Anworth Reports Third Quarter 2016 Financial Results

Anworth Mortgage Asset Corporation (NYSE: ANH) (the "Company") today reported its financial results for the third quarter ended September 30, 2016.

Earnings

The following table summarizes the Company's Core Earnings, GAAP net income to common stockholders and Comprehensive Income for the three months ended September 30, 2016 (dollar amounts in thousands):
  Three Months Ended
September 30, 2016
(unaudited)
 
Earnings Earnings Per

Weighted

Share
Core Earnings $ 12,082 $ 0.13
GAAP net income to common stockholders $ 26,638 $ 0.28
Comprehensive income $ 34,224 $ 0.36
 

Core Earnings is a non-GAAP financial measure which is explained and reconciled to GAAP net income to common stockholders in the section entitled "Non-GAAP Financial Measures" at the end of this earnings release. For the three months ended September 30, 2016, Core Earnings included an adjustment to reflect paydown expense on Agency MBS, which is the proportional expense of Agency MBS purchase premiums relative to the principal payments and prepayments which occurred during the quarter.

Comprehensive Income is shown on the consolidated statements of comprehensive income included in this earnings release.

Portfolio

At September 30, 2016, the composition of the Company's portfolio at fair value was as follows (dollar amounts in thousands):
  September 30, 2016
Dollar Amount   Percentage
Agency MBS:
ARMS and hybrid ARMs $ 3,171,873 53.9 %
Fixed-rate Agency MBS 886,741 15.1 %
TBA Agency MBS   367,555 6.3 %
Total Agency MBS $ 4,426,169 75.3 %
Non-Agency MBS 644,216 11.0 %
Residential mortgage loans (1) 795,527 13.5 %
Residential real estate   14,289 0.2 %
Total Portfolio $ 5,880,201 100.0 %
Total Assets (2) $ 6,026,722

_________________
(1)   Residential mortgage loans owned by consolidated variable interest entities ("VIEs") that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company.
(2) Includes TBA Agency MBS.
 

Agency MBS

At September 30, 2016, the allocation of the Company's agency mortgage-backed securities, or Agency MBS, was approximately 73% adjustable-rate and hybrid adjustable-rate Agency MBS, 19% fixed-rate Agency MBS and 8% fixed-rate TBA Agency MBS as detailed below (dollar amounts in thousands):
  September 30,
2016
 
Fair value of Agency MBS and TBA Agency MBS $ 4,426,169  
Adjustable-rate Agency MBS coupon reset (less than 1 year) 45 %
Hybrid adjustable-rate Agency MBS coupon reset (1-2 years) 1 %
Hybrid adjustable-rate Agency MBS coupon reset (2-3 years) 4 %
Hybrid adjustable-rate Agency MBS coupon reset (3-4 years) 10 %
Hybrid adjustable-rate Agency MBS coupon reset (4-5 years) 2 %
Hybrid adjustable-rate Agency MBS coupon reset (5-7 years)   11 %
Total adjustable-rate Agency MBS   73 %
15-year fixed-rate TBA Agency MBS 8 %
15-year fixed-rate Agency MBS 16 %
20-year and 30-year fixed-rate Agency MBS   3 %
Total MBS   100 %
 

At September 30, 2016, the key metrics of the Company's Agency MBS portfolio were as follows (dollar amounts in thousands):
  September 30,

2016
Weighted Average Agency MBS Coupon:
Adjustable-rate Agency MBS 2.75 %
Hybrid adjustable-rate Agency MBS 2.44
15-year fixed-rate Agency MBS 2.65
15-year fixed-rate TBA Agency MBS 2.50
20-year and 30-year fixed-rate Agency MBS 4.29
Total Agency MBS: 2.68 %
Average Amortized Cost:
Adjustable-rate Agency MBS 102.95 %
Hybrid adjustable-rate Agency MBS 102.94
15-year fixed-rate Agency MBS 102.73
15-year fixed-rate TBA Agency MBS 103.23
20-year and 30-year fixed-rate Agency MBS 103.10
Total Agency MBS: 102.95 %
Average asset yield (weighted average coupon divided by average amortized cost) 2.60 %
Unamortized premium $114.1 million
Unamortized premium as a percentage of par value 2.95 %

Premium amortization expense on Agency MBS for the third quarter 2016
$7.1 million
  September 30,

2016
Constant prepayment rate (CPR) of Agency MBS 24%
Constant prepayment rate (CPR) of adjustable-rate and hybrid adjustable-rate Agency MBS 24%
Weighted average term to next interest rate reset on Agency MBS 23 months
 

Non-Agency MBS

Our Non-Agency MBS were either issued before 2008 or were recently issued and collateralized by currently non-performing residential mortgage loans that were originated before 2008. The following table summarizes the Company's Non-Agency MBS at September 30, 2016 (dollar amounts in thousands):
      Weighted Average
Mortgage Loan Type Fair

Value
Current

Principal
Amortized

Cost
  Coupon   Yield
 
Prime $ 50,851 $ 62,159 81.85 % 4.57 % 5.18 %
Alt-A 391,408 502,565 77.72 % 5.33 % 5.40 %
Subprime 49,795 52,728 95.26 % 4.43 % 5.20 %
Non-performing 152,176 157,039 98.90 % 4.65 % 5.46 %
Paydowns receivable   (14 )   - - - -
Total Non-Agency MBS $ 644,216   $ 774,491 83.54 % 5.07 % 5.38 %
 

Residential Mortgage Loans

The following table summarizes the Company's residential mortgage loans held-for-investment at September 30, 2016 (in thousands):
Residential mortgage loans held-for-investment   $ 795,527
Asset-backed securities issued by securitization trusts $ 779,761
Retained interest in loans held in securitization trust $ 15,766
 

Residential Real Estate

At September 30, 2016, Anworth Properties, Inc. owned 88 single-family residential rental properties located in Southeastern Florida that are carried at a total cost, net of accumulated depreciation, of $14.3 million.

MBS Portfolio Financing and Leverage

  September 30, 2016
Agency

MBS
  Non-Agency

MBS
  Total

MBS
Repurchase Agreements: (dollar amounts in thousands)
Outstanding repurchase agreement balance $ 3,540,000 $ 400,800 $ 3,940,800
Average interest rate 0.71 % 2.14 % 0.85 %
Average maturity 36 days 15 days 34 days
Average interest rate after adjusting for interest rate swaps 1.16 %
Average maturity after adjusting for interest rate swaps 478 days
 

At September 30, 2016, the Company's leverage multiple was 5.5x. The leverage multiple is calculated by dividing the Company's repurchase agreements outstanding by the aggregate of common stockholders' equity plus preferred stock and junior subordinated notes. The Company's effective leverage, which includes the effect of TBA dollar roll financing, was 6.0x at September 30, 2016.

Interest Rate Swaps and Eurodollar Futures Contracts

At September 30, 2016, the Company's interest rate swap agreements ("Swaps") had the following notional amounts (in thousands), weighted average fixed rates and remaining terms:
  September 30, 2016
Maturity Notional

Amount
  Weighted

Average

Fixed

Rate
  Remaining

Term in

Months
  Remaining

Term in

Years
 
Less than 12 months $ 775,000 0.69 % 4 0.3
1 year to 2 years 435,000 0.90 16 1.3
2 years to 3 years 100,000 1.00 25 2.1
3 years to 4 years 116,000 1.32 38 3.2
4 years to 5 years 200,000 2.06 55 4.6
5 years to 7 years   420,000 2.73 78 6.5
$ 2,046,000 1.34 % 30 2.5
 

At September 30, 2016, the Company's short position in Eurodollar Futures Contracts had the following notional amount (in thousands) and weighted average purchase price:
  September 30, 2016
Eurodollar Futures Contracts
Expiration Notional

Amount
  Weighted

Average

Purchase

Price
Less than 12 months $ 2,350,000 $ 99.08
 

Effective Net Interest Rate Spread

  September 30,

2016
Average asset yield, including TBA dollar roll income

2.82

%
Effective cost of funds 1.62
Effective net interest rate spread

1.20

%
 

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

Dividend

On September 15, 2016, the Company declared a quarterly common stock dividend of $0.15 per share for the third quarter ended September 30, 2016. Based upon the closing price of $4.92 on September 30, 2016, the annualized dividend yield on the Company's common stock at September 30, 2016 was 12.2%.

Book Value Per Common Share

At September 30, 2016, the Company's book value was $6.25 per share of common stock, which was an increase of $0.19 from $6.06 in the prior quarter.

The $0.15 quarterly dividend and the $0.19 increase in book value per share resulted in a return on equity to common stockholders of 5.61% for the quarter ended September 30, 2016. For the nine months ended September 30, 2016, the return on equity to common stockholders was 7.50% (unannualized).

Stock Transactions

During the quarter ended September 30, 2016, the Company sold an aggregate of 33,695 shares of its Series C Preferred Stock under its At Market Issuance Sales Agreements, which provided net proceeds to the Company of approximately $834 thousand.

During the quarter ended September 30, 2016, the Company repurchased an aggregate of 339,953 shares of its common stock at a weighted average price of $4.84 per share.

Subsequent Events

From October 1, 2016 through November 1, 2016, the Company issued an aggregate of 8,218 shares of Series C Preferred Stock at a weighted average price of $24.97 per share, resulting in net proceeds to us of approximately $203 thousand.

From October 1, 2016 through November 1, 2016, the Company repurchased an aggregate of 80,421 shares of its common stock at a weighted average price of $4.78 per share under its share repurchase program.

Conference Call

The Company will host a conference call on Thursday, November 3, 2016 at 1:00 PM Eastern Time, 10:00 AM Pacific Time, to discuss its third quarter 2016 results. The dial-in number for the conference call is 877-504-2731 for U.S. callers (international callers should dial 412-902-6640 and Canadian callers should dial 855-669-9657). When dialing in, participants should ask to be connected to the Anworth Mortgage earnings call. Replays of the call will be available for a 7-day period commencing at 3:00 PM Eastern Time on November 3, 2016. The dial-in number for the replay is 877-344-7529 for U.S. callers (Canadian callers should dial 855-669-9658 and international callers should dial 412-317-0088) and the conference number is 10095610. The conference call will also be webcast live over the Internet, which can be accessed on the Company's website at http://www.anworth.com through the corresponding link located at the top of the home page.

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

About Anworth Mortgage Asset Corporation

We are an externally-managed mortgage real estate investment trust ("REIT"). Our principal business is to invest primarily in mortgage-backed securities on a leveraged basis. Income generated for distribution to our shareholders is based primarily on the difference between the yield on our mortgage assets and the cost of our borrowings. We qualify as a REIT for federal income tax purposes and are not subject to federal corporate income taxes on distributions to our stockholders. We are managed by Anworth Management, LLC, or the Manager, pursuant a management agreement. The Manager is subject to the supervision and direction of our Board of Directors and is responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services and other services and activities relating to our assets and operations as may be appropriate. Our common stock is traded on the New York Stock Exchange under the symbol "ANH." Anworth Mortgage Asset Corporation is a component of the Russell 2000® Index.

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

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

(in thousands, except per share amounts)
 
September 30, December 31,
  2016     2015  
(audited)
ASSETS
Agency MBS:
Agency MBS pledged to counterparties at fair value $ 3,836,791 $ 4,694,731
Agency MBS at fair value 191,982 173,344
Paydowns receivable   29,841     24,707  
$ 4,058,614 $ 4,892,782
Non-Agency MBS at fair value (including $521,364 and $596,831 pledged to counterparties at

September 30, 2016 and December 31, 2015, respectively)
644,216 682,061
Residential mortgage loans held-for-investment (1) 795,527 969,172
Residential real estate 14,289 14,363
Cash and cash equivalents 17,097 5,754
Restricted cash 19,426 39,230
Interest and dividends receivable 16,616 17,525
Derivative instruments at fair value 2,023 12,470
Prepaid expenses and other   91,359     2,983  
Total Assets: $ 5,659,167   $ 6,636,340  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued interest payable $ 10,355 $ 13,443
Repurchase agreements 3,940,800 4,915,528
Asset-backed securities issued by securitization trusts (1) 779,761 915,486
Junior subordinated notes 37,380 37,380
Derivative instruments at fair value 48,224 34,547
Dividends payable on Series A Preferred Stock 1,035 1,035
Dividends payable on Series B Preferred Stock 394 394
Dividends payable on Series C Preferred Stock 216 207
Dividends payable on common stock 14,366 14,861
Accrued expenses and other   143,052     1,308  

Total Liabilities:
$ 4,975,583   $ 5,934,189  

Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($25,241 and $25,241, respectively); 1,010 and 1,010 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
$ 23,924   $ 23,924  
Stockholders' Equity:

Series A Cumulative Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($47,984 and $47,984, respectively); 1,919 and 1,919 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
$ 46,537 $ 46,537

Series C Cumulative Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($11,690 and $10,848, respectively); 468 and 434 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
10,872 10,039

Common Stock: par value $0.01 per share; authorized 200,000 shares, 95,772 shares issued and 95,742 shares outstanding at September 30, 2016 and 99,078 shares issued and 98,944 shares outstanding at December 31, 2015, respectively
958 991
Additional paid-in capital 966,720 981,034
Accumulated other comprehensive income consisting of unrealized gains and losses 37,449 949
Accumulated deficit   (402,876 )   (361,323 )
Total Stockholders' Equity: $ 659,660   $ 678,227  
Total Liabilities and Stockholders' Equity: $ 5,659,167   $ 6,636,340  

__________
(1)   The consolidated balance sheets include assets of consolidated variable interest entities ("VIEs") that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. At September 30, 2016 and December 31, 2015, total assets of the consolidated VIEs were $798 million and $972 million, respectively, and total liabilities were $782 million and $918 million, respectively.
 
 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)
   
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2016       2015     2016       2015  
Interest and other income:
Interest-Agency MBS $ 18,494 $ 24,572 $ 49,948 $ 82,624
Interest-Non-Agency MBS 8,766 8,078 27,185 18,110
Interest-residential mortgage loans 8,359 4,120 26,783 5,308
Income-rental properties 424 399 1,263 1,178
Other interest income   11     11     35     31  
  36,054     37,180     105,214     107,251  
Interest Expense:
Interest expense on repurchase agreements 8,615 8,167 26,973 22,256
Interest expense on asset-backed securities 7,918 3,729 24,932 4,804
Interest expense on junior subordinated notes   360     323     1,060     957  
  16,893     12,219     52,965     28,017  
Net operating income   19,161     24,961     52,249     79,234  
Provision for loan losses   -     70     -     140  
Net operating income after provision for loan losses   19,161     24,891     52,249     79,094  
Operating Expenses:
Management fee to related party (1,943 ) (2,167 ) (5,956 ) (6,684 )
General and administrative expenses   (1,493 )   (1,356 )   (4,751 )   (3,869 )

Total operating expenses
  (3,436 )   (3,523 )   (10,707 )   (10,553 )
Other income (loss):
Gain on sales of Agency MBS 1,206 - (2,032 ) -
Unrealized gain on Agency MBS held as trading investments 1,148 - 1,148 -
Loss on sales of Non-Agency MBS - - - (76 )
Gain on sales of residential mortgage loans held-for-investment 716 - 749 -
Gain (loss) on interest rate swaps, net 8,141 (50,965 ) (58,167 ) (92,378 )
Gain on derivatives-TBA Agency MBS, net 3,412 10,345 26,826 12,297
Loss on derivatives-Eurodollar Futures Contracts (2,060 ) (2,569 ) (3,396 ) (6,639 )
Recovery on Non-Agency MBS   1     7     3     13  
Total other income (loss)   12,564     (43,182 )   (34,869 )   (86,783 )
Net income (loss) $ 28,289   $ (21,814 ) $ 6,673   $ (18,242 )
Dividend on Series A Cumulative Preferred Stock (1,035 ) (1,035 ) (3,105 ) (3,105 )
Dividend on Series B Cumulative Convertible Preferred Stock (394 ) (394 ) (1,182 ) (1,182 )
Dividend on Series C Cumulative Redeemable Preferred Stock   (222 )   (203 )   (636 )   (514 )
Net income (loss) to common stockholders $ 26,638   $ (23,446 ) $ 1,750   $ (23,043 )
Basic earnings (loss) per common share $ 0.28 $ (0.23 ) $ 0.02 $ (0.22 )
Diluted earnings (loss) per common share $ 0.27 $ (0.23 ) $ 0.02 $ (0.22 )
Basic weighted average number of shares outstanding 95,881 102,431 96,644 104,611
Diluted weighted average number of shares outstanding 100,590 102,431 96,644 104,611
 
 

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except for per share amounts)

(unaudited)
   
Three Months Ended Nine Months Ended
September 30, September 30,
  2016       2015     2016       2015  
 
Net income (loss) $ 28,289   $ (21,814 ) $ 6,673   $ (18,242 )
Available-for-sale Agency MBS, fair value adjustment (3,955 ) 9,213 33,511 15,237
Reclassification adjustment for (gain) loss on sales of Agency MBS

included in net income (loss)
(1,206 ) - 2,032 -
Available-for-sale Non-Agency MBS, fair value adjustment 10,225 (792 ) (5,156 ) 4,089
Reclassification adjustment for loss on sales of Non-Agency MBS

included in net income (loss)
- - - 76
Unrealized gains on derivatives 784 4,540 5,718 15,929
Reclassification adjustment for interest expense on swap agreements

included in net income (loss)
  87     535     395     1,589  
Other comprehensive income   5,935     13,496     36,500     36,920  
Comprehensive income (loss) $ 34,224   $ (8,318 ) $ 43,173   $ 18,678  
 
 

Non-GAAP Financial Measures

In addition to the Company's operating results presented in accordance with GAAP, the following tables include the following non-GAAP financial measures: Core Earnings (including per common share), total interest income and average asset yield, including TBA dollar roll income, paydown expense on Agency MBS and effective total interest expense and effective cost of funds. The first table below reconciles the Company's "net loss to common stockholders" for the quarter ended September 30, 2016 to "Core Earnings" for the same period. Core Earnings represents "net loss to common stockholders" (which is the nearest comparable GAAP measure), adjusted for the items shown in the table below. The second table below reconciles the Company's total interest and other income for the quarter ended September 30, 2016 (which is the nearest comparable GAAP measure) to the total interest income and average asset yield, including TBA dollar roll income, and shows the annualized amounts as a percentage of the Company's average earning assets and also reconciles the Company's total interest expense (which is the nearest comparable GAAP measure) to the effective total interest expense and effective cost of funds and shows the annualized amounts as a percentage of the Company's average borrowings.

The Company's management believes that these non-GAAP financial measures are useful because they provide investors with greater transparency to the information that the Company uses in its financial and operational decision-making process. Management believes the inclusion of paydown expense on Agency MBS is more indicative of the current earnings potential of the Company's investment portfolio, as it reflects the actual principal paydowns which occurred during the period. Paydown expense on Agency MBS is not dependent on future assumptions on prepayments or the cumulative effect from prior periods of any current changes to those assumptions, as is the case with the GAAP measure, "Premium amortization on Agency MBS." Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the Company's performance to that of its peers, particularly those that have discontinued hedge accounting and those that have used similar portfolio and derivative strategies. These non-GAAP financial measures should not be used as a substitute for the Company's operating results for the quarter ended September 30, 2016. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

Core Earnings

  Three Months Ended
September 30, 2016
Amount   Per Share
(in thousands)
Net income to common stockholders $ 26,638 $ 0.28
Adjustments to derive core earnings:
Unrealized gain on Agency MBS held as trading investments (1,148 ) (0.01 )
Gain on sales of Agency MBS (1,206 ) (0.01 )
Gain on sales of residential mortgage loans held-for-investment (716 ) (0.01 )
Gain on interest rate swaps (8,141 ) (0.08 )
Gain on derivatives-TBA securities, net (3,412 ) (0.04 )
Loss on derivatives-Eurodollar Futures Contracts 2,060 0.02
Recovery on Non-Agency MBS 1 -
Amortization of other comprehensive income on de-designated interest rate swaps (1) 87 -
Periodic net settlement on interest rate swaps after de-designation (2) (3,443 ) (0.04 )
Dollar roll income on TBA securities (3) 3,477 0.04
Loss from expiration of Eurodollar Futures Contracts (311 ) -
Premium amortization on Agency MBS 7,078 0.07
Paydown expense (4)   (8,882 )   (0.09 )
Core earnings $ 12,082   $ 0.13  
Basic weighted average number of shares outstanding   95,881  

_______________
(1)   This amount represents the amortization of the balance remaining in "accumulated other comprehensive income" as a result of the Company's discontinuation of hedge accounting and is recorded in its statements of operations as a portion of interest expense in accordance with GAAP.
(2) Periodic net settlements on interest rate swaps after de-designation include all subsequent net payments made on interest rate swaps which were de-designated as hedges in August 2014. Net payments on the interest rate swaps made prior to de-designation are recognized in GAAP net income to common stockholders.
(3) Dollar roll income on TBA Agency MBS is the income resulting from the price discount typically obtained by extending the settlement of TBA Agency MBS to a later date. This is a component of both the "Gain on derivatives-TBA Agency MBS" and "Derivative income-TBA Agency MBS" that are shown on the Company's statements of operations.
(4) Paydown expense on Agency MBS represents the proportional expense of Agency MBS purchase premiums relative to the Agency MBS principal payments and prepayments which occurred during the quarter.
 
 

Effective Net Interest Rate Spread

  Three Months Ended
September 30, 2016
 

Amount
  Annualized

Percentage
(in thousands)
Average Asset Yield, Including TBA Dollar Roll Income:
Total interest and other income $ 36,054 2.70 %
Dollar roll income on TBA Agency MBS (1) 3,477 0.26 %
Premium amortization on Agency MBS 7,078 0.53 %
Paydown expense on Agency MBS (2)   (8,882 ) -0.67 %
Total interest income and average asset yield, including TBA dollar roll income $ 37,727   2.82 %
Effective Cost of Funds:
Total interest expense $ 16,893 1.37 %
Periodic net settlement on interest rate Swaps after de-designation (3) 3,443 0.28 %
Amortization of other comprehensive income on de-designated Swaps (4) 87 0 %
Loss on expiration of Eurodollar Futures Contracts   (311 ) -0.03 %
Effective total interest expense and effective cost of funds $ 20,112   1.62 %
Effective net interest rate spread 1.20 %
Average earning assets $ 5,344,533  
Average borrowings $ 4,954,807  

_______________
(1)   Dollar roll income on TBA Agency MBS is the income resulting from the price discount typically obtained by extending the settlement of TBA Agency MBS to a later date. This is a component of both the "(loss) gain on derivatives-TBA Agency MBS" and "derivative income-TBA Agency MBS" that are shown on the Company's statements of operations.
(2) Paydown expense on Agency MBS represents the proportional expense of Agency MBS purchase premiums relative to the Agency MBS principal payments and prepayments which occurred during the quarter.
(3) Periodic net settlements on interest rate swaps after de-designation include all subsequent net payments made on interest rate swaps which were de-designated as hedges in August 2014. Net payments on the interest rate swaps made prior to de-designation are recognized in GAAP net income to common stockholders.
(4) This amount represents the amortization of the balance remaining in "accumulated other comprehensive income" as a result of the Company's discontinuation of hedge accounting and is recorded in its statements of operations as a portion of interest expense in accordance with GAAP.

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