) loss on Agency MBS held as trading investments (9,674 ) (0.10 ) Unrealized (loss) gain on interest rate swaps, net 54,575 0.55 (Gain) loss on derivatives-TBA Agency MBS, net (10,071 ) (0.10 ) Net settlement on interest rate swaps after de-designation(2) 3,134 0.03 Dollar roll income on TBA Agency MBS(3) 2,960 0.03 Premium amortization on MBS 7,356 0.08 Paydown expense(4) (5,283 ) (0.05 ) Gain on sale of residential rental properties (23 ) - Depreciation expense on residential rental properties(5)   119     -   Core earnings $ 10,704   $ 0.11   Basic weighted average number of shares outstanding   98,444   ____________________ (1)     Impairment charge on Non-Agency MBS represents the amount applied against current GAAP earnings when future loss expectations exceed previously-existing loss expectations. When future loss expectations become less than previously-existing loss expectations, the difference would be amortized into earnings over the life of the security. (2)

Net settlement on interest rate swaps after de-designation include all subsequent net payments made on interest rate swaps which were de-designated as hedges in August 2014 and are recorded in “Loss on interest rate swaps, net.”

(3)

Dollar roll income on TBA Agency MBS is the income resulting from the price discount typically obtained by extending the settlement of TBA Agency MBS to a later date. This is a component of the “(Loss) gain on derivatives, net” that is included in the Company’s statements of operations.

(4) Paydown expense on Agency MBS represents the proportional expense of Agency MBS purchase premiums relative to the Agency MBS principal payments and prepayments which occurred during the quarter. (5) Depreciation expense is added back in the core earnings calculation, as it is a non-cash item, and it is similarly added back in other companies’ calculation of core earnings or funds from operations.    

Effective Net Interest Rate Spread

  Three Months Ended December 31, 2018

Amount

  Annualized

Percentage

(in thousands) (unaudited) Average Asset Yield, Including TBA Dollar Roll Income: Total interest income $ 39,201 3.12 % Income-rental properties 428 0.03 % Dollar roll income on TBA Agency MBS(1) 2,960 0.24 % Premium amortization on Agency MBS 7,356 0.59 % Paydown expense on Agency MBS(2)   (5,283 ) -0.42 % Total interest and other income and average asset yield, including TBA dollar roll income $ 44,662   3.56 % Effective Cost of Funds: Total interest expense $ 31,239 2.80 %

Net settlement on interest rate Swaps after de-designation(3)

  (3,134 ) -0.28 % Effective total interest expense and effective cost of funds $ 28,105   2.52 % Effective net interest rate spread 1.04 % Average earning assets $ 5,017,025   Average borrowings $ 4,467,256   ____________________ (1)    

Dollar roll income on TBA Agency MBS is the income resulting from the price discount typically obtained by extending the settlement of TBA Agency MBS to a later date. This is a component of the “(Loss) gain on derivatives, net” that is shown on the Company’s statements of operations.

(2) Paydown expense on Agency MBS represents the proportional expense of Agency MBS purchase premiums relative to the Agency MBS principal payments and prepayments which occurred during the quarter.

(3)

Net settlement on interest rate swaps after de-designation include all subsequent net payments made on interest rate swaps which were de-designated as hedges in August 2014 and are recorded in “Loss on interest rate swaps, net.”

Anworth Mortgage Asset CorporationJohn T. Hillman1299 Ocean Avenue, Second FloorSanta Monica, CA 90401(310) 255-4438 or (310) 255-4493Email: jhillman@anworth.comWeb site: http://www.anworth.com

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