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EX-31.2 - EX-31.2 - Western Asset Mortgage Capital Corpa16-7220_1ex31d2.htm

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016

 

o     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:  001-35543

 

Western Asset Mortgage Capital Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware

 

27-0298092

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification Number)

 

Western Asset Mortgage Capital Corporation

385 East Colorado Boulevard

Pasadena, California 91101

(Address of Registrant’s principal executive offices)

 

(626) 844-9400

(Registrant’s telephone number, including area code)

 

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 o

 

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 o

 

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 o

Accelerated filer x

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

As of May 4, 2016, there were 41,919,801 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

 

 

 




Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands—except share and per share data)

 

 

 

March 31, 2016

 

December 31, 2015

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

22,440

 

$

24,711

 

Mortgage-backed securities and other securities, at fair value ($2,587,846 and $2,777,717 pledged as collateral, at fair value, respectively)

 

2,593,418

 

2,851,127

 

Residential Whole-Loans, at fair value ($201,267 and $218,538 pledged as collateral, at fair value, respectively)

 

201,267

 

218,538

 

Securitized commercial loan, at fair value

 

23,675

 

25,000

 

Receivable under reverse repurchase agreements

 

9,307

 

 

Investment related receivable

 

21,509

 

572

 

Accrued interest receivable

 

24,494

 

22,621

 

Due from counterparties

 

280,471

 

249,563

 

Derivative assets, at fair value

 

100,161

 

21,915

 

Other assets

 

173

 

382

 

Total Assets (1)

 

$

3,276,915

 

$

3,414,429

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Borrowings under repurchase agreements, net

 

$

2,403,129

 

$

2,585,667

 

Securitized debt, at fair value

 

10,417

 

11,000

 

Accrued interest payable

 

20,340

 

20,431

 

Investment related payables

 

18,044

 

66,146

 

Due to counterparties

 

21,608

 

9,950

 

Derivative liability, at fair value

 

322,387

 

180,177

 

Accounts payable and accrued expenses

 

1,971

 

2,078

 

Payable to related party

 

3,103

 

3,019

 

Dividend payable

 

18,864

 

24,313

 

Total Liabilities (2)

 

2,819,863

 

2,902,781

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock, $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively

 

419

 

419

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding

 

 

 

Additional paid-in capital

 

763,869

 

763,283

 

Retained earnings (accumulated deficit)

 

(307,236

)

(252,054

)

Total Stockholders’ Equity

 

457,052

 

511,648

 

Total Liabilities and Stockholders’ Equity

 

$

3,276,915

 

$

3,414,429

 

 

See notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued) (Unaudited)

(in thousands—except share and per share data)

 

 

 

March 31, 2016

 

December 31, 2015

 

(1) Assets of consolidated VIEs included in the total assets above:

 

 

 

 

 

Residential Whole-Loans, at fair value ($201,267 and $218,538 pledged as collateral, at fair value, respectively)

 

$

201,267

 

$

218,538

 

Securitized commercial loan, at fair value

 

23,675

 

25,000

 

Investment related receivable

 

3,200

 

 

Accrued interest receivable

 

1,737

 

1,836

 

Total assets of consolidated VIEs

 

$

229,879

 

$

245,374

 

 

 

 

 

 

 

(2) Liabilities of consolidated VIEs included in the total liabilities above:

 

 

 

 

 

Securitized debt, at fair value

 

$

10,417

 

$

11,000

 

Accrued interest payable

 

85

 

85

 

Accounts payable and accrued expenses

 

2

 

2

 

Total liabilities of consolidated VIEs

 

$

10,504

 

$

11,087

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands—except share and per share data)

 

 

 

For the three months
ended March 31, 2016

 

For the three months
ended March 31,
2015

 

 

 

 

 

 

 

Net Interest Income:

 

 

 

 

 

Interest income

 

$

29,618

 

$

40,806

 

Interest expense

 

7,979

 

6,402

 

Net Interest Income

 

21,639

 

34,404

 

 

 

 

 

 

 

Other Income (Loss):

 

 

 

 

 

Realized gain (loss) on sale of investments, net

 

(6,055

)

7,468

 

Other than temporary impairment

 

(10,797

)

(4,651

)

Unrealized gain (loss), net

 

10,769

 

28,410

 

Gain (loss) on derivative instruments, net

 

(45,170

)

(48,302

)

Other, net

 

(332

)

2,384

 

Other Income (Loss), net

 

(51,585

)

(14,691

)

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

General and administrative (includes $572 and $679 non-cash stock based compensation, respectively)

 

3,605

 

2,874

 

Management fee — related party

 

2,753

 

2,693

 

Total Operating Expenses

 

6,358

 

5,567

 

 

 

 

 

 

 

Net income (loss) available to Common Stock and participating securities

 

$

(36,304

)

$

14,146

 

 

 

 

 

 

 

Net income (loss) per Common Share — Basic

 

$

(0.88

)

$

0.34

 

Net income (loss) per Common Share — Diluted

 

$

(0.88

)

$

0.34

 

Dividends Declared per Share of Common Stock

 

$

0.45

 

$

0.67

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(in thousands—except shares and share data)

 

 

 

Common Stock

 

Additional Paid-

 

Retained
Earnings
(Accumulated)

 

 

 

 

 

Shares

 

Par

 

In Capital

 

Deficit

 

Total

 

Balance at December 31, 2015

 

41,919,801

 

$

419

 

$

763,283

 

$

(252,054

)

$

511,648

 

Vesting of restricted stock

 

 

 

572

 

 

572

 

Net income

 

 

 

 

(36,304

)

(36,304

)

Dividends declared on common stock

 

 

 

14

 

(18,878

)

(18,864

)

Balance at March 31, 2016

 

41,919,801

 

$

419

 

$

763,869

 

$

(307,236

)

$

457,052

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

For the three months
ended March 31,
2016

 

For the three months
ended March 31,
2015

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(36,304

)

$

14,146

 

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

 

 

 

 

 

Premium amortization and (discount accretion) on investments, net

 

895

 

2,582

 

Interest income earned added to principal of securities

 

(94

)

 

Amortization of deferred financing costs

 

134

 

 

Restricted stock amortization expense

 

572

 

679

 

Premium amortization for MAC interest rate swaps

 

(164

)

(371

)

(Interest received) Interest payments and basis recovered on MAC interest rate swaps

 

(159

)

246

 

Premium on purchase of Residential Whole-Loans

 

 

(230

)

Unrealized gain, net

 

(10,769

)

(28,410

)

Mark-to-market adjustments on derivative instruments

 

64,555

 

56,037

 

Other than temporary impairment

 

10,797

 

4,651

 

Realized (gain) loss on sale of securities, net

 

6,055

 

(7,468

)

Realized (gain) loss on sale of Interest-Only Strips accounted for as derivatives, net

 

(300

)

2

 

Realized gain on sale of TBAs, net

 

(7,739

)

(7,448

)

Realized (gain) loss on sale of swaptions, net

 

712

 

(713

)

Realized gain on futures

 

(14,316

)

 

Realized (gain) loss on forward contracts

 

28

 

(646

)

Realized gain on options

 

(4,756

)

 

Realized gain on foreign currency swaps

 

(3,942

)

 

Realized gain on total return swaps

 

(8

)

 

(Gain) loss on foreign currency transactions, net

 

575

 

(2,396

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accrued interest receivable

 

(1,873

)

(4,533

)

Decrease in other assets

 

209

 

155

 

Decrease in accrued interest payable

 

(91

)

(1,247

)

Increase (decrease) in accounts payable and accrued expenses

 

(107

)

841

 

Increase in payable to related party

 

84

 

178

 

Net cash provided by operating activities

 

3,994

 

26,055

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of securities

 

(1,059,720

)

(334,429

)

Proceeds from sale of securities

 

1,166,621

 

536,869

 

Principal payments and basis recovered on securities

 

75,531

 

100,436

 

Purchase of Residential Whole-Loans

 

 

(10,230

)

Principal payments on Residential Whole-Loans

 

14,021

 

20

 

Purchase of Commercial Whole-Loans

 

 

(8,750

)

Payment of premium for option derivatives

 

(17,951

)

 

Premium received from option derivatives

 

22,707

 

 

Net settlements of TBAs

 

7,624

 

9,629

 

Proceeds from termination of futures

 

14,316

 

 

Proceeds from sale of interest rate swaptions

 

2,075

 

17,768

 

Premium for MAC interest rate swaps

 

465

 

 

(Interest received) Interest payments and basis recovered on MAC interest rate swaps

 

159

 

(32

)

Due from counterparties

 

(9,719

)

 

Payment on termination of foreign currency swaps

 

3,942

 

 

Payments on total return swaps

 

8

 

 

Payments made on reverse repurchase agreements

 

(9,307

)

(65,674

)

Premium for interest rate swaptions, net

 

 

(19,215

)

Net cash provided by investing activities

 

210,772

 

226,392

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from repurchase agreement borrowings

 

3,775,760

 

5,074,942

 

Repayments of repurchase agreement borrowings

 

(3,959,010

)

(5,331,410

)

Proceeds from forward contracts

 

30,876

 

71,417

 

Repayments of forward contracts

 

(30,904

)

(70,771

)

Interest payments and basis recovered on MAC interest rate swaps containing an other-than-insignificant financing element

 

 

(214

)

Due from counterparties, net

 

(21,189

)

(51,435

)

Due to counterparties, net

 

11,658

 

62,373

 

Dividends paid on common stock

 

(24,313

)

(29,204

)

Net cash used in financing activities

 

(217,122

)

(274,302

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

85

 

115

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,271

)

(21,740

)

Cash and cash equivalents beginning of period

 

24,711

 

47,222

 

Cash and cash equivalents end of period

 

$

22,440

 

$

25,482

 

 

 

 

 

 

 

Supplemental disclosure of operating cash flow information:

 

 

 

 

 

Interest paid

 

$

7,626

 

$

6,560

 

Supplemental disclosure of non-cash financing/investing activities:

 

 

 

 

 

Principal payments of securities, not settled

 

$

 

$

290

 

Securities sold, not settled

 

$

151

 

$

 

Net unsettled TBAs

 

$

115

 

$

4

 

Principal payments of Residential Whole-Loans, not settled

 

$

3,200

 

$

 

Dividends and distributions declared, not paid

 

$

18,864

 

$

28,086

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(in thousands- except share and per share data)

 

The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: “Agency” or “Agencies” refer to a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae” or “GNMA”); references to “MBS” refer to mortgage backed securities, including residential mortgage-backed securities or “RMBS”, commercial mortgage-backed securities or “CMBS”, and “Interest-Only Strips” (as defined herein);”Agency MBS” refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while “ Non-Agency MBS “ refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to “ARMs” refers to adjustable rate mortgages; references to “Interest-Only Strips” refer to interest-only (“IO”) and inverse interest-only (“IIO”) securities issued as part of or collateralized with MBS; references to Residential Whole-Loans and Commercial Whole-Loans (collectively “Whole-Loans”) refer to individual mortgage loans secured by single family and commercial properties, respectively.

 

Note 1 — Organization

 

Western Asset Mortgage Capital Corporation and subsidiaries (the “Company”) is a Delaware corporation commencing operations in May 2012 focusing on investing in, financing and managing a diversified portfolio of real estate related securities, whole-loans and other financial assets.  The Company’s portfolio is comprised of Agency RMBS (including TBAs as defined herein), Non-Agency RMBS, Agency and Non-Agency CMBS and Whole-Loans. In addition, and to a significantly lesser extent, the Company has invested in other securities including certain Agency obligations that are not technically MBS as well as certain Non U.S. CMBS and in asset-backed securities (“ABS”) investments secured by a portfolio of private student loans.  The Company’s investment strategy is based on Western Asset Management Company’s (the “Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time.  The Manager will vary the allocation among various asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940 (the “1940 Act”).  These restrictions limit the Company’s ability to invest in non-qualifying MBS, non-real estate assets and/or assets which are not secured by real estate.  Accordingly, the Company’s portfolio will continue to be principally invested in qualifying MBS and other real estate related assets.

 

The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission (“SEC”).  The Manager is a wholly-owned subsidiary of Legg Mason, Inc.  The Company operates and has elected to be taxed as a real estate investment trust or “REIT” commencing with its taxable year ended December 31, 2012.

 

Note 2 — Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 periods.  Actual results could differ from those estimates.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.  The Company also consolidated two variable interest entities (“VIE”) where it was primary beneficiary.  Refer to Note 5 - “Variable Interest Entities” for additional information regarding the impact of consolidation of theses VIE’s.  All intercompany amounts between the Company and its subsidiary and consolidated VIE’s have been eliminated in consolidation.

 

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Table of Contents

 

Variable Interest Entities

 

VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

 

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers is deemed to have the power to direct the activities of a VIE.

 

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.

 

In instances when a VIE is owned by both the Company and related parties, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed.  If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed.  If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group does as a whole meets these two criteria, the determination of primary beneficiary within the related party group is based upon an analysis of the facts and circumstances with the objective of determining which party is most closely associated with the VIE.  Determining the primary beneficiary within the related party group requires significant judgement.

 

In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity, under GAAP, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

 

Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.

 

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary have been made to present fairly the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2016. The results of operations for the period ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year or any future period.

 

The Company currently operates as one business segment.

 

Cash and Cash Equivalents

 

The Company considers all highly-liquid short term investments with original maturities of 90 days or less when purchased to be cash equivalents.  Cash and cash equivalents are exposed to concentrations of credit risk. The Company places its cash and cash equivalents with what it believes to be high credit quality institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.

 

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Fair Value Election

 

The Company has elected the fair value option for all of its investments and its securitized debt, which permits the Company to measure these financial instruments at fair value with the change in fair value included as a component of earnings. In the Manager’s view, this election more appropriately reflects the results of the Company’s operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of economic hedging instruments.

 

Mortgage-Backed Securities and Other Securities

 

The Company’s purchases and sales of mortgage-backed securities and other securities are recorded on the trade date, which results in an investment related payable (receivable) for MBS and other securities purchased (sold) for which settlement has not taken place as of the balance sheet date. In addition, the Company’s TBAs (as defined herein) which have matured but have not settled as of the balance sheet date result in an investment related payable (receivable).  The Company’s MBS and other securities are pledged as collateral against borrowings under repurchase agreements.  The Company’s MBS and other securities are included in Mortgage-backed securities and other securities at fair value and Investment related receivables in the Consolidated Balance Sheets, with the fair value of such MBS and other securities pledged disclosed parenthetically.

 

Residential and Commercial Loans

 

The Company records its purchases of residential and commercial loans on settlement date as the amount paid to the seller plus any fees paid or less any fees received.  All other costs incurred in connection with acquiring residential and commercial loans or committing to purchase residential and commercial loans are charged to expense as incurred. The Company amortizes or accretes any premium or discount over the life of the related loan utilizing the effective interest method, based on the contractual payment terms of the loan. On at least a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the Company does not record an allowance for loan loss as the Company has elected the fair value option.  However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

 

Valuation of financial instruments

 

The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). In accordance with GAAP, the Company is required to provide enhanced disclosures regarding instruments in the Level III category (which require significant management judgment), including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities.  GAAP establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements. GAAP further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

 

Level I — Quoted prices in active markets for identical assets or liabilities.

 

Level II — Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, for example, when there is little or no market activity for an investment at the end of the period, unobservable inputs may be used.

 

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The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Transfers between levels are determined by the Company at the end of the reporting period.

 

When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will use independent pricing services and if the independent pricing service cannot price a particular asset or liability, the Company will obtain third party broker quotes. The Manager’s pricing group, which functions independently from its portfolio management personnel, corroborates the third party broker quote by comparing the broker price to alternate sources or using internal valuation techniques.  If independent pricing service, or third party broker quotes are not available, the Company determines the fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and when applicable, estimates of prepayment and credit losses.

 

Fair value under GAAP represents an exit price in the normal course of business, not a forced liquidation price. If the Company is forced to sell assets in a short period to meet liquidity needs, the prices it receives can be substantially less than their recorded fair values.

 

The Company performs quarterly reviews of the independent third party pricing data which may consist of a review of the daily change in the prices provided by the independent pricing vendor that exceed established tolerances or comparisons to executed transaction prices, utilizing its Manager’s pricing group.  The Manager’s pricing group corroborates the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations.  If the price change or difference cannot be corroborated, the Manager’s pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted.  To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.

 

Interest income recognition and Impairment

 

Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase

 

Interest income on mortgage-backed and other securities is accrued based on the respective outstanding principal balances and corresponding contractual terms. Premiums and discounts associated with Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase, are amortized into interest income over the estimated life of such securities using the effective yield method. Adjustments to premium and discount amortization are made for actual prepayment activity.  The Company estimates prepayments at least quarterly for its securities and, as a result, if prepayments increase (or are expected to increase), the Company will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization.  Alternatively, if prepayments decrease (or are expected to decrease), the Company will reduce the rate of amortization on the premiums or discounts and make a retrospective adjustment to historical amortization.

 

The Company assesses its Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase, for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other —than —temporarily impaired involves judgement and assumptions based on subjective and objective factors.  When the fair value of an investment is less than its amortized cost at the balance sheet date, during a reporting period, the security is considered impaired and the impairment is designated as either “temporary” or “other-than-temporary.” In deciding on whether or not a security is other-than-temporarily impaired, the Company considers several factors, including the nature of the investment, communications (if any) from the trustee of securitization regarding the credit quality of the security, the severity and duration of the impairment and  the cause of the impairment. When a security is impaired an OTTI is considered to have occurred if there is an adverse change in the expected cash flows (principal or interest) to be received and the fair value of the security is less than its carrying amount and either the Company intends to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost.    In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date.  The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. The OTTI is recorded in the Company’s Consolidated Statement of Operations.

 

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The determination as to whether OTTI exists is subjective given that such determination is based on information available at the time of assessment as well as the Company’s estimates of the future performance and cash flow projections on the security. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

 

Finally, certain of the Company’s MBS and other securities that are in an unrealized loss position at the end of the reporting period are not considered other-than-temporarily impaired because the Company has the ability and intent to hold the securities to maturity or for a period of time sufficient for a price recovery up to or above the amortized cost of the investment and the Company is not required to sell the security for regulatory or other reasons.

 

Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives

 

Interest income on Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives are recognized based on the effective yield method.  The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on the Company’s observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses.  On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Where appropriate, the Company may include in its cash flow projections the U.S Department of Justice’s settlements with the major residential mortgage originators, regarding certain lending practices. 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 securities are affected by the contractual lives of the underlying collateral, periodic payments of scheduled principal, and prepayments of principal. Therefore, actual maturities of the securities will generally be shorter than stated contractual maturities.

 

Based on the projected cash flow of such securities purchased at a discount to par value, the Company may designate a portion of such purchase discount as credit protection against future credit losses and, therefore, not accrete such amount into interest income.  The amount designated as credit discount 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 credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income prospectively.

 

In addition, an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows (principal or interest) to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date.  The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. The OTTI is recorded in the Company’s Consolidated Statements of Operations as Other than temporary impairment.

 

Securities denominated in a foreign currency contain additional risk in that the amortized cost basis for those securities may not be recovered due to declines in currency exchange rates.  The Company considers the length of time that the security’s fair value has declined due to the decline in foreign exchange rates, when assessing other-than temporary impairment.

 

The determination as to whether OTTI exists is subjective given that such determination is based on information available at the time of assessment as well as the Company’s estimates of the future performance and cash flow projections on the security. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

 

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Finally, certain of the Company’s MBS and other securities that are in an unrealized loss position at the end of the reporting period are not be considered other-than-temporarily impaired because the Company has the ability and intent to hold the securities to maturity or for a period of time sufficient for a price recovery up to or above the amortized cost of the investment and the Company is not required to sell the security for regulatory or other reasons.

 

Sales of Investments

 

Sales of investments are driven by the Company’s portfolio management process. The Company seeks to mitigate risks including those associated with prepayments and will opportunistically rotate the portfolio into securities and/or other assets the Company’s Manager believes have more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes. Realized gains or losses on sales of investments, including Agency Interest-Only Strips not characterized as derivatives, are included in the net Realized gain (loss) on sale of investments, net in the Consolidated Statements of Operations, and are recorded at the time of disposition.  Realized gains losses on Interest-Only Strips which are characterized as derivatives are included in Gain (loss) on derivative instruments, net line item in the Consolidated Statements of Operations.  The cost of positions sold is calculated using the specific identification method.

 

Investments in an unrealized loss position at the end of each reporting period are evaluated by the Company’s Manager to determine whether the Company has the intent to sell such investments.  To the extent the Company has no intent as of the end of such reporting period to sell such investments and it is more likely than not that the Company will not be required to sell the investment before recovery of its amortized cost basis, such unrealized loss is included in Unrealized gain (loss), net in the Consolidated Statements of Operations.  Otherwise, when the Company has determined its intent to sell such securities, the unrealized loss is characterized as a realized loss and included in Other than temporary impairment in the Consolidated Statements of Operations. The Company has no intent to sell any of its investments in an unrealized loss position at March 31, 2016.

 

Foreign currency transactions

 

The Company has and expects to continue to enter into transactions denominated in foreign currency from time to time.  At the date the transaction is recognized, the asset and/or liability will be measured and recorded using the exchange rate in effect at the date of the transaction.  At each balance sheet date, such foreign currency assets and liabilities are re-measured using the exchange rate in effect at the date of the balance sheet, resulting in unrealized foreign currency gains or losses.  Unrealized foreign currency gains or losses on MBS and other assets are recorded in Unrealized gain (loss), net in the Consolidated Statement of Operations. In addition, the Company evaluates whether an other-than-temporary impairment is deemed to have occurred on MBS and other assets denominated in a foreign currency.  Cash flows from MBS and other assets denominated in foreign currencies are received in a foreign currency, and as a result, the Company may incur a loss due to changes in foreign exchange rates even when all contractual cash flows are received.   These adjustments are reflected in the Consolidated Statements of Operations as Other than temporary impairment.  Unrealized and realized foreign currency gains or losses on borrowings under repurchase agreements are recorded in Other, net in the Consolidated Statement of Operations. Interest income from investments denominated in a foreign currency and interest expense on borrowings denominated in a foreign currency are recorded at the average rate of exchange during the period.

 

Due from counterparties/Due to counterparties

 

Due from counterparties represents cash posted by the Company with its counterparties as collateral for the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs. Due to counterparties represents cash posted with the Company by its counterparties as collateral under the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs.  Included in the due from counterparties and/or due to counterparties are daily variation margin settlement amounts with counterparties which are based on the price movement of the Company’s futures contracts.  In addition, as provided below, Due to counterparties may include non-cash collateral in which the Company has the obligation to return and which the Company has either sold or pledged. To the extent the Company receives collateral other than cash from its counterparties such assets are not included in the Company’s Consolidated Balance Sheets.  Notwithstanding the foregoing, if the Company either rehypothecates such assets or pledges the assets as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability are reflected in the Consolidated Balance Sheets.

 

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Derivatives and hedging activities

 

Subject to maintaining its qualification as a REIT for U.S. federal income tax purposes, the Company utilizes derivative financial instruments, including interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, TBAs and Agency and Non-Agency Interest-Only Strips to hedge the interest rate and currency risk associated with its portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation.  The Company has also entered into a total return swap, which transfer the total return of a referenced security to the Company.  The Company determines the fair value of its derivative positions and obtains quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If the Company’s hedging activities do not achieve the desired results, reported earnings may be adversely affected.

 

GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative. The fair value adjustment will affect either  other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a for hedge for accounting purposes and if so, the nature of the hedging activity.  The Company elected not to apply hedge accounting for its derivative instruments.  Accordingly, the Company records the change in fair value, of its derivative instruments, which includes net interest rate swap payments/receipts (including accrued amounts) and net currency payments (including accrued amounts) related to interest rate swaps and currency swaps, respectively in Gain (loss) on derivative instruments, net in its Consolidated Statements of Operations.

 

In the Company’s Consolidated Statements of Cash Flows, premiums received or paid on termination of its interest rate swaps, excluding interest rate swaps containing an other-than-insignificant financing element and the unamortized premium of market agreed coupon (“MAC”) interest rate swaps, are included in cash flows from operating activities. Notwithstanding the foregoing, proceeds and payments on settlement of swaptions, mortgage put options, futures contracts and TBAs are included in cash flows from investing activities.  Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in the Company’s Consolidated Statement of Cash Flows.  While payments made at the time of entering MAC interest rate swaps are included in cash flows from investing activities, payments received by the Company upon entering MAC interest rate swaps are included in either cash flows from investing activities or cash flows financing activities, depending on whether or not the derivative instrument includes an other-than-insignificant financing element.  For MAC interest rate swaps containing an other-than-insignificant financing element, all cash flows over the life of the derivative are treated as cash flows from financing activities.  Return and recovery of basis activity for MAC interest rate swaps is included in cash flows from investing activities for swaps not containing an other-than-insignificant financing element in the Company’s Consolidated Statement of Cash Flows.  For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in the Company’s Consolidated Statement of Cash Flows.

 

The Company evaluates the terms and conditions of its holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts, total return swaps and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP.  In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only Strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as a MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value. Accordingly, Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts, total return swaps and TBAs having the characteristics of derivatives are accounted for at fair value with such changes recognized in Gain (loss) on derivative instruments, net in its Consolidated Statements of Operations, along with any interest earned or paid (including accrued amounts). The carrying value of the Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in Mortgage-backed securities in the Consolidated Balance Sheets.  The carrying value of interest rate swaptions, currency forwards, futures contracts, total return swaps and TBAs is included in Derivative assets or Derivative liabilities in the Consolidated Balance Sheets.

 

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The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.  An embedded derivative is separated from the host contact and accounted for separately when all of the guidance criteria are met.  Hybrid instruments that are remeasured at fair value through earnings, including the fair value option are not bifurcated.  Derivative instruments, including derivative instruments accounted for as liabilities, are recorded at fair value and are re-valued at each reporting date, with changes in the fair value together with interest earned or paid (including accrued amounts) reported in the Gain (loss) on derivative instruments, net in the Consolidated Statements of Operations.

 

Repurchase agreements and Reverse Repurchase agreements

 

Mortgage-backed securities and other securities sold under repurchase agreements are treated as collateralized financing transactions, unless they meet sales treatment. Securities financed through a repurchase agreement remain on the Company’s Consolidated Balance Sheets as assets and cash received from the lender is recorded in the Company’s Consolidated Balance Sheets as a liability. Interest payable in accordance with repurchase agreements is recorded as accrued interest payable in the Consolidated Balance Sheets.  Interest paid (including accrued amounts) in accordance with repurchase agreements was recorded as interest expense.  The Company reflects all proceeds from repurchase agreement borrowings and repayment of repurchase agreement borrowings, including transactions pertaining to collateral received with respect to certain swap transactions, on a gross basis in the Consolidated Statements of Cash Flows.

 

The Company may borrow securities under reverse repurchase agreements to deliver a security owned and sold by the Company but pledged to a different counterparty under a separate repurchase agreement when in the Manager’s view terminating the outstanding repurchase agreement is not in the Company’s interest.  Cash paid to the borrower is recorded in the Company’s Consolidated Balance Sheets as an asset.  Interest receivable in accordance with reverse repurchase agreements is recorded as accrued interest receivable in the Consolidated Balance Sheets. The Company reflects all proceeds on reverse repurchase agreement and repayment of reverse repurchase agreement, on a net basis in the Consolidated Statements of Cash Flows.  Upon sale of a pledged security, the Company recognizes an obligation to return the borrowed security in the Consolidated Balance Sheet in Due to Counterparty.  The Company establishes haircuts to ensure the market value of the underlying asset remains sufficient to protect the Company in the event of default by the counterparty.  Realized gains and losses associated with the sale of the security are recognized in Realized gain (loss) on sale of investments, net in the Consolidated Statement of Cash Flows.

 

Securitized debt

 

Securitized debt was issued at par by a consolidated securitization trust.  The Company elected the fair value option for the debt and as a result all changes in fair value are reflected in Unrealized gain (loss), net in the Consolidated Statement of Operations.

 

Share-based compensation

 

The Company accounts for share-based compensation to its independent directors, to any employee, to its Manager and to employees of its Manager and its affiliates using the fair value based methodology prescribed by GAAP.  Compensation cost related to restricted common stock issued to the Company’s independent directors including any such restricted stock which is subject to a deferred compensation program, and any employee of the Company is measured at its fair value at the grant date, and amortized into expense over the service period on a straight-line basis. Compensation cost related to restricted common stock issued to the Manager and to employees of the Manager, including officers of the Company who are employees of the Manager and its affiliates is initially measured at fair value at the grant date, and amortized into expense over the vesting period on a straight-line basis and re-measured on subsequent dates to the extent the awards are unvested.

 

Warrants

 

For the Company’s warrants, the Company uses a variation of the adjusted Black-Scholes option valuation model to record the financial instruments at their relative fair values at issuance. The warrants issued with the Company’s common stock in the private placement to certain accredited institutional investors on May 15, 2012, were evaluated by the Company and were recorded at their relative fair value as a component of equity at the date of issuance.

 

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Income taxes

 

The Company operates and has elected to be taxed as a REIT commencing with its taxable year ended December 31, 2012. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that the Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact on the Company’s results of operations and amounts available for distribution to stockholders.

 

The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the consolidated financial statements. Taxable income, generally, will differ from net income reported in the consolidated financial statements because the determination of taxable income is based on tax regulations and not GAAP.

 

The Company has elected to treat a wholly-owned subsidiary as a domestic Taxable REIT Subsidiary (“TRS”) and in the future may create and elect other subsidiaries as either a domestic or foreign TRS. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A domestic TRS is subject to U.S. federal, state and local corporate income taxes, and its value may not exceed 25% of the value of the Company. While a TRS may generate net income, a TRS can declare dividends to the Company, which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at the TRS level, no distribution is required and it can increase book equity of the consolidated entity.

 

The Company evaluates uncertain tax positions, if any, and classifies interest and penalties, if any, related to unrecognized tax benefits, if any, as a component of the provision for income taxes.  In addition, the Company evaluates the performance of the TRS each period to determine the need for a provision for income taxes.

 

Offering costs

 

Offering costs borne by the Company in connection with common stock offerings and private placements are reflected as a reduction of additional paid-in-capital.

 

Earnings per share

 

GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings for the period had been distributed.  Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings.  During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.  The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

 

The remaining earnings are allocated to common stockholders and participating securities, to the extent that each security shares in earnings, as if all of the earnings for the period had been distributed.  Each total is then divided by the applicable number of shares to arrive at basic earnings per share.  For the diluted earnings, the denominator includes all outstanding common shares and all potential common shares assumed issued if they are dilutive.  The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares.

 

Comprehensive Income (Loss)

 

The Company has none of the components of comprehensive income (loss) and therefore comprehensive income (loss) is not presented.

 

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Accounting standards applicable to emerging growth companies

 

The JOBS Act contains provisions that relax certain requirements for “emerging growth companies”, which includes the Company. For as long as the Company is an emerging growth company, which may be up to five full fiscal years, unlike other public companies, the Company will not be required to: (i) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act; (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of the Company’s system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; (iii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Company currently takes advantage of some of these exemptions. The Company’s qualification for remaining an emerging growth company under the five full fiscal years expires on December 31, 2017. However, the Company will no longer qualify for such exemption if its gross revenues for any year equals or exceeds $1.0 billion, the Company issues more than $1.0 billion in non-convertible debt during the three previous years, or if the Company is deemed to be a large accelerated filer.

 

Recent accounting pronouncements

 

Accounting Standards Adopted in 2016

 

In January 2015, the FASB issued guidance to simplify income statement presentation by eliminating the concept of extraordinary items. U.S. GAAP currently requires that a company separately classify, disclose and present extraordinary events and transactions. The guidance eliminates the concept of extraordinary items from U.S. GAAP.  Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The standard is effective for periods beginning after December 15, 2015. The effective date is the same for both public companies and all other entities.  The 2016 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

In February 2015, the FASB issued guidance to simplify and reduce the number of consolidation models through the elimination of an indefinite deferral for certain entities and by placing more emphasis on risk of loss when determining a controlling financial interest.  The guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities.  All legal entities are subject to reevaluation under the revised consolidation model.  The standard is effective for a public company for fiscal years, and for interim periods within fiscal years beginning after December 15, 2015.  The 2016 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued guidance to amend the presentation of debt issuance cost related to a recognized debt liability. Under the new guidance, the debt issuance costs were presented in the balance sheet as a direct deduction from the carrying amount of the recognized debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected under the new guidance. The standard is effective for a public company for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The guidance should be applied on a retrospective basis. The Company’s December 31, 2015 balance sheet was adjusted to reflect the effects of applying the new guidance on a retrospective basis and resulted in a $134 thousand reduction in Borrowings under repurchase agreements and a corresponding reduction in Other assets. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The 2016 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

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Accounting Standards to be Adopted in Future Periods

 

In May 2014, the Financial Accounting Standards Board issued guidance that changes an entity’s recognition of revenue from contracts with customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In addition, the new guidance requires improved disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In applying the new guidance, an entity may use either a retrospective approach to each prior reporting period or a retrospective approach with the cumulative effect recognized at the date of initial application. For a public company, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted for a public entity. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the Financial Accounting Standards Board issued guidance that will require an entity’s management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. According to the new guidance, substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The term “probable” is used consistently with its current use in U.S. GAAP for loss contingencies. Disclosures will be required if conditions give rise to substantial doubt about the entity’s ability to continue as a going concern, including whether management’s plans that are intended to mitigate those conditions will alleviate the substantial doubt when implemented. The guidance is effective for annual periods ending after December 15, 2016. The effective date is the same for both public companies and all other entities.  Early application is permitted. The Company’s first assessment under the new guidance will be completed for the year ending December 31, 2016.

 

In January 2016, the FASB issued guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  The standard is effective for a public company for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.  Early adoption by public companies for fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance of this guidance are permitted as of the beginning of the fiscal year of adoption, under certain restrictions.  The Company should apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.  The guidance related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist at the date of adoption.  The Company is currently assessing the impact that this guidance will have on its consolidated financial statements when adopted.

 

In March 2016, the Financial Accounting Standards Board issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis.  For a public company, the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted in any interim or annual period.  The Company is currently assessing the impact that this guidance will have on its consolidated financial statements when adopted.

 

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Note 3 — Fair Value of Financial Instruments

 

The following tables present the Company’s financial instruments carried at fair value as of March 31, 2016 and December 31, 2015, based upon the valuation hierarchy (dollars in thousands):

 

 

 

March 31, 2016

 

 

 

Fair Value

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

 

$

592,573

 

$

 

$

592,573

 

30-Year mortgage

 

 

1,008,436

 

 

1,008,436

 

Agency RMBS Interest-Only Strips

 

 

32,671

 

 

32,671

 

Agency and Non-Agency Interest-Only Strips accounted for as derivatives, included in MBS

 

 

45,013

 

3,982

 

48,995

 

Non-Agency RMBS

 

 

272,282

 

166,558

 

438,840

 

Agency and Non-Agency CMBS

 

 

391,822

 

32,082

 

423,904

 

Other securities

 

 

17,615

 

30,384

 

47,999

 

Subtotal

 

 

2,360,412

 

233,006

 

2,593,418

 

 

 

 

 

 

 

 

 

 

 

Residential Whole-Loans

 

 

 

201,267

 

201,267

 

Securitized commercial loan

 

 

 

23,675

 

23,675

 

Subtotal

 

 

 

224,942

 

224,942

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

100,161

 

 

100,161

 

Total

 

$

 

$

2,460,573

 

$

457,948

 

$

2,918,521

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

1,794

 

$

319,727

 

$

866

 

$

322,387

 

Securitized debt

 

 

 

10,417

 

10,417

 

Total

 

$

1,794

 

$

319,727

 

$

11,283

 

$

332,804

 

 

 

 

December 31, 2015

 

 

 

Fair Value

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

 

$

687,272

 

$

 

$

687,272

 

30-Year mortgage

 

 

926,459

 

 

926,459

 

Agency RMBS Interest-Only Strips

 

 

71,954

 

 

71,954

 

Agency and Non-Agency Interest-Only Strips accounted for as derivatives, included in MBS

 

 

56,431

 

3,556

 

59,987

 

Non-Agency RMBS

 

 

278,885

 

247,753

 

526,638

 

Agency and Non-Agency CMBS

 

 

334,687

 

143,031

 

477,718

 

Other securities

 

 

29,103

 

71,996

 

101,099

 

Subtotal

 

 

2,384,791

 

466,336

 

2,851,127

 

 

 

 

 

 

 

 

 

 

 

Residential Whole-Loans

 

 

 

218,538

 

218,538

 

Securitized commercial loan

 

 

 

25,000

 

25,000

 

Subtotal

 

 

 

243,538

 

243,538

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

63

 

21,852

 

 

21,915

 

Total

 

$

63

 

$

2,406,643

 

$

709,874

 

$

3,116,580

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

698

 

$

179,479

 

$

 

$

180,177

 

Securitized debt

 

 

 

11,000

 

11,000

 

Total

 

$

698

 

$

179,479

 

$

11,000

 

$

191,177

 

 

When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will use independent pricing services and if the independent pricing service cannot price a particular asset or liability, the Company will obtain third party broker quotes.  The Manager’s pricing group, which functions independently from its portfolio management personnel, corroborates the third party broker quote by comparing the broker price to alternate sources or using internal valuation techniques.  If independent pricing service, or third party broker quotes are not available, the Company determines the fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and when applicable, estimates of prepayments and credit losses.

 

18



Table of Contents

 

Mortgage-backed securities and other securities

 

In determining the proper fair value hierarchy or level, all securities are initially classified in Level III.  The Company further determined, given the amount of available observable market data, Agency RMBS should be classified in Level II.  For Non-Agency RMBS, CMBS and other securities, to determine whether a security should be a Level II, the securities are grouped by security type and the Manager reviews the internal trade history, for the quarter, for each security type. If there is sufficient trade data above a predetermined threshold of a security type, the Managers determines it has sufficient observable market data and the security will be categorized as a Level II.

 

Values for the Company’s securities are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates a commonly used market pricing method. Depending on the type of asset and the underlying collateral, the primary inputs to the model include yields for TBAs, Agency RMBS, the U.S. Treasury market and floating rate indices such as LIBOR, the Constant Maturity Treasury rate and the prime rate as a benchmark yield. In addition, the model may incorporate the current weighted average maturity and additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the third party pricing service cannot adequately price a particular security, the Company utilizes a broker’s quote which is validated by the Manager’s pricing group.

 

Residential and Commercial Loans

 

Values for the Company’s residential and commercial loans are based upon prices obtained from an independent third party pricing service that specializes in residential and commercial loans, utilizing a trade based valuation model. Their valuation methodology incorporates commonly used market pricing methods, including loan to value (“LTV”), debt to income, maturity, interest rates, collateral location, and unpaid principal balance, prepayment penalties, FICO scores, lien position and times late. Due to the inherent uncertainty of such valuation, the fair values established for residential and commercial loans held by the Company may differ from the fair values that would have been established if a ready market existed for these loans. Accordingly, the Company’s loans are classified as Level III in the fair value hierarchy.

 

Securitized commercial loan and securitized debt

 

Values for the Company’s securitized commercial loan and securitized debt is based on the fair value that is more observable.  Since there is an extremely limited market for the securitized commercial loan, the Company determined the fair value of the securitized debt was more observable.  The fair value of the securitized debt was based upon a third party broker quote, which is validated by the Manager’s pricing group. Due to the inherent uncertainty of such valuation the Company classifies its securitized commercial loan and securitized debt as Level III.

 

Derivatives

 

Values for the Company derivatives are based upon prices from third party pricing services, whose pricing is subject to review by the Manager’s pricing committee. In valuing its over-the-counter interest rate derivatives, such as swaps and swaptions, its currency derivatives, such as swaps and forwards and credit derivatives such as total return swaps, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. The majority of the Company’s interest rate swaps are cleared through a central clearing house and subject to the clearing house margin requirements. The Company’s agreements with its derivative counterparties also contain netting provisions; however the Company has elected to report its interest rate swaps and swaptions and currency swaps and forwards on a gross basis.  No credit valuation adjustment was made in determining the fair value of interest rate and/or currency derivatives for the periods ended March 31, 2016 and December 31, 2015.

 

The Company performs quarterly reviews of the independent third party pricing data. These reviews may consist of a review of the daily change in the prices provided by the independent pricing vendor which exceed established tolerances or comparisons to executed transaction prices, utilizing the Manager’s pricing group.  The Manager’s pricing group, which functions independently from its portfolio management personnel, corroborates the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations.  If the price change or difference cannot be corroborated, the Manager’s pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted.  To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.

 

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Table of Contents

 

The following tables present additional information about the Company’s financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level III inputs to determine fair value:

 

 

 

Three months ended March 31, 2016

 

$ in thousands

 

Mortgage-backed
securities and
other securities

 

Residential
Whole-Loans

 

Securitized
commercial loan

 

Beginning balance

 

$

466,336

 

$

218,538

 

$

25,000

 

Transfers into Level III from Level II

 

 

 

 

Transfers from Level III into Level II

 

(158,566

)

 

 

Purchases

 

94

 

 

 

Sales and settlements

 

(68,910

)

 

 

Principal repayments

 

(4,021

)

(17,221

)

 

Total net gains / (losses) included in net income

 

 

 

 

 

 

 

Realized gains/(losses), net

 

(6,191

)

 

 

Other than temporary impairment

 

(4,063

)

 

 

Unrealized gains/(losses), net(1)

 

10,719

 

547

 

(1,325

)

Premium and discount amortization, net

 

(2,392

)

(597

)

 

Ending balance

 

$

233,006

 

$

201,267

 

$

23,675

 

 


(1)   For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at March 31, 2016, the Company recorded gross unrealized gains of approximately $17.1 million, $790 thousand and $0 and gross unrealized losses of approximately $2.6 million, $24 thousand and $1.3 million, respectively. These gains and losses are included in Unrealized gain (loss), net on the Consolidated Statements of Operations.

 

 

 

Three months ended March 31, 2016

 

$ in thousands

 

Derivative
Liability

 

Securitized
debt

 

Beginning balance

 

$

 

$

11,000

 

Transfers into Level III from Level II

 

 

 

Transfers from Level III into Level II

 

 

 

Purchases

 

 

 

Sales and settlements

 

 

 

Principal repayments

 

 

 

Total net gains / (losses) included in net income

 

 

 

 

 

Realized gains/(losses), net

 

 

 

Other than temporary impairment

 

 

 

Unrealized (gains)/losses, net(1)

 

866

 

(583

)

Premium and discount amortization, net

 

 

 

Ending balance

 

$

866

 

$

10,417

 

 


(1)   For Derivative liability and Securitized debt classified as Level III at March 31, 2016, the Company recorded gross unrealized gains of $0 and approximately $583 thousand and gross unrealized losses of approximately $866 thousand and $0, respectively. These gains and losses are included in Gain (loss) on derivative instruments, net and Unrealized gain (loss), net in the Consolidated Statements of Operations, respectively.

 

20



Table of Contents

 

 

 

Three months ended March 31, 2015

 

$ in thousands

 

Mortgage-backed
securities and
other securities

 

Residential
Whole-Loans

 

Commercial
Whole-Loan

 

Linked
Transactions

 

Beginning balance

 

$

291,407

 

$

7,220

 

$

 

$

20,627

 

Fair value of securities previously accounted for as linked transactions(1)

 

52,484

 

 

 

 

Fair value of financial instruments previously accounted for as linked transactions(1)

 

 

 

 

(20,627

)

Transfers into Level III from Level II

 

5,357

 

 

 

 

Transfers from Level III into Level II

 

 

 

 

 

Purchases

 

101,710

 

10,460

 

8,750

 

 

Sales and settlements

 

(49,724

)

 

 

 

Principal repayments

 

(2,345

)

(20

)

 

 

Total net gains / (losses) included in net income

 

 

 

 

 

 

 

 

 

Realized gains/(losses), net

 

4,470

 

 

 

 

Other than temporary impairment

 

(1,194

)

 

 

 

Unrealized gains/(losses), net(2)

 

130

 

246

 

150

 

 

Premium and discount amortization, net

 

(3,414

)

(46

)

 

 

Ending balance

 

$

398,881

 

$

17,860

 

$

8,900

 

$

 

 


(1)   Resulting from the implementation of guidance issued by the Financial Accounting Standards Board which eliminated the requirement to account for certain financial instruments as linked transactions.

(2)   For Mortgage-backed securities and other securities, Residential Whole-Loans and Commercial Whole-Loan classified as Level III at March 31, 2015, the Company recorded gross unrealized gains of approximately $6.9 million, $246 thousand and $150 thousand and gross unrealized losses of approximately $6.7 million, $0 and $0, respectively. These gains and losses are included in Unrealized gain (loss), net in the Consolidated Statements of Operations.

 

Transfers between hierarchy levels for the three months ended March 31, 2016 and March 31, 2015 were based on the availability of sufficient observable inputs to meet Level II versus Level III criteria.  The leveling of these assets was based on information received from a third party pricing service which, along with the back-testing of historical sales transactions performed by the Manager provided the sufficient observable data for the movement from Level III to Level II. The Company did not have transfers between Level I and Level II for the three months ended March 31, 2016 and March 31, 2015.

 

Other Fair Value Disclosures

 

Due from counterparties and Due to counterparties on the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.

 

The fair value of the repurchase agreements is based on an expected present value technique. This method discounts future estimated cash flows using rates the Company determined best estimate current market interest rates that would be offered for loans with similar characteristics and credit quality. The use of different market assumptions or estimation methodologies could have a material effect on the fair value amounts. At March 31, 2016, the Company’s borrowings under repurchase agreements had a fair value of approximately $2.406 billion and a carrying value of approximately $2.403 billion.  At March 31, 2016, the Company’s receivable under reverse repurchase agreements had a fair value of approximately $9.3 million and a carrying value of approximately $9.3 million. Inputs used to arrive at the fair value of the repurchase agreement borrowings and receivables under reverse repurchase agreements are generally observable, and therefore, they would be considered a Level II fair value measurement.

 

21



Table of Contents

 

Note 4 — Mortgage-Backed Securities and other securities

 

The following tables present certain information about the Company’s investment portfolio at March 31, 2016 and December 31, 2015 (dollars in thousands).

 

 

 

March 31, 2016

 

 

 

Principal
Balance

 

Unamortized
Premium
(Discount),
net

 

Discount
Designated as
Credit Reserve
and OTTI

 

Amortized
Cost

 

Unrealized
Gain

 

Unrealized
Loss

 

Estimated
Fair Value

 

Net
Weighted
Average
Coupon (1)

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

551,238

 

$

29,886

 

$

 

$

581,124

 

$

11,678

 

$

(229

)

$

592,573

 

3.9

%

30-Year mortgage

 

927,137

 

68,878

 

 

996,015

 

14,901

 

(2,480

)

1,008,436

 

4.1

%

Agency RMBS Interest-Only Strips (2)

 

N/A

 

N/A

 

N/A

 

32,264

 

1,314

 

(907

)

32,671

 

2.8

%(2)

Agency and Non-Agency Interest-Only Strips, accounted for as derivatives (2) (3)

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

48,995

 

2.4

%(2)

Non-Agency RMBS

 

482,117

 

(26,376

)

(106,562

)

349,179

 

12,659

 

(7,539

)

354,299

 

3.8

%

Non-Agency RMBS Interest- Only Strips (2)

 

N/A

 

N/A

 

N/A

 

63,580

 

21,175

 

(214

)

84,541

 

5.9

%(2)

Agency and Non-Agency CMBS

 

538,320

 

(73,237

)

(9,585

)

455,498

 

2,607

 

(35,853

)

422,252

 

5.0

%

Agency CMBS Interest-Only Strips (2)

 

N/A

 

N/A

 

N/A

 

1,486

 

166

 

 

1,652

 

4.6

%(2)

Other securities (4)

 

30,897

 

(876

)

(1,943

)

50,031

 

277

 

(2,309

)

47,999

 

6.4

%

Total

 

$

2,529,709

 

$

(1,725

)

$

(118,090

)

$

2,529,177

 

$

64,777

 

$

(49,531

)

$

2,593,418

 

4.0

%

 

 

 

December 31, 2015

 

 

 

Principal
Balance

 

Unamortized
Premium
(Discount),
net

 

Discount
Designated as
Credit Reserve
and OTTI

 

Amortized
Cost

 

Unrealized
Gain

 

Unrealized
Loss

 

Estimated
Fair Value

 

Net
Weighted
Average
Coupon (1)

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

645,313

 

$

35,216

 

$

 

$

680,529

 

$

8,562

 

$

(1,819

)

$

687,272

 

3.9

%

30-Year mortgage

 

856,014

 

71,342

 

 

927,356

 

10,827

 

(11,724

)

926,459

 

4.2

%

Agency RMBS Interest-Only Strips (2)

 

N/A

 

N/A

 

N/A

 

71,632

 

2,499

 

(2,177

)

71,954

 

3.1

%(2)

Agency and Non-Agency Interest-Only Strips, accounted for as derivatives (2) (3)

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

59,987

 

2.5

%(2)

Non-Agency RMBS

 

601,233

 

(16,669

)

(141,014

)

443,550

 

9,345

 

(7,446

)

445,449

 

3.7

%

Non-Agency RMBS Interest- Only Strips (2)

 

N/A

 

N/A

 

N/A

 

66,600

 

14,589

 

 

81,189

 

5.9

%(2)

Agency and Non-Agency CMBS

 

575,351

 

(73,835

)

(9,017

)

492,499

 

4,289

 

(21,183

)

475,605

 

5.0

%

Agency CMBS Interest-Only Strips (2)

 

N/A

 

N/A

 

N/A

 

1,915

 

198

 

 

2,113

 

4.7

%(2)

Other securities (4)

 

81,518

 

1,135

 

(2,719

)

102,778

 

1,233

 

(2,912

)

101,099

 

4.8

%

Total

 

$

2,759,429

 

$

17,189

 

$

(152,750

)

$

2,786,859

 

$

51,542

 

$

(47,261

)

$

2,851,127

 

3.9

%

 


(1) Net weighted average coupon as of March 31, 2016 and December 31, 2015 is presented, net of servicing and other fees.

(2) Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, Agency and Non-Agency IOs and IIOs, accounted for as derivatives, and Agency and Non-Agency CMBS IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on interest-only class of securities.  At March 31, 2016, the notional balance for Agency RMBS IOs and IIOs, Non-Agency IOs and IIOs, Agency and Non-Agency IOs and IIOs, accounted for as derivatives, and CMBS IOs and IIOs was $337.4 million, $309.0 million, $602.9 million and $42.6 million, respectively.  At December 31, 2015, the notional balance for Agency RMBS IOs and IIOs, Non-Agency IOs and IIOs, Agency and Non-Agency IOs and IIOs, accounted for as derivatives, and CMBS IOs and IIOs was $593.4 million, $321.0 million, $655.6 million and $43.2 million, respectively.

(3) Interest on these securities is reported as a component of Gain (loss) on derivative instruments, net in the Consolidated Statements of Operations.

(4) Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.0 million and $22.8 million, as of March 31, 2016 and December 31, 2015, respectively.

 

As of March 31, 2016 and December 31, 2015 the weighted average expected remaining term to the expected maturity of the MBS and other securities investment portfolio was 6.6 years and 7.1 years, respectively.

 

22



Table of Contents

 

The following tables present the changes in the components of the Company’s purchase discount and amortizable premium on its Non-Agency RMBS, Non-Agency CMBS and other securities for the three months ended March 31, 2016 and March 31, 2015 (dollars in thousands):

 

 

 

Three months ended March 31, 2016

 

 

 

Discount Designated as
Credit Reserve and
OTTI

 

Accretable Discount(1)

 

Amortizable Premium(1)

 

Balance at beginning of period

 

$

(152,750

)

$

(145,532

)

$

56,163

 

Accretion of discount

 

 

4,737

 

 

Amortization of premium

 

 

 

(1,702

)

Realized credit losses

 

3,666

 

 

 

Purchases

 

 

(2,265

)

 

Sales

 

28,154

 

7,831

 

(8,436

)

Net impairment losses recognized in earnings

 

(8,445

)

 

 

Transfers/release of credit reserve(2)

 

11,285

 

(8,667

)

(2,618

)

Balance at end of period

 

$

(118,090

)

$

(143,896

)

$

43,407

 

 


(1)

 

Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.

(2)

 

Subsequent reductions of a security’s non-accretable discount results in a corresponding reduction in its amortizable premium.

 

 

 

 

Three months ended March 31, 2015

 

 

 

Discount Designated as
Credit Reserve and
OTTI

 

Accretable Discount(1)

 

Amortizable Premium(1)

 

Balance at beginning of period

 

$

(182,007

)

$

(105,804

)

$

82,228

 

Securities previously accounted for as linked transactions(2)

 

(2,320

)

(1,393

)

4,587

 

Accretion of discount

 

 

5,154

 

 

Amortization of premium

 

 

 

(2,728

)

Realized credit losses

 

2,668

 

 

 

Purchases

 

(30,587

)

(48,298

)

2,057

 

Sales

 

53,815

 

36,852

 

(9,946

)

Net impairment losses recognized in earnings

 

(3,529

)

 

 

Transfers/release of credit reserve(3)

 

(1,932

)

1,687

 

245

 

Balance at end of period

 

$

(163,892

)

$

(111,802

)

$

76,443

 

 

 


(1)

 

Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.

(2)

 

Resulting from the implementation of guidance issued by the Financial Accounting Standards Board which eliminated the requirement to account for certain financial instruments as linked transactions.

(3)

 

Subsequent reductions of a security’s non-accretable discount results in a corresponding reduction in its amortizable premium.

 

The following tables present the fair value and contractual maturities of the Company’s investment securities at March 31, 2016 and December 31, 2015 (dollars in thousands):

 

 

 

March 31, 2016

 

 

 

< or equal to 10
years

 

> 10 years and < or
equal to 20 years

 

> 20 years and < or
equal to 30 years

 

> 30 years

 

Total

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

 

$

592,573

 

$

 

$

 

$

592,573

 

30-Year mortgage

 

 

 

1,008,436

 

 

1,008,436

 

Agency RMBS Interest-Only Strips

 

 

22,651

 

10,020

 

 

32,671

 

Agency and Non-Agency Interest-Only Strips, accounted for as derivatives

 

1,075

 

9,010

 

26,454

 

12,456

 

48,995

 

Non-Agency RMBS

 

14

 

67,868

 

66,757

 

219,660

 

354,299

 

Non-Agency RMBS Interest- Only Strips

 

 

 

22,604

 

61,937

 

84,541

 

Agency and Non-Agency CMBS

 

46,083

 

28,788

 

149,581

 

197,800

 

422,252

 

Agency CMBS Interest-Only Strips

 

1,652

 

 

 

 

1,652

 

Other securities

 

11,536

 

9,310

 

6,079

 

21,074

 

47,999

 

Total

 

$

60,360

 

$

730,200

 

$

1,289,931

 

$

512,927

 

$

2,593,418

 

 

23



 

Table of Contents

 

 

 

December 31, 2015

 

 

 

< or equal to 10
years

 

> 10 years and < or
equal to 20 years

 

> 20 years and < or
equal to 30 years

 

> 30 years

 

Total

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

 

$

687,272

 

$

 

$

 

$

687,272

 

30-Year mortgage

 

 

 

926,459

 

 

926,459

 

Agency RMBS Interest-Only Strips

 

 

40,900

 

31,054

 

 

71,954

 

Agency and Non-Agency Interest-Only Strips, accounted for as derivatives

 

1,310

 

10,081

 

35,219

 

13,377

 

59,987

 

Non-Agency RMBS

 

15

 

86,172

 

59,502

 

299,760

 

445,449

 

Non-Agency RMBS Interest- Only Strips

 

 

 

20,639

 

60,550

 

81,189

 

Agency and Non-Agency CMBS

 

65,213

 

27,849

 

167,355

 

215,188

 

475,605

 

Agency CMBS Interest-Only Strips

 

2,113

 

 

 

 

2,113

 

Other securities

 

29,102

 

11,088

 

39,256

 

21,653

 

101,099

 

Total

 

$

97,753

 

$

863,362

 

$

1,279,484

 

$

610,528

 

$

2,851,127

 

 

The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS and other securities by length of time that such securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015 (dollars in thousands):

 

 

 

March 31, 2016

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Unrealized

 

of

 

 

 

Unrealized

 

of

 

 

 

Unrealized

 

of

 

 

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

50,288

 

$

(100

)

2

 

$

46,978

 

$

(129

)

13

 

$

97,266

 

$

(229

)

15

 

30-Year mortgage

 

156,253

 

(33

)

16

 

247,475

 

(2,447

)

45

 

403,728

 

(2,480

)

61

 

Agency RMBS Interest-Only Strips

 

21,658

 

(908

)

13

 

 

 

 

21,658

 

(908

)

13

 

Non-Agency RMBS

 

170,213

 

(6,959

)

34

 

16,500

 

(579

)

4

 

186,713

 

(7,538

)

38

 

Non-Agency RMBS Interest-Only Strips

 

3,755

 

(214

)

1

 

 

 

 

3,755

 

(214

)

1

 

Agency and Non-Agency CMBS

 

318,025

 

(30,380

)

63

 

45,855

 

(5,473

)

11

 

363,880

 

(35,853

)

74

 

Other securities

 

34,208

 

(2,309

)

4

 

 

 

 

34,208

 

(2,309

)

4

 

Total

 

$

754,400

 

$

(40,903

)

133

 

$

356,808

 

$

(8,628

)

73

 

$

1,111,208

 

$

(49,531

)

206

 

 

 

 

 

December 31, 2015

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Number

 

 

 

 

 

Unrealized

 

of

 

 

 

Unrealized

 

of

 

 

 

Unrealized

 

of

 

 

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Agency RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20-Year mortgage

 

$

113,919

 

$

(1,229

)

35

 

$

44,470

 

$

(590

)

10