Thornburg Mortgage, Inc. (NYSE:TMA), today reported net income for
the quarter ended September 30, 2008, of $140.0 million, or $1.23
diluted earnings per common share based on a weighted average of
110.1 million common shares and penny warrants outstanding.
Earnings for the quarter were significantly impacted by the
following items: $654.7 million loss on further impairment of the
company�s MBS portfolio due to further declines in MBS fair value
prices and an $8.2 million net loss on the sale of ARM loans and
REO $594.6 million fair value gain related to the Senior
Subordinated Secured Notes due 2015 (the �Senior Subordinated
Notes�) $160.2 million fair value gain related to the Principal
Participation Agreement (the �PPA�) and Additional Warrant
Liability Net interest income was $80.1 million compared to $53.3
million for the prior quarter of 2008, or 50% more than the prior
quarter. Third quarter operating expenses as a percentage of
average assets was 0.32% at September 30, 2008. Override Agreement
Lender Status The company and the counterparties to the Override
Agreement continue to be in active negotiations to resolve the
outstanding interpretative issues under the Override Agreement. As
of September 30, 2008, $267.3 million of previously restricted cash
was applied to the outstanding reverse repurchase agreement
balances. Securities collateralizing the reverse repurchase
agreements had a face amount of $7.3 billion and a carrying value
of $4.8 billion at September 30, 2008. Credit Performance of ARM
Portfolio The credit performance of the company�s portfolio of ARM
Assets continues to be favorable compared to industry benchmarks,
however actual loss and delinquency experience has increased as
mortgage credit performance generally has deteriorated. The
company�s originated and purchased mortgage loan portfolio has very
low delinquencies and realized losses. The company believes that,
despite downgrades, its MBS portfolio still has substantial credit
protection to absorb losses on the underlying mortgage collateral.
At September 30, 2008, 98.1% of the company�s ARM asset portfolio
was high quality, of which 15.0% represented purchased ARM assets
rated AAA or AA based on the highest rating received and the
remaining 83.1% comprised high quality ARM loans. All of the
mortgage assets in the company�s Purchased ARM assets portfolio are
credit enhanced through credit subordination as opposed to being
credit guaranteed by a private sector mono-line credit insurer.
During the third quarter, the company continued to experience
credit downgrades from the various credit rating agencies on its
mortgage assets portfolio. As of September 30, 2008, the company
experienced downgrades on $2.0 billion of unpaid principal balance
and $1.2 billion of carrying value of its mortgage assets
portfolio. Since September 30, 2008, there have been additional
credit downgrades announced by the credit rating agencies. As of
November 3, 2008, an additional $570.0 million of unpaid principal
balance and $372.0 million of carrying value of mortgage assets
have been downgraded. After taking into consideration all of these
downgrades, 70.3% of the carrying value of the securities
collateralizing the reverse repurchase agreements remains AA or AAA
rated and the majority of this portfolio continues to have
substantial credit protection in the form of credit subordination.
Despite the downgrades, the company believes that any ultimate
realization of losses will be less than the deeply discounted
carrying value of its mortgage asset portfolio. Purchased
securitized loans comprised 1.5% of the company�s ARM assets at
September 30, 2008�assets in which the company has retained the
credit risk associated with its ownership and which have a total
principal balance of underlying loans of $5.3 billion. Accordingly,
the company has currently estimated credit losses in the form of a
nonaccretable discount of $22.4 million, or 0.42% of the balance of
these securities. At September 30, 2008, 60-day plus delinquent
loans and REO properties in the company�s originated and bulk
purchased loans totaled 1.58% of its $21.4 billion portfolio of
securitized and unsecuritized ARM loans, up from 0.81% at June�30,
2008, but still significantly below the industry�s conventional
prime ARM loan delinquency ratio of 8.25% at June�30, 2008 as
reported by the Mortgage Bankers Association. One category of bulk
purchased loans, specifically $528.0 million of pay option ARMs
purchased from one seller, continues to exhibit substantially
higher delinquencies than the rest of the company�s loan portfolio
and is effectively doubling the company�s total portfolio
delinquency rate. The company is actively managing these
delinquencies so as to minimize losses as best as possible. In the
third quarter, the company realized loan losses and charge-offs
relating to REO of $6.1 million. The company believes that the
impairments totaling $631.3 million reflected in its securitized
ARM loans greatly exceeded all probable credit losses inherent in
the ARM loan portfolio at September 30, 2008, and that the
substantial majority of such impairment relates to current market
conditions and liquidity risk. Consistent with broader market
conditions and a lack of ability to securitize loans at reasonable
prices, Thornburg Mortgage did not complete a securitization in the
third quarter of 2008. Instead, the company completed a sale of
$111.2 million in ARM loans at a loss of $13.2 million during the
third quarter of 2008 in order to reduce its warehouse financing.
Subsequent to September 30, 2008, the company has an agreement to
sell an additional $92.2 million of loans and upon settlement later
this month expects to completely pay of its warehouse financing
with these proceeds. During the quarter ended September 30, 2008,
Thornburg Mortgage also did not originate or purchase any ARM
assets. Third Quarter Results The company's third quarter earnings
of $140.0 million were primarily due to decreases in the fair value
of the PPA and additional warrant liability and the Senior
Subordinated Notes of $160.2 million and $594.6 million,
respectively, partially offset by a net loss on ARM assets of
$662.9 million primarily due to continued declines in the fair
value of its MBS portfolio. However, aside from these fair market
value related income items, net interest income, a significant
component of core ongoing earnings, was $80.1 million compared to
$53.3 million for the prior quarter, or 50% more than the prior
quarter. The portfolio yield during the third quarter of 2008
increased 22 basis points to 7.17% from 6.95% in the prior quarter,
primarily due to a 30 basis point increase in accretion of asset
discounts. Thornburg Mortgage�s average cost of funds decreased to
6.01% in the third quarter from 6.19% in the prior quarter. This
resulted in an average net interest margin of 1.15% for the
quarter. The primary cause of the decrease in the company�s cost of
funds from the second quarter of 2008 was a decrease in the
one-month LIBOR rate during the period. Premium amortization for
the quarter ended September 30, 2008 resulted in accretion of $81.7
million for the third quarter of 2008, which reflects an actual CPR
for the quarter of 12%, down from 16% and 14%, respectively, for
the quarters ended June�30, 2008 and September 30, 2007,
respectively. Largely as a result of the other-than-temporary
impairment charges taken in the fourth quarter of 2007 and the
first half of 2008, the company owns its mortgage assets at a net
discount of 9.65%, which suggests that any increase in prepayments
will have a positive impact on portfolio spreads and margins. Book
value at September 30, 2008 was a deficit of $(34.20) per common
share, as compared to $(36.76) per common share at June�30, 2008.
The decrease in the per share deficit is principally due to the PPA
and additional warrant liability fair value improvement and other
factors discussed above, partially offset by a net decrease in the
unrealized fair value of the company�s purchased ARM assets and
hedging instruments recorded in accumulated other comprehensive
income. Reverse Stock Split On September 26, 2008, the company
effected a one-for-ten reverse split of its common stock. As a
result of the reverse split, every 10 shares of (old) common stock,
par value $0.01 per share, which were outstanding as of September
26, 2008, the effective date, were combined into one share of (new)
common stock, par value of $0.01 per share. All historical numbers
relating to shares of common stock have been adjusted to reflect
the one-for-ten reverse split. The reverse stock split was
implemented to cure a deficiency under Section 802.01C of the New
York Stock Exchange Listed Company Manual that resulted from the
average closing price of the company�s common stock falling below
$1.00 for more than 30 consecutive trading days. Interest �Payment
in Kind� Consents On October 1, 2008, Thornburg Mortgage announced
it had received consents, effective September 30, 2008, from the
holders of approximately 98.6% of the aggregate principal amount
outstanding of the Senior Subordinated Notes to accept the
September 30th interest payment on their notes in the form of
additional Senior Subordinated Notes in principal amount equal to
the cash interest payable. All Senior Subordinated Notes will
continue to bear interest at a rate of 18% per annum until the
successful completion of the Exchange Offer and Consent
Solicitation and until the additional warrants are issued to the
Senior Subordinated Note holders. As consideration for their
consents, consenting holders received a consent fee, at their
election, of either (i) 6.5217 shares of the company�s common stock
in respect of each $1,000 principal amount of the Senior
Subordinated Notes (the "Consent Stock") or (ii) additional Senior
Subordinated Notes with an aggregate principal amount equal to the
market value of the total number of shares of Consent Stock on the
date of issuance to which such holder would have been entitled.
Exchange Offer and Consent Solicitation On October 31, 2008, the
company announced that it is extending the expiration of its
Exchange Offer and Consent Solicitation (the �Exchange Offer�) for
all outstanding shares of its 8.00% Series C Cumulative Redeemable
Preferred Stock, Series D Adjusting Rate Cumulative Redeemable
Preferred Stock, 7.50% Series E Cumulative Convertible Redeemable
Preferred Stock and 10% Series F Cumulative Convertible Redeemable
Preferred Stock (collectively, the �Preferred Stock�) from 5:00
p.m., New York City time, on October 31, 2008 to 5:00 p.m., New
York City time, on November 19, 2008, unless further extended or
terminated by the company. Each share of Preferred Stock tendered
in the Exchange Offer will receive three shares of common stock. As
of November 3, 2008, the Company had received tenders for 71.0% of
the outstanding shares of its Series C Preferred Stock, 73.3% of
the outstanding shares of its Series D Preferred Stock, 75.1% of
the outstanding shares of its Series E Preferred Stock and 66.2% of
the outstanding shares of its Series F Preferred Stock. Holders of
the Preferred Stock that have tendered their shares may withdraw
their shares at any time. The company believes that successfully
completing the amended Exchange Offer remains a critical step in
order for the company to be able to resume normalized business
operations as doing so will reduce the interest rate on its Senior
Subordinated Notes from 18% to 12%, which will greatly reduce the
cash demands on the company. In addition, the successful completion
of the amended Exchange Offer will result in the termination of the
PPA, an agreement which provides to each investor who also
purchased Senior Subordinated Notes an interest in the then unpaid
principal amount of a specific portfolio of mortgage-backed
securities and rights under any repurchase agreements, reverse
repurchase agreements, swap agreements, loan agreements and other
agreements to which Thornburg Mortgage is a party as well as other
consideration outlined in the PPA. The termination of the PPA is
also integral to the company being able to maintain its REIT status
which provides for significant tax savings and higher returns to
shareholders during profitable periods. The Exchange Offer is being
made to holders of Preferred Stock in reliance upon the exemption
from the registration requirements of the Securities Act of 1933,
as amended, afforded by Section�3(a)(9) thereof. Investor inquiries
about the Exchange Offer should be directed to the company at
866-222-2093 (toll free). Holders of the Preferred Stock are urged
to read the Offering Circular dated July 23, 2008 and all
amendments and supplements thereto, which have been filed with the
SEC, and the amended and restated Offering Circular filed on
November 3, 2008. Requests for copies of the Offering Circular, all
amendments and supplements thereto and related documents may be
directed to Georgeson Inc., the information agent for the Exchange
Offer, at 866-399-8748 (toll free). The Offering Circular, all
amendments and supplements thereto and other information regarding
the Exchange Offer may also be obtained through the SEC's Web site
at www.sec.gov and the company�s Web site at:
www.thornburgmortgagetender.com. Conference Call Information The
company will host a dial-in conference call from 10:30 a.m. to noon
EST on Wednesday, November 12, 2008, to discuss the third-quarter
results. The U.S. teleconference dial-in number is (800) 762-6085
and the international dial-in number is (480) 629-9025. A replay of
the call will be available beginning at 1:30 p.m. EST on November
12, 2008 and ending at 1:59 p.m. EST on December 12, 2008. The
replay dial-in number is (800) 475-6701 in the U.S. and (320)
365-3844 internationally. The access code for both replay numbers
is 968830. The conference call will also be archived on the
company's web site throughout the fourth quarter of 2008. The
conference call will also be web cast live through a link at:
http://www.talkpoint.com/viewer/starthere.asp?Pres=124117 �
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED
BALANCE SHEETS (In thousands, except share data) � � � September
30, 2008 December 31, 2007 ASSETS (Unaudited) ARM Assets: Purchased
ARM Assets: ARM securities, net $ 3,596,872 $ 10,046,818 Purchased
Securitized Loans, net � 393,434 � � 647,225 � Purchased ARM Assets
� 3,990,306 � � 10,694,043 � ARM Loans: Securitized ARM Loans, net
824,852 2,557,961 ARM Loans Collateralizing Debt, net 20,433,846
21,383,177 ARM loans held for sale or securitization, net � 157,120
� � 549,359 � ARM Loans � 21,415,818 � � 24,490,497 � ARM Assets
25,406,124 35,184,540 Cash and cash equivalents 16,699 149,109
Restricted cash and cash equivalents 354,600 538,505 Liquidity
Reserve Fund 113,457 - Hedging Instruments 6,139 17,523 Accrued
interest receivable 120,812 190,484 Other assets � 267,491 � �
192,200 � Total assets $ 26,285,322 � $ 36,272,361 � � LIABILITIES
Reverse Repurchase Agreements $ 4,638,927 $ 11,547,354 Asset-backed
CP - 400,000 Collateralized Mortgage Debt 20,362,739 21,246,086
Whole loan financing facilities 72,777 453,500 Senior Notes 305,000
305,000 Senior Subordinated Notes 406,964 - Subordinated Notes
240,000 240,000 PPA and Additional Warrant Liability 423,355 -
Hedging Instruments 11,557 123,936 Accrued interest payable 62,379
90,260 Dividends payable - 47,330 Accrued expenses and other
liabilities � 84,959 � � 59,161 � � 26,608,657 � � 34,512,627 � �
COMMITMENTS AND CONTINGENCIES SHAREHOLDERS� EQUITY (DEFICIT)
Preferred Stock: par value $0.01 per share 1,001,589 832,485 Common
Stock: par value $0.01 per share; 3,955,985,785 and 458,585,500
shares authorized, respectively; 38,736,393 and 13,993,600 shares
issued and outstanding, respectively 387 140 Warrants 7,805 -
Additional paid-in-capital 3,329,734 2,897,462 Accumulated other
comprehensive loss (97,160 ) (172,432 ) Accumulated deficit �
(4,565,690 ) � (1,797,921 ) � (323,335 ) � 1,759,734 � Total
liabilities and shareholders� equity (deficit) $ 26,285,322 � $
36,272,361 � � THORNBURG MORTGAGE, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED INCOME STATEMENTS (Unaudited) (In thousands, except
per share data) � � Three Months Ended September 30, 2008 � 2007
Interest income from ARM Assets and cash equivalents $ 498,639 $
621,980 Interest expense on borrowed funds � (418,570 ) � (585,829
) Net interest income � 80,069 � � 36,151 � � Servicing income, net
1,792 4,125 Mortgage services income, net 1,091 575 Gain (Loss) on
ARM Assets, net (662,904 ) (1,099,246 ) Gain (Loss) on Derivatives,
net (12,669 ) (25,271 ) Gain (Loss) on extinguishment of debt - -
PPA and Additional Warrant Liability fair value changes 160,192 -
Senior Subordinated Notes fair value changes � 594,553 � � - � Net
noninterest income (loss) � 82,055 � � (1,119,817 ) � Reversal of
(provision for) loan losses - (2,628 ) Management fee (6,000 )
(6,183 ) Performance fee - - Long-term incentive awards (320 )
15,490 Other operating expenses � (16,047 ) � (9,192 ) Income
(loss) before provision for (benefit from) income taxes 139,757
(1,086,179 ) Provision for (benefit from) income taxes � 290 � �
(12,000 ) NET INCOME (LOSS) $ 140,047 � $ (1,098,179 ) � Net income
(loss) $ 140,047 $ (1,098,179 ) Dividends declared on Preferred
Stock � - � � (10,238 ) Net income (loss) available to common
shareholders $ 140,047 � $ (1,108,417 ) � Basic earnings (loss) per
common share $ 2.74 � $ (89.41 ) Diluted earnings (loss) per common
share $ 1.23 � $ (89.41 ) Dividends declared per common share $ - �
$ - � Thornburg Mortgage is a leading single-family residential
mortgage lender focused principally on prime and super-prime
borrowers seeking jumbo and super-jumbo adjustable-rate mortgages.
This press release contains forward-looking statements within the
meaning of the federal securities laws. These forward-looking
statements are based on current expectations, estimates and
projections, and are not guarantees of future performance, events
or results. Actual results and developments could differ materially
from those expressed in or contemplated by the forward-looking
statements due to a number of factors, including but not limited
to: the ongoing impact of the March 31, 2008 financing transaction;
the company�s ability to meet the ongoing conditions of the
Override Agreement and successfully conclude negotiations with the
parties thereto with respect to an amended and restated agreement;
general economic conditions; the company�s ability to meet its
interest payment obligations under its outstanding debt securities
and other payment obligations; ongoing volatility in the mortgage
and mortgage-backed securities industry; the company�s ability to
complete the Exchange Offer and terminate the PPA; the company�s
ability to raise additional capital; the company�s ability to
retain or sell additional assets; further downgrades on our
mortgage securities portfolio, delinquency rates for loans, changes
in interest rates and other risk factors discussed in the company's
SEC reports, including its most recent quarterly report on Form
10-Q, annual report on Form 10-K/A, its current reports on Form
8-K, its Proxy Statement for its Annual Meeting held on June 12,
2008, its Offering Circular, as amended to date, and its
Registration Statement on Form S-3. These forward-looking
statements speak only as of the date on which they are made and,
except as required by law, the company does not intend to update
such statements to reflect events or circumstances arising after
such date.
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