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EX-31.1 - EX-31.1 - ANWORTH MORTGAGE ASSET CORPanh-ex311_201503316.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-13709

 

ANWORTH MORTGAGE ASSET CORPORATION

(Exact name of registrant as specified in its charter)

 

 

MARYLAND

52-2059785

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

1299 Ocean Avenue, Second Floor,
Santa Monica, California

90401

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (310) 255-4493

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer

x

Accelerated Filer

¨

 

 

 

 

Non-Accelerated Filer

¨  (Do not check if a smaller reporting company)

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

At May 6, 2015, the registrant had 105,084,859 shares of common stock issued and 104,809,859 shares outstanding.

 

 

 

 


ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

 

 

 

 

Page

Part I.

 

FINANCIAL INFORMATION

1

 

Item 1.

Consolidated Financial Statements

1

 

 

Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014

1

 

 

Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014 (unaudited)

3

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2015 (unaudited)

4

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)

5

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

Item 4.

Controls and Procedures

45

Part II.

 

OTHER INFORMATION

46

 

Item 1.

Legal Proceedings

46

 

Item 1A.

Risk Factors

46

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

Item 3.

Defaults Upon Senior Securities

46

 

Item 4.

Mine Safety Disclosures

46

 

Item 5.

Other Information

46

 

Item 6.

Exhibits

46

 

 

Signatures

49

 

 

 


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Agency MBS:

 

 

 

 

 

 

 

 

Agency MBS pledged to counterparties at fair value

 

$

6,436,205

 

 

$

6,650,143

 

Agency MBS at fair value

 

 

272,734

 

 

 

343,734

 

Paydowns receivable

 

 

35,702

 

 

 

29,486

 

 

 

$

6,744,641

 

 

$

7,023,363

 

Non-Agency MBS at fair value (including $318,599 and $155,311 pledged to counterparties at March 31, 2015 and December 31, 2014, respectively)

 

 

376,379

 

 

 

199,710

 

Residential real estate

 

 

14,278

 

 

 

12,871

 

Cash and cash equivalents

 

 

3,682

 

 

 

14,989

 

Interest and dividends receivable

 

 

18,983

 

 

 

19,115

 

Derivative instruments at fair value

 

 

6,560

 

 

 

9,792

 

Prepaid expenses and other

 

 

28,582

 

 

 

18,495

 

Total Assets:

 

$

7,193,105

 

 

$

7,298,335

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accrued interest payable

 

$

11,272

 

 

$

17,606

 

Repurchase agreements

 

 

6,284,037

 

 

 

6,370,740

 

Junior subordinated notes

 

 

37,380

 

 

 

37,380

 

Derivative instruments at fair value

 

 

70,188

 

 

 

45,259

 

Dividends payable on Series A Preferred Stock

 

 

1,035

 

 

 

1,035

 

Dividends payable on Series B Preferred Stock

 

 

394

 

 

 

394

 

Dividends payable on Series C Preferred Stock

 

 

111

 

 

 

-

 

Dividends payable on common stock

 

 

15,828

 

 

 

15,396

 

Accrued expenses and other

 

 

5,520

 

 

 

29,084

 

Total Liabilities:

 

$

6,425,765

 

 

$

6,516,894

 

Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating

    preference $25.00 per share ($25,241 and $25,241, respectively); 1,010 and 1,010

    shares issued and outstanding at March 31, 2015 and December 31, 2014,

    respectively

 

$

23,924

 

 

$

23,924

 

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 March 31, 2015 and December 31, 2014,

              respectively

 

$

46,537

 

 

$

46,537

 

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

              preference $25.00 per share ($8,828 and $0, respectively); 353 and 0 shares issued

              and outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

8,085

 

 

 

-

 

          Common Stock: par value $0.01 per share; authorized 200,000 shares, 105,519 shares

               issued and 105,157 shares outstanding at March 31, 2015 and 109,972 shares issued

               and 109,234 shares outstanding at December 31, 2014, respectively

 

 

1,055

 

 

 

1,100

 

Additional paid-in capital

 

 

1,011,954

 

 

 

1,033,015

 

Accumulated other comprehensive income (loss) consisting of unrealized gains and losses

 

 

17,614

 

 

 

(14,981

)

Accumulated deficit

 

 

(341,829

)

 

 

(308,154

)

Total Stockholders' Equity:

 

$

743,416

 

 

$

757,517

 

Total Liabilities and Stockholders' Equity:

 

$

7,193,105

 

 

$

7,298,335

 

See accompanying notes to unaudited consolidated financial statements.

 

 

1


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

Interest and other income:

 

 

 

 

 

 

 

 

Interest on Agency MBS

 

$

30,588

 

 

$

44,394

 

Interest on Non-Agency MBS

 

 

3,647

 

 

 

1

 

Income on rental properties

 

 

370

 

 

 

-

 

Other interest income

 

 

10

 

 

 

11

 

 

 

 

34,615

 

 

 

44,406

 

Interest Expense:

 

 

 

 

 

 

 

 

Interest expense on repurchase agreements

 

 

6,689

 

 

 

27,406

 

Interest expense on junior subordinated notes

 

 

315

 

 

 

314

 

 

 

 

7,004

 

 

 

27,720

 

Net operating income

 

 

27,611

 

 

 

16,686

 

Operating Expenses:

 

 

 

 

 

 

 

 

Management fee to related party

 

 

(2,336

)

 

 

(2,916

)

General and administrative expenses

 

 

(1,279

)

 

 

(1,064

)

Total operating expenses

 

 

(3,615

)

 

 

(3,980

)

Other Income:

 

 

 

 

 

 

 

 

Loss on sales of Non-Agency MBS

 

 

(3

)

 

 

-

 

(Loss) gain on interest rate swaps, net

 

 

(46,488

)

 

 

628

 

Gain on derivatives-TBA Agency MBS, net

 

 

8,525

 

 

 

-

 

(Loss) on derivatives-Eurodollar Futures Contracts

 

 

(2,338

)

 

 

-

 

Recovery on Non-Agency MBS

 

 

1

 

 

 

37

 

Total other (loss) income

 

 

(40,303

)

 

 

665

 

Net (loss) income

 

$

(16,307

)

 

$

13,371

 

Dividend on Series A Cumulative Preferred Stock

 

 

(1,035

)

 

 

(1,035

)

Dividend on Series B Cumulative Convertible Preferred Stock

 

 

(394

)

 

 

(394

)

Dividend on Series C Cumulative Redeemable Preferred Stock

 

 

(111

)

 

 

-

 

Net (loss) income to common stockholders

 

$

(17,847

)

 

$

11,942

 

Basic earnings per common share

 

$

(0.17

)

 

$

0.09

 

Diluted earnings per common share

 

$

(0.17

)

 

$

0.09

 

Basic weighted average number of shares outstanding

 

 

107,228

 

 

 

136,848

 

Diluted weighted average number of shares outstanding

 

 

111,472

 

 

 

140,875

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

2


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Month Ended

March 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(16,307

)

 

$

13,371

 

Available-for-sale Agency MBS, fair value adjustment

 

 

23,803

 

 

 

29,759

 

Available-for-sale Non-Agency MBS, fair value adjustment

 

 

2,157

 

 

 

(37

)

Reclassification adjustment for loss on sales of Non-Agency MBS included in net (loss) income

 

 

3

 

 

 

-

 

Unrealized gains (losses) on derivatives

 

 

6,108

 

 

 

(29,655

)

Reclassification adjustment for interest expense on swap agreements included in net (loss) income

 

 

524

 

 

 

20,455

 

Other comprehensive income

 

 

32,595

 

 

 

20,522

 

Comprehensive income

 

$

16,288

 

 

$

33,893

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

3


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(unaudited)

 

 

 

Series A

Preferred Stock Shares Outstanding

 

 

Series C

Preferred Stock Shares Outstanding

 

 

Common Stock Shares Outstanding

 

 

Series A

Preferred Stock

Par Value

 

 

Series C

Preferred Stock

Par Value

 

 

Common Stock Par Value

 

 

Additional

Paid-In

Capital

 

 

Accum. Other

Comp.

Income (Loss)

Agency MBS

 

 

Accum. Other

Comp.

Income (Loss)

Non-Agency MBS

 

 

Accum. Other Comp. (Loss) Derivatives

 

 

Accum. (Deficit)

 

 

Total

 

Balance, December 31, 2014

 

 

1,919

 

 

 

-

 

 

 

109,234

 

 

$

46,537

 

 

$

-

 

 

$

1,100

 

 

$

1,033,015

 

 

$

31,596

 

 

 

5

 

 

$

(46,582

)

 

$

(308,154

)

 

$

757,517

 

Issuance of Series C Preferred Stock

 

 

 

 

 

 

353

 

 

 

 

 

 

 

 

 

 

 

8,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,085

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

83

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

425

 

Redemption of common stock

 

 

 

 

 

 

 

 

 

 

(3,798

)

 

 

 

 

 

 

 

 

 

 

(46

)

 

 

(19,609

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,655

)

Other comprehensive income, fair value adjustments and reclassifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,803

 

 

 

2,160

 

 

 

6,632

 

 

 

 

 

 

 

32,595

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,307

)

 

 

(16,307

)

Shares repurchased pending retirement

 

 

 

 

 

 

 

 

 

 

(362

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,900

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,900

)

Amortization of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

Dividend declared - $0.539063 per Series A preferred share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,035

)

 

 

(1,035

)

Dividend declared - $0.396025 per Series B preferred share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(394

)

 

 

(394

)

Dividend declared - $0.338889 per Series C preferred share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Dividend declared - $0.15 per common  share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,828

)

 

 

(15,828

)

Balance, March 31, 2015

 

 

1,919

 

 

 

353

 

 

 

105,157

 

 

$

46,537

 

 

$

8,085

 

 

$

1,055

 

 

$

1,011,954

 

 

$

55,399

 

 

 

2,165

 

 

$

(39,950

)

 

$

(341,829

)

 

$

743,416

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

4


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

Operating Activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(16,307

)

 

$

13,371

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of premium (Agency MBS)

 

 

11,784

 

 

 

9,887

 

Accretion of purchase discounts (Non-Agency MBS)

 

 

(1,021

)

 

 

-

 

Depreciation on rental properties

 

 

112

 

 

 

-

 

Loss on sales of Non-Agency MBS

 

 

3

 

 

 

-

 

Amortization of restricted stock

 

 

24

 

 

 

24

 

Recovery on Non-Agency MBS

 

 

(1

)

 

 

(37

)

Periodic net settlements on interest rate swaps, net of amortization

 

 

(10,400

)

 

 

(245

)

Loss (gain) on interest rate swaps, net

 

 

46,488

 

 

 

(628

)

(Gain) on derivatives, net of derivative income - TBA Agency MBS

 

 

(8,525

)

 

 

-

 

Loss on derivatives - Eurodollar Futures Contracts

 

 

2,338

 

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in interest receivable

 

 

131

 

 

 

224

 

(Increase) in prepaid expenses and other

 

 

(12,424

)

 

 

(5,153

)

(Decrease) in accrued interest payable

 

 

(6,334

)

 

 

(4,380

)

Increase in accrued expenses

 

 

597

 

 

 

1,435

 

Net cash provided by operating activities

 

$

6,465

 

 

$

14,498

 

Investing Activities:

 

 

 

 

 

 

 

 

Available-for-sale Agency MBS:

 

 

 

 

 

 

 

 

Purchases

 

 

-

 

 

 

(238,748

)

Principal payments

 

 

290,741

 

 

 

330,460

 

Available-for-sale Non-Agency MBS:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

4,120

 

 

 

-

 

Purchases

 

 

(204,004

)

 

 

-

 

Principal payments

 

 

4,215

 

 

 

-

 

Residential properties purchases

 

 

(1,518

)

 

 

(694

)

Net cash provided by investing activities

 

$

93,554

 

 

$

91,018

 

Financing Activities:

 

 

 

 

 

 

 

 

Borrowings from repurchase agreements

 

$

7,390,606

 

 

$

8,733,100

 

Repayments on repurchase agreements

 

 

(7,477,309

)

 

 

(8,803,100

)

Net settlements on TBS Agency MBS commitments

 

 

5,247

 

 

 

-

 

Common stock repurchased net of proceeds from common stock issued

 

 

(21,130

)

 

 

(28,065

)

Proceeds on Series C Preferred Stock issued

 

 

8,085

 

 

 

-

 

Series A Preferred stock dividends paid

 

 

(1,035

)

 

 

(1,035

)

Series B Preferred stock dividends paid

 

 

(394

)

 

 

(394

)

Common stock dividends paid

 

 

(15,396

)

 

 

(11,116

)

Net cash (used in) financing activities

 

$

(111,326

)

 

$

(110,610

)

Net (decrease) in cash and cash equivalents

 

$

(11,307

)

 

$

(5,094

)

Cash and cash equivalents at beginning of period

 

 

14,989

 

 

 

7,368

 

Cash and cash equivalents at end of period

 

$

3,682

 

 

$

2,274

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

23,737

 

 

$

32,344

 

Common stock repurchased

 

$

24,634

 

 

$

28,323

 

Change in payable for MBS purchased

 

$

(22,179

)

 

$

100,064

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

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 we 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 presently are primarily agency mortgage-backed securities, or Agency MBS.

Agency MBS include residential mortgage pass-through certificates and collateralized mortgage obligations, or 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, or GSE, such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac.

We also own non-agency mortgage-backed securities, or 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.

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, or REIT, under the Internal Revenue Code of 1986, as amended, or 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 income to our stockholders and we routinely distribute to our stockholders substantially all of the 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. We believe that we have met all of these requirements and that we will continue to qualify as a REIT.

In February 2014, we incorporated our wholly-owned Qualified REIT Subsidiary, or QRS, Anworth Properties, Inc., which commenced operations in March 2014. Our QRS has acquired REIT-qualified residential real estate assets from which we receive rental income and that have the potential for price appreciation. In addition, our QRS may also own other types of mortgage assets, from which we would receive interest income, and other real estate assets.

In March 2014, we also incorporated Anworth Property Services, Inc., which we will elect to be treated as a Taxable REIT Subsidiary, or TRS. Anworth Property Services, Inc. is wholly-owned by us and currently has no operations. Our TRS will provide the entity through which we may participate in various activities that might otherwise have adverse tax consequences if conducted directly by a REIT or a QRS. Unlike a REIT, a TRS pays standard corporate taxes on its income earned from these activities in the mortgage and real estate markets. These other activities include almost everything other than receiving rent on properties owned and collecting interest on real estate mortgages or related investments. Examples of other possible activities in which our TRS might engage in include the securitization of mortgage loans; mortgage origination; leasing and managing of rental properties owned by third parties; and owning properties acquired through the foreclosure process.

Our Manager

We are externally managed and advised by Anworth Management, LLC, or our Manager. Effective as of December 31, 2011, we entered into a Management Agreement (which we refer to as the “Management Agreement”) with our Manager, which effected the externalization of our management function, or the Externalization. Since the effective date, our day-to-day operations are being conducted by our Manager through the authority delegated to it under the Management Agreement and pursuant to the policies established by our board of directors.

Our Manager is supervised and directed by our board of directors and is responsible for administering our day-to-day operations. In addition, our Manager 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.

6


 

Our Manager will also perform such other services and activities relating to our assets and operations as may be appropriate. In exchange for these services, 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, or 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 Non-Agency MBS, amortization of security premiums, accretion of security discounts and accounting for derivatives and hedging activities. Actual results could materially differ from these estimates. In the opinion of 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, 2014.

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 three 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 either 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 all of our MBS as available-for-sale. 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).

The most significant source of our revenue is derived from 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 the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 320-10. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, 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.

A majority of our Non-Agency MBS are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Credit Deterioration, or ASC 310-30. A debt security accounted for under ASC 310-30 is initially recorded at its purchase price (fair value). The amount of expected cash flows that exceed the initial investment represents the market yield adjustment (accretable yield), which

7


 

is recognized as interest income on a level yield basis over the life of the security. The excess of total contractual cash flows over the cash flows expected at its origination is considered to be the non-accretable difference. We must periodically reassess the expected cash flows of loans accounted for under ASC 310-30 along with the cash flows received. A significant increase in expected cash flows must be accounted for as an increase in the rate of accretion over the remaining life of the security. Conversely, if expected cash flows decrease, an other-than-temporary impairment must be recognized as a charge to earnings. Adjustments to the fair value of Non-Agency MBS, accounted for as available-for-sale securities, are recorded in “Accumulated other comprehensive income,” or AOCI. The determination as to whether impairment and accretable yield exists is based on cash flow projections related to the securities. As a result, the timing and amount of impairment and accretable yield constitutes a material estimate that is susceptible to significant change.

Interest income on the Non-Agency MBS that were purchased at a discount to par value and were rated below AA at the time of purchase is recognized based on the security’s effective interest rate. The effective interest rate on these securities is based on the projected cash flows from each security, which are estimated based on our observation of current information and events and include assumptions related to interest rates, prepayment rates, and the timing and amount of credit losses. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the available-for-sale securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, and prepayments of principal. Therefore actual maturities of available-for-sale securities are generally shorter than stated contractual maturities. Stated contractual maturities are generally greater than ten years. There can be no assurance that our assumptions used to estimate future cash flows or the current period’s yield for each asset would not change in the near term, and the change could be material.

Based on the projected cash flows from our Non-Agency MBS purchased at a discount to par value, a portion of the purchase discount may be designated as a non-accretable difference and, therefore, not accreted into interest income. The amount designated as a non-accretable difference may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions, and other factors. If the performance of a security with a non-accretable difference is more favorable than forecasted, a portion of the amount designated as a non-accretable difference may be accreted into interest income prospectively. Conversely, if the performance of a security with a non-accretable difference is less favorable than forecasted, an impairment charge and write-down of such security to a new cost basis results.

Securities 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 table shows the gross unrealized losses and fair value of those individual securities in our MBS portfolio that have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time (dollar amounts in thousands):

March 31, 2015

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

Description

of

Securities

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

Agency MBS

 

 

341

 

 

$

2,439,637

 

 

$

(30,488

)

 

 

90

 

 

$

370,924

 

 

$

(2,744

)

 

 

431

 

 

$

2,810,561

 

 

$

(33,232

)

Non-Agency MBS

 

 

3

 

 

$

12,901

 

 

$

(16

)

 

 

-

 

 

$

-

 

 

$

-

 

 

 

3

 

 

$

12,901

 

 

$

(16

)

December 31, 2014

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

Description

of

Securities

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Number

of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

Agency MBS

 

 

91

 

 

$

348,783

 

 

$

(1,792

)

 

 

361

 

 

$

3,032,057

 

 

$

(53,820

)

 

 

452

 

 

$

3,380,840

 

 

$

(55,612

)

Non-Agency MBS

 

 

7

 

 

$

45,988

 

 

$

(63

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

7

 

 

$

45,988

 

 

$

(63

)

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. We currently do not have the intent to sell the Agency MBS at a price less

8


 

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 do 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, 2015.

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 Accounting Standards Codification (“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.

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 continuously 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 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, or LIBOR. The notional amounts are not exchanged. We do not issue or hold the interest rate swaps and the Eurodollar Futures Contracts for speculative purposes. See Note 13 for more information on the Eurodollar Futures Contracts.

We also enter into To-Be-Announced, or 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.

9


 

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 on 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” and specifically identified as either relating to interest rate swaps, Eurodollar Futures Contracts or TBA Agency MBS. 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 swaps had historically been accounted for as cash flow hedges under ASC 815. However, on March 17, 2014, we discontinued hedge accounting on approximately $1.685 billion in notional amounts by de-designating these swaps as cash flow hedges. After August 22, 2014, none of our swaps were designated for hedge accounting. As a result of discontinuing hedge accounting for our swaps, changes in the fair value of these swaps are recorded in “Gain (loss) on interest rate swaps, net” in our consolidated statements of operations rather than in AOCI.  Also, net interest paid or received on these swaps which was previously recognized in interest expense, is instead recognized in “Gain (loss) on interest rate swaps, net.” These 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 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 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.

For more details on the amounts and other qualitative information on all our derivative transactions, see Note 13. For more information on the fair value of our derivative instruments, see Note 7.

Credit Risk

At March 31, 2015, 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 losses and 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.

10


 

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, or 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.

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 swap agreements. In order to limit this risk, our practice was to only enter into swaps with large financial institution counterparties who were market makers for these types of instruments, limit our exposure on each 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 swaps held with that counterparty. For all swaps entered into on or after September 9, 2013, all swap participants are required by rules of the Commodities Futures Trading Commission, or CFTC, under authority granted to it pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, to clear swaps through a registered derivatives clearing organization, or “swap execution facility,” through standardized documents under which each swap counterparty transfers its position to another entity whereby a central clearinghouse effectively becomes the counterparty on each side of the swap. Both the swap execution facility and the central clearinghouse could require greater initial and periodic margin (collateral) requirements and additional transaction fees. It is the intent of the Dodd-Frank Act that the clearing of 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.

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 2015 relative to any tax positions taken prior to January 1, 2015. 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, 2015. 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 2010 and 2009, respectively.

Cumulative Convertible Preferred Stock

We classify our Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, on our balance sheets using the guidance in ASC 480-10-S99. The 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 the Series B Preferred Stock as temporary equity.

We have analyzed whether the conversion features in the 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 12).

11


 

Earnings Per Share

Basic earnings per share, or 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, 2015 and 2014 is as follows (amounts in thousands, except per share data):

 

 

 

Net Income

Available to

Common

Stockholders

 

 

Average

Shares

 

 

Earnings

per

Share

 

For the three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

(17,847

)

 

 

107,228

 

 

$

(0.17

)

Effect of dilutive securities

 

 

-

 

 

 

4,244

 

 

 

-

 

Diluted EPS

 

$

(17,847

)

 

 

111,472

 

 

$

(0.17

)

For the three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

11,942

 

 

 

136,848

 

 

$

0.09

 

Effect of dilutive securities

 

 

394

 

 

 

4,027

 

 

 

-

 

Diluted EPS

 

$

12,336

 

 

 

140,875

 

 

$

0.09

 

For the three months ended March 31, 2015 and 2014, options to purchase 5,000 and 5,000 shares of common stock, respectively, were outstanding and not included in the computation of diluted EPS as their exercise price and option expense exceeded the average stock price for those respective periods.

Accumulated Other Comprehensive Income

In accordance with ASC 220-10-55-2, total comprehensive income is divided into 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 that qualify for cash flow hedge accounting under ASC 815-10. 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.

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. We do not believe that this ASU will have a material impact on our financial statements.

In June 2014, the FASB issued a new standard on repurchase agreements, ASU No. 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (Topic 860).” This new standard introduces two major changes to the existing accounting guidance: (1) it requires transferors and transferees to account for repurchase-to-maturity

12


 

transactions as secured borrowings, where the transferor maintains control over the transferred asset instead of accounting for these as a sale; and (2) it requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, causing the repurchase agreement to be accounted for as a secured borrowing. For these types of transactions, there is additional disclosure about the nature of the transaction. This ASU also requires the following disclosures for all repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings: (i) a disaggregation of the gross obligation by the class of collateral pledged; (ii) the remaining contractual tenor of the agreements; and (iii) a discussion of the potential risks associated with the agreements and the related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed. This ASU became effective for our financial statements beginning with the quarter ending March 31, 2015. We do not believe that this ASU has a material impact on our financial statements.

In November 2014, the FASB issued ASU 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity – a consensus of the FASB Emerging Issues Task Force.” U.S. GAAP defines a “hybrid” financial instrument as consisting of a host contract and an embedded derivative (for example, convertible, redeemable preferred stock). An entity must bifurcate (account for separately as a derivative) an embedded derivative from a hybrid financial instrument if the embedded derivative (1) is not clearly and closely related to the host contract and (2) meets the definition of a derivative as a freestanding instrument. To determine whether an embedded derivative is clearly and closely related to the host contract, an entity must  first determine whether the terms and features in a hybrid financial instrument are debt-like versus equity-like, and then weigh the terms and features based on relevant facts and circumstances to ultimately determine the nature of the host contract. This ASU will become effective for our financial statements beginning with the quarter ending March 31, 2016. We do not believe this ASU will have a material impact on our financial statements.

In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” Currently, an event or transaction that is unusual and occurs infrequently must be separately classified and presented as an extraordinary item net of tax after income from continuing operations. Entities are also required to disclose income taxes and earnings per share data for each extraordinary item if the amounts are not already disclosed on the face of the income statements. By removing the concept of extraordinary items from U.S. GAAP, this ASU removes the uncertainty and disparity in practice involved in identifying, presenting and disclosing extraordinary items. This ASU will become effective for our financial statements beginning with the quarter ending March 31, 2016. We do not believe that this ASU will have a material impact on our financial statements.

On February 18, 2015, the FASB issued an ASU regarding guidance on consolidations, ASU No. 2015-02, “Consolidation (Topic 810): Amendment to the Consolidation Analysis.” This new standard changes consolidation analysis by: placing more emphasis on risk of loss when determining a controlling financial interest and outlining the conditions under which a decision maker or service provider may have to consolidate the entity for which it provides the service. As such, we believe that entities for which decision making rights are conveyed through contractual arrangement are less likely to be consolidated. This ASU will become effective for our financial statements beginning with the quarter ending March 31, 2016. We do not believe that this ASU will have a material effect on our financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This ASU will be effective for our financial statements beginning with the quarter ending March 31, 2016. We do not believe this ASU will have a material impact on our financial statements.

 

NOTE 2. REVERSE REPURCHASE AGREEMENTS

At March 31, 2015, we did not have any reverse repurchase agreements outstanding. During the three months ended March 31, 2015, the maximum amount of the reverse repurchase agreements outstanding was $51 million and the average amount outstanding was $0.9 million. These investments are used as a means of investing excess cash. The collateral for these loans would be U.S. Treasury securities or Agency MBS with an aggregate fair value equal to the amount of the loans. At December 31, 2014, there were no reverse repurchase agreements outstanding.

 

NOTE 3. MORTGAGE-BACKED SECURITIES (MBS)

The following tables summarize our Agency MBS and Non-Agency MBS, classified as available-for-sale, at March 31, 2015 and December 31, 2014, which are carried at their fair value (amounts in thousands):  

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March 31, 2015

 

By Agency

 

 

Ginnie Mae

 

 

Freddie Mac

 

 

Fannie Mae

 

 

Total

Agency MBS

 

 

Non-Agency

MBS

 

 

Total

MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

 

$

11,425

 

 

$

2,759,654

 

 

$

3,882,460

 

 

$

6,653,539

 

 

$

374,215

 

 

$

7,027,754

 

Paydowns receivable(1)

 

 

 

-

 

 

 

35,702

 

 

 

-

 

 

 

35,702

 

 

 

-

 

 

 

35,702

 

Unrealized gains

 

 

 

7

 

 

 

21,471

 

 

 

67,154