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EX-32.2 - EX-32.2 - ANWORTH MORTGAGE ASSET CORPanh-ex322_8.htm
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EX-31.2 - EX-31.2 - ANWORTH MORTGAGE ASSET CORPanh-ex312_6.htm
EX-31.1 - EX-31.1 - ANWORTH MORTGAGE ASSET CORPanh-ex311_7.htm

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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      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      No  

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

 

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-Accelerated Filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

At May 3, 2017, the registrant had 95,631,598 shares of common stock issued and 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, 2017 (unaudited) and December 31, 2016

1

 

 

Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016 (unaudited)

3

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2017 (unaudited)

4

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

5

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

Item 2.

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

30

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

Item 4.

Controls and Procedures

50

Part II.

 

OTHER INFORMATION

51

 

Item 1.

Legal Proceedings

51

 

Item 1A.

Risk Factors

51

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

Item 3.

Defaults Upon Senior Securities

51

 

Item 4.

Mine Safety Disclosures

51

 

Item 5.

Other Information

51

 

Item 6.

Exhibits

52

 

 

Signatures

54

 

 

 


 

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,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Agency MBS at fair value (including $3,508,865 and $3,707,062 pledged to counterparties

     at March 31, 2017 and December 31, 2016, respectively)

 

$

3,670,780

 

 

$

3,925,193

 

Non-Agency MBS at fair value (including $613,001 and $525,169 pledged to counterparties

     at March 31, 2017 and December 31, 2016, respectively)

 

 

739,510

 

 

 

641,246

 

Residential mortgage loans held-for-investment(1)

 

 

723,777

 

 

 

744,462

 

Residential real estate

 

 

14,243

 

 

 

14,262

 

Cash and cash equivalents

 

 

52,040

 

 

 

31,031

 

Restricted cash

 

 

9,211

 

 

 

12,390

 

Interest and dividends receivable

 

 

16,125

 

 

 

16,203

 

Derivative instruments at fair value

 

 

13,075

 

 

 

8,192

 

Receivables for MBS sold

 

 

8,213

 

 

 

-

 

Prepaid expenses and other

 

 

3,120

 

 

 

2,797

 

Total Assets

 

$

5,250,094

 

 

$

5,395,776

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accrued interest payable

 

$

10,120

 

 

$

11,850

 

Repurchase agreements

 

 

3,765,317

 

 

 

3,911,015

 

Asset-backed securities issued by securitization trusts(1)

 

 

714,409

 

 

 

728,683

 

Junior subordinated notes

 

 

37,380

 

 

 

37,380

 

Derivative instruments at fair value

 

 

18,793

 

 

 

34,302

 

Dividends payable on preferred stock

 

 

1,681

 

 

 

1,660

 

Dividends payable on common stock

 

 

14,337

 

 

 

14,358

 

Payables for MBS purchased

 

 

14,632

 

 

 

-

 

Accrued expenses and other

 

 

1,295

 

 

 

1,506

 

Total Liabilities

 

$

4,577,964

 

 

$

4,740,754

 

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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, respectively

 

$

46,537

 

 

$

46,537

 

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

               $25.00 per share ($17,084 and $12,146, respectively); 683 and 486 shares issued

               and outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

16,175

 

 

 

11,321

 

          Common Stock: par value $0.01 per share; authorized 200,000 shares, 95,582 shares

               issued and outstanding at March 31, 2017 and 95,718 shares issued and

               outstanding at December 31, 2016, respectively

 

 

956

 

 

 

957

 

Additional paid-in capital

 

 

967,056

 

 

 

966,714

 

Accumulated other comprehensive income consisting of unrealized gains and losses

 

 

21,179

 

 

 

8,648

 

Accumulated deficit

 

 

(403,697

)

 

 

(403,079

)

Total Stockholders' Equity

 

$

648,206

 

 

$

631,098

 

Total Liabilities and Stockholders' Equity

 

$

5,250,094

 

 

$

5,395,776

 

 

 

 

(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 March 31, 2017 and December 31, 2016, total assets of the consolidated VIEs were $726 million and $747 million (including accrued interest receivable of $2.4 million and $2.5 million), respectively, and total liabilities were $717 million and $731 million (including accrued interest payable of $2.3 million and $2.4 million), respectively. Please refer to Note 4, “Variable Interest Entities,” for further discussion.  

 

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,

 

 

 

2017

 

 

2016

 

Interest and other income:

 

 

 

 

 

 

 

 

Interest-Agency MBS

 

$

17,103

 

 

$

20,765

 

Interest-Non-Agency MBS

 

 

9,568

 

 

 

9,281

 

Interest-residential mortgage loans

 

 

7,351

 

 

 

9,313

 

Other interest income

 

 

26

 

 

 

12

 

 

 

 

34,048

 

 

 

39,371

 

Interest Expense:

 

 

 

 

 

 

 

 

Interest expense on repurchase agreements

 

 

10,411

 

 

 

9,398

 

Interest expense on asset-backed securities

 

 

7,075

 

 

 

8,599

 

Interest expense on junior subordinated notes

 

 

384

 

 

 

346

 

 

 

 

17,870

 

 

 

18,343

 

Net interest income

 

 

16,178

 

 

 

21,028

 

Operating Expenses:

 

 

 

 

 

 

 

 

Management fee to related party

 

 

(1,821

)

 

 

(2,044

)

General and administrative expenses

 

 

(1,484

)

 

 

(1,568

)

Total operating expenses

 

 

(3,305

)

 

 

(3,612

)

Other income (loss):

 

 

 

 

 

 

 

 

Income-rental properties

 

 

449

 

 

 

410

 

Loss on sales of MBS

 

 

(68

)

 

 

(3,239

)

Impairment charge on Non-Agency MBS

 

 

(732

)

 

 

-

 

Unrealized gain on Agency MBS held as trading investments

 

 

122

 

 

 

-

 

Gain on sales of residential mortgage loans held-for-investment

 

 

378

 

 

 

-

 

Gain (loss) on derivatives, net

 

 

2,378

 

 

 

(34,843

)

Recovery on Non-Agency MBS

 

 

1

 

 

 

1

 

Total other income (loss)

 

 

2,528

 

 

 

(37,671

)

Net income (loss)

 

$

15,401

 

 

$

(20,255

)

Dividends on preferred stock

 

 

(1,755

)

 

 

(1,636

)

Net income (loss) to common stockholders

 

$

13,646

 

 

$

(21,891

)

Basic earnings (loss) per common share

 

$

0.14

 

 

$

(0.22

)

Diluted earnings (loss) per common share

 

$

0.14

 

 

$

(0.22

)

Basic weighted average number of shares outstanding

 

 

95,705

 

 

 

97,704

 

Diluted weighted average number of shares outstanding

 

 

100,544

 

 

 

97,704

 

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 Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net income (loss)

 

$

15,401

 

 

$

(20,255

)

Available-for-sale Agency MBS, fair value adjustment

 

 

2,335

 

 

 

24,385

 

Reclassification adjustment for loss  on sales of Agency MBS

     included in net income (loss)

 

 

68

 

 

 

3,239

 

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

 

 

9,514

 

 

 

(22,333

)

Unrealized gains on swap agreements

 

 

540

 

 

 

3,369

 

Reclassification adjustment for interest expense on swap agreements

     included in net income (loss)

 

 

74

 

 

 

202

 

Other comprehensive income

 

 

12,531

 

 

 

8,862

 

Comprehensive income (loss)

 

$

27,932

 

 

$

(11,393

)

 

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 Gain

Agency MBS

 

 

Accum. Other

Comp.

Income

Non-Agency MBS

 

 

Accum. Other Comp. Gain (Loss) Derivatives

 

 

Accum. (Deficit)

 

 

Total

 

Balance, December 31, 2016

 

 

1,919

 

 

 

486

 

 

 

95,718

 

 

$

46,537

 

 

$

11,321

 

 

$

957

 

 

$

966,714

 

 

$

24,869

 

 

 

1,536

 

 

$

(17,757

)

 

$

(403,079

)

 

$

631,098

 

Issuance of stock

 

 

 

 

 

 

197

 

 

 

61

 

 

 

 

 

 

 

4,854

 

 

 

1

 

 

 

320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,175

 

Cancellation of common stock

 

 

 

 

 

 

 

 

 

 

(197

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Other comprehensive income, fair value adjustments and  reclassifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,403

 

 

 

9,514

 

 

 

614

 

 

 

 

 

 

 

12,531

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,401

 

 

 

15,401

 

Amortization of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

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 - $0.4765625 per Series C preferred share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(253

)

 

 

(253

)

Dividend declared - $0.15 per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,337

)

 

 

(14,337

)

Balance, March 31, 2017

 

 

1,919

 

 

 

683

 

 

 

95,582

 

 

$

46,537

 

 

$

16,175

 

 

$

956

 

 

$

967,056

 

 

$

27,272

 

 

 

11,050

 

 

$

(17,143

)

 

$

(403,697

)

 

$

648,206

 

 

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,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,401

 

 

$

(20,255

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of premium (Agency MBS)

 

 

8,368

 

 

 

7,429

 

Amortization/accretion of market yield adjustments (Non-Agency MBS)

 

 

522

 

 

 

922

 

Accretion of discount (residential mortgage loans)

 

 

(68

)

 

 

(114

)

Depreciation on rental properties

 

 

115

 

 

 

112

 

Loss on sales of MBS

 

 

68

 

 

 

3,239

 

Impairment charge on Non-Agency MBS

 

 

732

 

 

 

-

 

Unrealized gain on Agency MBS held as trading investments

 

 

(122

)

 

 

-

 

Gain on sales of residential mortgage loans

 

 

(378

)

 

 

-

 

Amortization of restricted stock

 

 

20

 

 

 

79

 

Recovery on Non-Agency MBS

 

 

(1

)

 

 

(1

)

Periodic net settlements on interest rate swaps, net of amortization

 

 

(2,346

)

 

 

(6,558

)

(Gain) loss on interest rate swaps, net

 

 

(473

)

 

 

50,219

 

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

 

 

(1,628

)

 

 

(15,354

)

(Gain) on derivatives - Eurodollar Futures Contracts

 

 

(276

)

 

 

(22

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) in interest receivable

 

 

(2,309

)

 

 

(1,564

)

(Increase) in prepaid expenses and other

 

 

(8,533

)

 

 

(1,910

)

Decrease in restricted cash

 

 

3,455

 

 

 

9,222

 

Increase in accrued interest payable

 

 

668

 

 

 

858

 

(Decrease) increase in accrued expenses

 

 

(137

)

 

 

5,106

 

Net cash provided by operating activities

 

$

13,078

 

 

$

31,408

 

Investing Activities:

 

 

 

 

 

 

 

 

MBS Portfolios:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

8,213

 

 

 

294,295

 

Purchases

 

 

(115,460

)

 

 

-

 

Principal payments

 

 

280,435

 

 

 

256,406

 

Residential mortgage loans held-for-investment:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

6,806

 

 

 

-

 

Principal payments

 

 

52

 

 

 

252

 

Residential properties purchases

 

 

(96

)

 

 

(86

)

Net cash provided by investing activities

 

$

179,950

 

 

$

550,867

 

Financing Activities:

 

 

 

 

 

 

 

 

Borrowings from repurchase agreements

 

$

5,452,732

 

 

$

7,962,265

 

Repayments on repurchase agreements

 

 

(5,598,430

)

 

 

(8,516,802

)

Net settlements on TBA Agency MBS commitments

 

 

(15,480

)

 

 

10,913

 

Settlements on terminated interest rate swaps

 

 

-

 

 

 

(6,162

)

Proceeds from common stock issued (common stock repurchased), net

 

 

322

 

 

 

(9,198

)

Proceeds on Series C Preferred Stock issued

 

 

4,855

 

 

 

-

 

Preferred stock dividends paid

 

 

(1,660

)

 

 

(1,636

)

Common stock dividends paid

 

 

(14,358

)

 

 

(14,862

)

Net cash (used in) financing activities

 

$

(172,019

)

 

$

(575,482

)

Net increase in cash and cash equivalents

 

$

21,009

 

 

$

6,793

 

Cash and cash equivalents at beginning of period

 

 

31,031

 

 

 

5,754

 

Cash and cash equivalents at end of period

 

$

52,040

 

 

$

12,547

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

14,790

 

 

$

19,606

 

Common stock repurchased

 

$

-

 

 

$

9,439

 

Change in payable for MBS purchased

 

$

14,632

 

 

$

-

 

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 commenced operations on March 17, 1998. Our principal business is to invest in, finance, and manage a leveraged portfolio of residential mortgage-backed securities (which we refer to as “MBS”) and residential mortgage loans, which presently include the following types of investments:

 

Agency mortgage-backed securities (which we refer to as “Agency MBS”), which include residential mortgage pass-through certificates and collateralized mortgage obligations (which we refer to as “CMOs”), which are securities representing interests in pools of mortgage loans secured by residential property in which the principal and interest payments are guaranteed by a government-sponsored enterprise (which we refer to as “GSE”), such as the Federal National Mortgage Association (which we refer to as “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (which we refer to as “Freddie Mac”).

 

Non-agency mortgage-backed securities (which we refer to as “Non-Agency MBS”), which are securities issued by companies that are not guaranteed by federally sponsored enterprises and that are secured primarily by first-lien residential mortgage loans.

 

Residential mortgage loans through consolidated securitization trusts. We finance our residential mortgage loans through asset-backed securities (which we refer to as “ABS”) issued by the consolidated securitization trusts. The ABS which are held by unaffiliated third parties are non-recourse financing. The difference in the amount of the loans and the amount of the ABS represents our retained net interest in the securitization trusts.

Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.

We have elected to be taxed as a real estate investment trust (which we refer to as “REIT”) under the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”). As long as we retain our REIT status, we generally will not be subject to federal or state income taxes to the extent that we distribute our taxable net income to our stockholders, and we routinely distribute to our stockholders substantially all of the taxable net income generated from our operations. In order to qualify as a REIT, we must meet various ongoing requirements under the tax law, including requirements relating to the composition of our assets, the nature of our gross income, minimum distribution requirements, and requirements relating to the ownership of our stock.

Our Manager

We are externally managed and advised by Anworth Management LLC (which we refer to as our “Manager”). Our Manager is supervised and directed by our board of directors (which we refer to as our “Board”). Our day-to-day operations are being conducted by our Manager through the authority delegated to it under the Management Agreement between us and our Manager (which we refer to as the “Management Agreement”) and pursuant to the policies established by our Board.

Our Manager will also perform such other services and activities relating to our assets and operations as described in the Management Agreement. In exchange for services provided, our Manager receives a management fee, paid monthly in arrears, in an amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement).

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles utilized in the United States of America (which we refer to as “GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are susceptible to change relate to the determination of the fair value of investments and derivatives, cash flow projections for and credit performance of Non-Agency MBS and residential mortgage loans held-for-investment, amortization of security and loan premiums, accretion of security and loan discounts, and accounting for derivative activities. Actual results could materially differ from these estimates. In the opinion of

6


 

management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

Our consolidated financial statements include the accounts of all subsidiaries. Significant intercompany accounts and transactions have been eliminated. The interim financial information in the accompanying unaudited consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Our consolidated financial statements also include the consolidation of certain securitization trusts that meet the definition of a variable interest entity (which we refer to as “VIE”), because the Company has been deemed to be the primary beneficiary of the securitization trusts. These securitization trusts hold pools of residential mortgage loans and issue series of ABS payable from the cash flows generated by the underlying pools of residential mortgage loans. These securitizations are non-recourse financing for the residential mortgage loans held-for-investment. Generally, a portion of the ABS issued by the securitization trusts are sold to unaffiliated third parties and the balance is purchased by the Company. The Company classifies the underlying residential mortgage loans owned by the securitization trusts as residential mortgage loans held-for-investment in its consolidated balance sheets. The ABS issued to third parties are recorded as liabilities on the Company’s consolidated balance sheets. The Company records interest income on the residential mortgage loans held-for-investment and interest expense on the ABS issued to third parties in the Company’s consolidated statements of operations. The Company records the initial underlying assets and liabilities of the consolidated securitization trusts at their fair value upon consolidation into the Company and, as such, no gain or loss is recorded upon consolidation. See Note 4, “Variable Interest Entities,” for additional information regarding the impact of consolidation of securitization trusts.

The consolidated securitization trusts are VIEs because the securitization trusts do not have equity that meets the definition of U.S. GAAP equity at risk. In determining if a securitization trust should be consolidated, the Company evaluates (in accordance with the Financial Accounting Standards Board (which we refer to as “FASB”) Accounting Standards Codification (which we refer to as “ASC”) 810-10) whether it has both (i) the power to direct the activities of the securitization trust that most significantly impact its economic performance and (ii) the right to receive benefits from the securitization trust or the obligation to absorb losses of the securitization trust that could be significant. The Company determined that it is the primary beneficiary of certain securitization trusts because it has certain delinquency and default oversight rights on residential mortgage loans. In addition, the Company owns the most subordinated class of ABS issued by the securitization trusts and has the obligation to absorb losses and right to receive benefits from the securitization trusts that could potentially be significant to the securitization trusts. The Company assesses modifications, if any, to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

The following is a summary of our significant accounting policies:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

Mortgage-Backed Securities (“MBS”)

Agency MBS are securities that are obligations (including principal and interest) guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our investment-grade Agency MBS portfolio is invested primarily in fixed-rate and adjustable-rate mortgage-backed pass-through certificates and hybrid adjustable-rate MBS. Hybrid adjustable-rate MBS have an initial interest rate that is fixed for a certain period, usually one to ten years, and then adjusts annually for the remainder of the term of the asset. We structure our investment portfolio to be diversified with a variety of prepayment characteristics, investing in mortgage assets with prepayment penalties, investing in certain mortgage security structures that have prepayment protections and purchasing mortgage assets at a premium and at a discount. A portion of our portfolio consists of Non-Agency MBS. Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.

We classify our MBS as trading investments, available-for-sale investments, or held-to-maturity investments. Our management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We currently classify most of our MBS as available-for-sale. We have designated a portion of our MBS as trading investments. All assets that are classified as available-for-sale are carried at fair value and unrealized gains or losses are generally included in “Other comprehensive income (loss)” as a component of stockholders’ equity. Losses that are credit-related on securities classified as available-for-sale, which are determined by management to be other-than-temporary in nature, are reclassified from “Other comprehensive income” to income (loss). Assets that are classified as trading investments are reported at fair value with unrealized gains and losses included in our consolidated statements of operations.

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The most significant source of our revenue is derived 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 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.

Securities transactions are recorded on the date the securities are purchased or sold. Realized gains or losses from securities transactions are determined based on the specific identified cost of the securities.

The following tables show the gross unrealized losses and fair value of those individual securities in our MBS portfolio that are in a continuous unrealized loss position at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time (dollar amounts in thousands):

March 31, 2017

 

 

 

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

 

 

95

 

 

$

1,371,819

 

 

$

(22,314

)

 

 

196

 

 

$

425,927

 

 

$

(6,234

)

 

 

291

 

 

$

1,797,746

 

 

$

(28,548

)

Non-Agency MBS

 

 

3

 

 

$

8,491

 

 

$

(768

)

 

 

41

 

 

$

217,108

 

 

$

(6,830

)

 

 

44

 

 

$

225,599

 

 

$

(7,598

)

December 31, 2016

 

 

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

 

120

 

$

978,041

 

 

$

(12,961

)

 

 

261

 

 

$

472,090

 

 

$

(8,556

)

 

 

381

 

 

$

1,450,131

 

 

$

(21,517

)

Non-Agency MBS

 

30

 

$

163,741

 

 

$

(5,911

)

 

 

36

 

 

$

206,516

 

 

$

(4,551

)

 

66

 

 

$

370,257

 

 

$

(10,462

)

 

 

We do not consider those Agency MBS that have been in a continuous loss position for 12 months or more to be other-than-temporarily impaired. The unrealized losses on our investments in Agency MBS were caused by fluctuations in interest rates. We purchased the Agency MBS primarily at a premium relative to their face value and the contractual cash flows of those investments are guaranteed by the U.S. government or government-sponsored agencies. Since September 2008, the government-sponsored agencies have been in the conservatorship of the U.S. government. At March 31, 2017, we did not expect to sell the Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of the Agency MBS is attributable to changes in interest rates and not the credit quality of the Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2017. At March 31, 2017, there was approximately $13.7 million in cumulative unrealized losses on Trading Agency MBS that was not included in the table above, as they were recognized on our statements of operations. At December 31, 2016, there was approximately $13.8 million in unrealized losses on Trading Agency MBS that was not included in the table above, as they were recognized on our statements of operations.

The unrealized losses on our investments in Non-Agency MBS were primarily caused by fluctuations in interest rates. We purchased the Non-Agency MBS primarily at a discount relative to their face value. At March 31, 2017, there were four bonds that were impaired for a total of approximately $0.7 million, as the cash flow projections were less favorable than previously forecasted. On the remainder of the Non-Agency bonds, at March 31, 2017, we did not expect to sell these Non-Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of these Non-Agency MBS is attributable to changes in interest rates and not the credit quality of these Non-Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2017.

Residential Mortgage Loans Held-for-Investment

Residential mortgage loans held-for-investment are residential mortgage loans held by consolidated securitization trusts. Residential mortgage loans held-for-investment are carried at unpaid principal balances net of any premiums or discounts and

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allowance for loan losses. We expect that we will be required to continue to consolidate the securitization trusts that hold the residential mortgage loans.

We establish an allowance for residential loan losses based on our estimate of credit losses. These estimates for the allowance for loan losses require consideration of various observable inputs including, but not limited to, historical loss experience, delinquency status, borrower credit scores, geographic concentrations, and loan-to-value ratios, and are adjusted for current economic conditions as deemed necessary by our management. Many of these factors are subjective and cannot be reduced to a mathematical formula. In addition, since we have not incurred any direct losses on our portfolio, we review national historical credit performance information from external sources to assist in our analysis. Changes in our estimates can significantly impact the allowance for loan losses and provision expense. The allowance reflects management’s best estimate of the credit losses inherent in the loan portfolio at the balance sheet date. It is also possible that we will experience credit losses that are different from our current estimates or that the time of those losses may differ from our estimates.

We recognize interest income from residential mortgage loans on an accrual basis. Any related premium or discount is amortized into interest income using the effective interest method over the weighted average life of these loans. Coupon interest is recognized as revenue when earned and deemed collectable or until a loan becomes more than 90 days past due, at which point the loan is placed on non-accrual status. Interest previously accrued for loans that have been placed on non-accrual status is reversed against interest income in the period the loan is placed in non-accrual status. Residential loans delinquent more than 90 days or in foreclosure are characterized as delinquent. Cash principal and interest that are advanced from servicers after a loan becomes greater than 90 days past due are recorded as a liability due to the servicer. When a delinquent loan previously placed on non-accrual status has cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan is placed back on accrual status. Alternatively, non-accrual loans may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.

Residential Properties

Residential properties are stated at cost and consist of land, buildings and improvements, including other costs incurred during their acquisition, possession, and renovation. Residential properties purchased that are not subject to an existing lease are treated as asset acquisitions and, as such, are recorded at their purchase price, including acquisition and renovation costs, all of which are allocated to land and building based upon their relative fair values at the date of acquisition. Residential properties acquired either subject to an existing lease or as part of a portfolio level transaction are treated as a business combination under ASC 805, Business Combinations, and, as such, are recorded at fair value, allocated to land, building and the existing lease, if applicable, based upon their relative fair values at the date of acquisition, with acquisition fees and other costs expensed as incurred.

Building depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We will generally use a 27.5 year estimated life with no salvage value. We will incur costs to prepare our acquired properties to be leased. These costs will be capitalized and allocated to building costs. Costs related to the restoration, renovation, or improvement of our properties that improve and extend their useful lives are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary repairs and maintenance are expensed as incurred. Costs incurred by us to lease the properties will be capitalized and amortized over the life of the lease. Escrow deposits include refundable and non-refundable cash and earnest money on deposit with independent third parties for property purchases.

Repurchase Agreements

We finance the acquisition of MBS primarily through the use of repurchase agreements. Under these repurchase agreements, we sell securities to a lender and agree to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that we receive and the repurchase price that we pay represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which we pledge our securities and accrued interest as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. Upon the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then-prevailing financing rate. These repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

Asset-Backed Securities Issued by Securitization Trusts

Asset-backed securities issued by the securitization trusts are recorded at principal balances net of unamortized premiums or discounts. This long-term debt is collateralized only by the assets held in the trusts and is otherwise non-recourse to the Company.

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Derivative Financial Instruments

Risk Management

We primarily use short-term (less than or equal to 12 months) repurchase agreements to finance the purchase of MBS. These obligations expose us to variability in interest payments due to changes in interest rates. We actively monitor changes in interest rate exposures and evaluate various opportunities to mitigate this risk. Our objective is to limit the impact of interest rate changes on earnings and cash flows. The principal instruments we use to achieve this are interest rate swap agreements (which we refer to as “interest rate swaps”) and Eurodollar Futures Contracts. Interest rate swaps effectively convert a percentage of our repurchase agreements to fixed-rate obligations over a period of up to ten years. Under interest rate swaps, we agree to pay an amount equal to a specified fixed-rate of interest times a notional principal amount and to receive in return an amount equal to a specified variable-rate of interest times a notional amount, generally based on the London Interbank Offered Rate (which we refer to as “LIBOR”). The notional amounts are not exchanged. We do not issue nor hold the interest rate swaps and the Eurodollar Futures Contracts for speculative purposes.

We also enter into To-Be-Announced (which we refer to as “TBA”) Agency MBS as either a means of investing in and financing Agency MBS, or as a means of disposing of or reducing our exposure to agency securities. Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, Agency MBS with certain principal and interest terms and certain types of collateral, but the particular Agency MBS to be delivered are not identified until shortly before the TBA settlement date. We also may choose, prior to settlement, to move the settlement of these MBS out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired-off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date. This transaction is commonly referred to as a “dollar roll.” The Agency MBS purchased or sold for a forward settlement date are typically priced at a discount to agency securities for settlement in the current month. This difference (or discount) is referred to as the “price drop.” The price drop represents compensation to us for foregoing net interest margin (interest income less repurchase agreement financing cost). TBA Agency MBS are accounted for as derivative instruments since they do not meet the exemption allowed for a “regular way” security trade under ASC 815, as either the TBA contracts do not settle in the shortest period of time possible or we cannot assess that it is probable at inception that we will take physical delivery of the security or that we will not settle on a net basis.

Accounting for Derivatives and Hedging Activities

We account for derivative instruments in accordance with ASC 815, which requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value, which is typically based on values obtained from large financial institutions who are market makers for these types of instruments. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as hedges in accordance with ASC 815. Changes in fair value related to derivatives not designated as hedges are recorded in our consolidated statements of operations as “Gain (loss) on derivatives.” For a derivative to qualify for hedge accounting, we must anticipate that the hedge will be highly “effective” as defined by ASC 815-10. A hedge of the variability of cash flows that are to be received or paid in connection with a recognized asset or liability is known as a ”cash flow” hedge. Changes in the fair value of a derivative that is highly effective and that is designated as a cash flow hedge, to the extent the hedge is effective, are recorded in AOCI and reclassified to income when the forecasted transaction affects income (e.g. when periodic settlement interest payments are due on repurchase agreements).  Hedge ineffectiveness, if any, is recorded in current period income.

When we discontinue hedge accounting, the gain or loss on the derivative remains in AOCI and is reclassified into income when the forecasted transaction affects income. In all situations where hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its fair value on our balance sheet, recognizing changes in fair value in current period income. All of our interest rate swaps had historically been accounted for as cash flow hedges under ASC 815. After August 22, 2014, none of our interest rate swaps were designated for hedge accounting. As a result of discontinuing hedge accounting for our interest rate swaps, changes in the fair value of these interest rate swaps are recorded in “Gain (loss) on derivatives, net” in our consolidated statements of operations rather than in AOCI.  Also, net interest paid or received on these interest rate swaps which was previously recognized in interest expense, is instead recognized in “Gain (loss) on derivatives, net.” These interest rate swaps continue to be reported as assets or liabilities on our consolidated balance sheets at their fair value.

As long as the forecasted transactions that were being hedged (i.e. rollovers of our repurchase agreement borrowings) are still expected to occur, the balance in AOCI from the activity in these interest rate swaps through the dates of de-designation will remain in AOCI and be recognized in our consolidated statements of operations as “interest expense” over the remaining term of these interest rate swaps.

For purposes of the consolidated statements of cash flows, cash flows hedges were classified with the cash flows from the hedged item. Cash flows from derivatives that are not hedges are classified according to the underlying nature or purpose of the derivative transaction.

10


 

For more details on the amounts and other qualitative information on all our derivative transactions, see Note 14. For more information on the fair value of our derivative instruments, see Note 8.

Credit Risk

At March 31, 2017, we have attempted to limit our exposure to credit losses on our Agency MBS by purchasing securities primarily through Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae MBS are guaranteed by those respective enterprises. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the U.S. government. While it is the intent that the conservatorship will help stabilize Freddie Mac’s and Fannie Mae’s overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac and Fannie Mae will be able to satisfy its guarantees of Agency MBS. There have also been concerns as to what the U.S. government will do regarding winding down the operations of Freddie Mac and Fannie Mae. There have also been concerns over the past few years regarding the credit standing of Freddie Mac, Fannie Mae, and U.S. sovereign debt. We do not know what effect any future ratings of Freddie Mac, Fannie Mae and U.S. sovereign debt may ultimately have on the U.S. economy, the value of our securities, or the ability of Freddie Mac and Fannie Mae to satisfy its guarantees of Agency MBS, if necessary.

Our adjustable-rate MBS are subject to periodic and lifetime interest rate caps. Periodic caps can limit the amount an interest rate can increase during any given period. Some adjustable-rate MBS subject to periodic payment caps may result in a portion of the interest being deferred and added to the principal outstanding.

We also invest in Non-Agency MBS, which are securities that are secured by pools of residential mortgages which are not issued by government-sponsored enterprises and are not guaranteed by any agency of the U.S. government or any federally chartered corporation. Such investments carry a risk that the borrower on the underlying mortgage may default on their obligation to make full and timely payments of principal and interest.

Other-than-temporary losses on our available-for-sale MBS, as measured by the amount of decline in estimated fair value attributable to credit losses that are considered to be other-than-temporary, are charged against income, resulting in an adjustment of the cost basis of such securities. Based on the criteria in ASC 320-10, the determination of whether a security is other-than-temporarily impaired (which we refer to as “OTTI”) involves judgments and assumptions based on both subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover its amortized cost basis (i.e., there is a credit-related loss). The following are among, but not all of, the factors considered in determining whether and to what extent an OTTI exists and the portion that is related to credit loss: (i) the expected cash flow from the investment; (ii) whether there has been an other-than-temporary deterioration of the credit quality of the underlying mortgages; (iii) the credit protection available to the related mortgage pool for MBS; (iv) any other market information available, including analysts’ assessments and statements, public statements and filings made by the debtor or counterparty; (v) management’s internal analysis of the security, considering all known relevant information at the time of assessment; and (vi) the magnitude and duration of historical decline in market prices. Because management’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary decline exists and, if so, the amount considered impaired, is also subjective and therefore constitutes material estimates that are susceptible to significant change.

We also own residential mortgage loans held-for-investment. As the majority of these loans (the tranches of the securitization trusts senior to our interests) are collateral for the asset-backed securities issued by the trusts, our potential credit risk is on the subordinated tranches that we own, as these tranches would be the first ones to absorb any losses resulting from defaults by the borrowers on the underlying mortgage loans.

For all interest rate swaps entered into on or before September 9, 2013, we are exposed to credit losses in the event of non-performance by counterparties to interest rate swaps. In order to limit this risk, our practice was to only enter into interest rate swaps with large financial institution counterparties who were market makers for these types of instruments, limit our exposure on each interest rate swap to a single counterparty under our defined guidelines and either pay or receive collateral to or from each counterparty on a periodic basis to cover the net fair market position of the interest rate swaps held with that counterparty. For all interest rate swaps entered into on or after September 9, 2013, all interest rate swap participants are required by rules of the Commodities Futures Trading Commission, under authority granted to it pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), to clear interest rate swaps through a registered derivatives clearing organization, or “swap execution facility,” through standardized documents under which each interest rate swap counterparty transfers its position to another entity whereby a central clearinghouse effectively becomes the counterparty on each side of the interest rate swap. It is the intent of the Dodd-Frank Act that the clearing of interest rate swaps in this manner is designed to avoid concentration of risk in any single entity by spreading and centralizing the risk in the clearinghouse and its members.

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Income Taxes

We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto. Accordingly, we will not be subject to federal income tax to the extent that our distributions to our stockholders satisfy the REIT requirements and that certain asset, income, and stock ownership tests are met.

We have no unrecognized tax benefits and do not anticipate any increase in unrecognized benefits during 2017 relative to any tax positions taken prior to January 1, 2017. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income taxes accounts; and no such accruals existed at March 31, 2017. We file REIT U.S. federal and California income tax returns. These returns are generally open to examination by the IRS and the California Franchise Tax Board for all years after 2012 and 2011, respectively.

Cumulative Convertible Preferred Stock

We classify our Series B Cumulative Convertible Preferred Stock (which we refer to as “Series B Preferred Stock”) on our balance sheets using the guidance in ASC 480-10-S99. Our Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events occur, such as a change in control. As redemption under these circumstances is not solely within our control, we have classified our Series B Preferred Stock as temporary equity.

We have analyzed whether the conversion features in our Series B Preferred Stock should be bifurcated under the guidance in ASC 815-10 and have determined that bifurcation is not necessary.

Stock-Based Expense

In accordance with ASC 718-10, any expense relating to share-based payment transactions is recognized in the unaudited consolidated financial statements.

Restricted stock is expensed over the vesting period (see Note 13).

Earnings Per Share

Basic earnings per share (which we refer to as “EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents (which includes stock options and convertible preferred stock) and the adding back of the Series B Preferred Stock dividends unless the effect is to reduce a loss or increase the income per share.

The computation of EPS for the three months ended March 31, 2017 and 2016 is as follows (amounts in thousands, except per share data):

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

to Common

 

 

Average

 

 

Earnings (Loss)

 

 

 

Stockholders

 

 

Shares

 

 

per share

 

For the three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

13,646

 

 

 

95,705

 

 

$

0.14

 

Effect of dilutive securities

 

 

394

 

 

 

4,839

 

 

 

-

 

Diluted EPS

 

$

14,040

 

 

 

100,544

 

 

$

0.14

 

For the three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

(21,891

)

 

 

97,704

 

 

$

(0.22

)

Effect of dilutive securities

 

 

-

 

 

 

-

 

 

 

-

 

Diluted EPS

 

$

(21,891

)

 

 

97,704

 

 

$

(0.22

)

 

Accumulated Other Comprehensive Income

In accordance with ASC 220-10-55-2, total comprehensive income is comprised of net income and other comprehensive income, which includes unrealized gains and losses on marketable securities classified as available-for-sale, and unrealized gains and losses on derivative financial instruments. In accordance with ASU 2013-02, we have identified, in our consolidated statements of comprehensive income, items that are reclassified and included in our consolidated statements of operations.

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USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued a new standard on revenue recognition, ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This new standard will replace more than 200 ad hoc pronouncements on revenue recognition. This ASU requires companies to recognize revenue in a way that shows the transfer of goods or services to customers in amounts that reflect the payment that a company expects to be entitled to in exchange for those goods or services. To do that, companies will now have to go through a five-step process: (1) tie the contract to a customer; (2) identify the contract’s performance obligations; (3) determine the transaction price; (4) connect the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) a company satisfies the performance obligation. This ASU only affects an entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within other standards (for example, insurance contracts or lease contracts). This ASU is effective for a public entity for the financial statements beginning with the quarter ending March 31, 2018. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.

 

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (Subtopic 825-10). The guidance in this new standard is intended to improve existing GAAP by (1) requiring equity investment (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans or receivables) on the balance sheet or the accompanying notes to the financial statements; (4) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; (5) eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (6) requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value  of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Public companies are required to apply the guidance beginning with the quarter ending March 31, 2018. We do not believe this ASU will have a material impact on our financial statements.

On February 25, 2016, the FASB issued ASU 2016-2, “Leases” (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes, and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. This ASU will become effective for public entities beginning with the quarter ending March 31, 2019. We do not believe that this ASU will have a material impact on our financial statements.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815) - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The term novation, as it relates to derivative instruments, refers to replacing one of the parties to a derivative instrument with a new party. This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU became effective for public companies beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.

On March 14, 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force).” This topic requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risk of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract. This ASU clarifies that when assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, entities must use the four-step decision sequence established by

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the Derivatives Implementation Group. The four-step decision sequence requires an entity to consider whether (1) the payoff or settlement is adjusted based on changes in an index; (2) the payoff is indexed to an underlying other than interest rates or credit risk; (3) the debt involves a substantial premium or discount; and (4) the call (put) option is contingently exercisable. This ASU became effective for public entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.

On March 15, 2016, the FASB issued ASU 2016-07, “Investments–Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting,” which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. This ASU requires that the equity method investor add the cost of acquiring the additional interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This ASU also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or less in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This ASU became effective for all entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.

On March 17, 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-08 will become effective for public entities beginning with the quarter ending March 31, 2018. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations.  When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognized revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognized revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.

On March 31, 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies some of the aspects of accounting for share-based payment transactions, mostly related to income tax consequences. This ASU became effective for public entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing.” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-10 will become effective for public companies beginning with the quarter ending March 31, 2018. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. This ASU clarifies that (1) an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; (2) an entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service; and (3) in determining whether promises to transfer goods or services to a customer are separately identifiable, an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item to which the promised goods or services are inputs. This ASU also amends the licensing implementation guidance related to ASU 2014-09. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” This ASU affects the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Both ASU 2014-09 and ASU 2016-12 will become effective for public companies beginning with the quarter ending March 31, 2018. One of the criterions in identifying a contract with a customer is whether it is probable that an entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. This ASU clarifies that the objective of this assessment is to determine whether a contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services that will be transferred to the customer. A new criterion was also added in this ASU to clarify when revenue would be recognized for a contract that fails to meet certain criteria. This would allow an entity to recognize revenue in the amount of consideration received when the entity has transferred control of the goods or services, the entity has stopped transferring goods or services (if applicable) and has no obligation under the contract to transfer additional goods or services, and the consideration received from the customer is

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nonrefundable. This ASU also clarifies that the measurement date for any noncash consideration is contract inception. This ASU also clarifies some of the transition guidance. Based on our revenue types, we do not believe that this ASU will have a material impact on our financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. The scope excludes financial assets measured at fair value through net income, available-for-sale securities, loans made to participants by defined contribution employee benefit plans, policy loan receivables of an insurance company, pledge receivables of a not-for-profit entity, and receivables between entities under common control. This ASU will require entities to immediately record the full amount of credit losses that are expected in their loan portfolios and to re-evaluate at each reporting period. The income statement will reflect the credit loss provision (or expense) necessary to adjust the allowance estimate since the previous reporting date. The expected credit loss estimate should consider available information relevant to assessing the collectability of contractual cash flows including information about past events (i.e. historical loss experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU will become effective for public entities beginning with the quarter ending March 31, 2020. Although, at this time, we are not able to measure the impact that this ASU will have on our financial statements, we believe that when implemented, while not having a significant impact on the losses incurred over the life of the loans, it is likely that credit losses will be recognized through the allowance account sooner than previously required.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on the following eight specific cash flow issues where there is currently either no guidance or the guidance is unclear: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash Flows and Application of the Predominance Principle. This ASU will become effective for all public entities beginning with the quarter ending March 31, 2018. We do not believe that this ASU will have a material impact on our financial statements.

In October 2016, the FASB issued ASU 2016-17, “Interests Held Through Related Parties That Are under Common Control, Consolidation (Topic 810).” A single decision maker of a VIE is required to consider indirect economic interest in the entity held through related parties on a proportionate basis when determining whether it is the primary beneficiary of that VIE unless the single decision maker and its related parties are under common control. If a single decision maker and its related parties are under common control, the single decision maker is required to consider indirect interests in the entity held through those related parties to be the equivalent of direct interests in their entirety. This ASU amends how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and therefore consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. This ASU became effective for public entities beginning with the quarter ended March 31, 2017. This ASU did not have a material impact on our financial statements.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash, Statement of Cash Flows (Topic 230).” Currently, diversity exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU will be effective for public entities beginning with the quarter ending March 31, 2018. While this ASU will affect the presentation of restricted cash and the related cash inflows and cash outflows on our statement of cash flows, we do not believe this ASU will have a material impact on our financial statements.

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2014-09. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09), which begins with the quarter ending March 31, 2018. Based on our revenue types, we do not believe this ASU will have a material impact on our financial statements.

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On January 5, 2017, the FASB issued ASU 2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidations. This ASU is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by establishing a more robust framework to use in this determination. This ASU is effective for public companies beginning with the quarter ending March 31, 2018. We do not believe this ASU will have a material impact on our financial statements.

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investment-Equity Method and Joint Ventures (Topic 323).” This ASU applies to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”; ASU 2016-02, “Leases (Topic 842)”; and ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU relates to a SEC Staff Announcement that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M.) Consistent with Topic 11.M, if a registrant does not know, or cannot reasonably estimate, the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then, in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The part of this ASU that relates to Topic 323 does not apply to the company as it relates to the accounting for investments in qualified affordable housing projects, which our Company does not have any such projects. This ASU not only applies immediately to the disclosures of the ASUs listed above, but also applies to any subsequent amendments to guidance in the ASUs that are issued prior to a registrant’s adoption of the aforementioned ASUs. We do not believe that this ASU will have a material impact on our financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities.”  Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This ASU will become effective for companies beginning with the quarter ending March 31, 2019. We do not believe that this ASU will have a material impact on our financial statements.

NOTE 2. RESTRICTED CASH

This includes cash pledged as collateral for interest rate swaps. The following represents the Company’s restricted cash balances at March 31, 2017 and December 31, 2016 (in thousands):