UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 2014
 

(Exact name of registrant as specified in its charter)
 

 
 
 
 
 
 
Maryland
 
001-34385
 
 26-2749336
(State or other jurisdiction
of incorporation)
 
(Commission File Number)
 
(IRS Employer
Identification No.)
 
 
 
 
1555 Peachtree Street, NE, Atlanta, Georgia
 
30309
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (404) 892-0896
n/a
(Former name or former address, if changed since last report.)
 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





 

Item 2.02
Results of Operations and Financial Condition.

On July 29, 2014, Invesco Mortgage Capital Inc. (the “registrant”) issued a press release announcing its financial results for the quarter ended June 30, 2014 (the “Release”).

Pursuant to General Instruction F to the Securities and Exchange Commission’s Current Report on Form 8-K, the Release is attached to this Report as Exhibit 99.1 and the information contained in the Release is incorporated into this Item 2.02 by this reference. The information contained in this Item 2.02 is being "furnished" and shall not be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities of that section. The information in this Item 2.02 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in such filing.





Item 9.01
Financial Statements and Exhibits.
 
 
(d)
Exhibits.
 
 
 
 
Exhibit No.
 
Description
99.1
 
Press Release, dated July 29, 2014, issued by Invesco Mortgage Capital Inc.








SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
Invesco Mortgage Capital Inc.

By: /s/ Richard Lee Phegley, Jr.
Richard Lee Phegley, Jr.
Chief Financial Officer


Date: July 29, 2014
 





Exhibit Index
 
 
 
 
Exhibit No.
 
Description
99.1
 
Press Release, dated July 29, 2014, issued by Invesco Mortgage Capital Inc.



IVRQ22014-8K-EX991
Exhibit 99.1


Press Release
For immediate release
Invesco Mortgage Capital Inc. Reports Second Quarter 2014 Financial Results
Book Value Gains and Stable Core Earnings Drive $1.77 of Comprehensive Income per share
Atlanta – July 29, 2014 -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended June 30, 2014, including core earnings of $0.50 per share and a 6.9% increase in book value.

"We are pleased to announce another quarter of stable core earnings and growth in book value per share," said Richard King, President and CEO. "We believe accumulation of an attractive dividend and long-term stability of book value will reward long-term investors. Year-to-date, IVR has declared $1 per share of dividends and has $1.83 of growth in book value per share."
 
Second Quarter Highlights
 
Ÿ
Book value per share increased 6.9% to $19.80
 
Ÿ
Core earnings of $62.1 million or $0.50 per share
 
Ÿ
GAAP net loss of $95.1 million or $0.76 per share, primarily due to change in value of interest rate swaps recorded in income
 
Ÿ
Comprehensive income attributable to common shareholders of $217.9 million or $1.77 per share

Management of the Company's portfolio reflects initiatives designed to take advantage of opportunities and mitigate risks resulting from structural changes in the financing of real estate in the United States. More narrative description of initiatives and rationale are included in the financial results below.
($ in millions, except per share amounts)
Q2 ‘14
Q1 ‘14
 
(unaudited)
(unaudited)
Average earning assets (at amortized costs)

$20,025.9


$19,416.3

Average borrowed funds
17,546.7

17,103.0

Average equity

$2,470.9


$2,335.3

 
 
 
Interest income

$174.5


$171.1

Interest expense
69.4

68.6

Net interest income
105.0

102.4

Loss on sale of investments
(20.8
)
(11.7
)
Loss on interest rate derivative instruments, net
(167.8
)
(151.3
)
Other income
4.2

0.8

Operating expenses
13.1

12.5

Net loss
(92.4
)
(72.5
)
Preferred dividend
2.7

2.7

Net loss after preferred dividend

($95.1
)

($75.3
)
 
 
 
Average portfolio yield
3.48
%
3.52
%
Cost of funds
1.58
%
1.60
%
Debt to equity ratio
6.82
x
7.00
x
Return on average equity
(15.40
%)
(12.89
%)
Book value per common share (diluted)

$19.80


$18.53

Loss per common share (basic)

($0.76
)

($0.60
)
Dividend per common share

$0.50


$0.50

Dividend per preferred share

$0.4844


$0.4844

 
 
 
Non-GAAP Financial Measures*:
 
 
Core earnings

$62.1


$56.9

Core earnings per common share

$0.50


$0.46

Effective interest expense

$100.1


$98.8

Effective cost of funds
2.28
%
2.31
%
Effective net interest income

$74.3


$72.3

Effective interest rate margin
1.20
%
1.21
%


Exhibit 99.1


* Core earnings, effective interest expense (and by calculation, effective cost of funds) and effective net interest income (and by calculation, effective interest rate margin) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).

Financial Summary

During the second quarter, the Company generated $62.1 million in core earnings, and the book value improved 6.9% to $19.80. This was accomplished while continuing to reposition the investment portfolio to be less interest rate sensitive. The Company made progress on its key initiatives by adding a residential loan securitization and increasing the investment in credit risk transfer securities issued by government-sponsored enterprises ("GSE CRT"). Net loss after preferred dividend for the second quarter of 2014 was $95.1 million, compared to $75.3 million for the first quarter of 2014. The increase in net loss after preferred dividend was primarily due to the change in value of the interest rate swaps recorded in income.

As of June 30, 2014, the Company’s mortgage-backed securities ("MBS") portfolio was $18.2 billion, an increase of $712.6 million from March 31, 2014. In addition, the Company increased its portfolio of loans held for investment to $2.4 billion, an increase of $243.0 million from March 31, 2014. For the quarter ended June 30, 2014, average earning assets were $20.0 billion, representing an increase of $609.6 million from March 31, 2014. The portfolio generated interest income of $174.5 million during the three months ended June 30, 2014, which reflects an increase of $3.4 million from the three months ended March 31, 2014. The increase in interest income was the result of higher average assets during the quarter and the change in portfolio composition.

For the quarter ended June 30, 2014, the Company had average borrowings of approximately $17.5 billion and effective interest expense of $100.1 million, compared to $17.1 billion and $98.8 million, respectively, for the first quarter of 2014. The Company's effective cost of funds was 2.28% and 2.31% for the second quarter of 2014 and first quarter of 2014, respectively. The decrease in effective cost of funds was due to the full quarter impact of lower rate, forward starting swaps that began accruing during the fourth quarter of 2013.

Operating expenses for the second quarter of 2014 totaled $13.1 million, compared to $12.5 million for the first quarter of 2014. The ratio of operating expenses to average equity for the second quarter was 2.12%, which was a decrease of 3 basis points from the first quarter of 2014. The decrease in operating expenses was primarily due to lower management fees after repurchasing shares of common stock in the first quarter of 2014.

The Company declared a common stock dividend of $0.50 per share for the second quarter of 2014. The dividend was paid on July 28, 2014.

The Company declared a preferred stock dividend of $0.4844 per share for the second quarter of 2014. The dividend was paid on July 25, 2014.


About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd. (NYSE: IVZ), a leading independent global investment management firm.



Exhibit 99.1

Earnings Call

Members of the investment community and the general public are invited to listen to the Company’s earnings conference call on Wednesday, July 30, 2014, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:    888-942-8507
International:        415-228-4839
Passcode:         Invesco

An audio replay will be available until 5:00 pm ET on August 15, 2014 by calling:

866-448-5638 (North America) or 203-369-1183 (International).

The presentation slides that will be reviewed during the call will be available on the Company’s website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute “forward-looking statements” within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance. In addition, words such as “will,” “anticipates,” “expects” and “plans,” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from the Company's expectations. The Company cautions investors not to rely unduly on any forward-looking statements and urges investors to carefully consider the risks identified under the captions “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company's annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission’s website at www.sec.gov.

All written or oral forward-looking statements that the Company makes, or that are attributable to the Company, are expressly qualified by this cautionary notice. The Company expressly disclaims any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Contact: Bill Hensel, 404-479-2886


Exhibit 99.1



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands, except per share data
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Mortgage-backed securities
151,920

 
168,736

 
303,659

 
329,080

Residential loans
20,471

 
6,889

 
38,175

 
7,026

Commercial loans
2,061

 
60

 
3,680

 
60

Total interest income
174,452

 
175,685

 
345,514

 
336,166

Interest Expense
 
 
 
 
 
 
 
Repurchase agreements
47,822

 
68,463

 
96,893

 
134,792

Secured loans
176

 
—

 
176

 
—

Exchangeable senior notes
5,613

 
5,622

 
11,220

 
6,782

Asset-backed securities
15,826

 
5,377

 
29,761

 
5,456

Total interest expense
69,437

 
79,462

 
138,050

 
147,030

Net interest income
105,015

 
96,223

 
207,464

 
189,136

Provision for loan losses
(50
)
 
663

 
157

 
663

Net interest income after provision for loan losses
105,065

 
95,560

 
207,307

 
188,473

Other Income (loss)
 
 
 
 
 
 
 
Gain (loss) on sale of investments, net
(20,766
)
 
5,692

 
(32,484
)
 
12,404

Equity in earnings and fair value change in unconsolidated ventures
3,894

 
2,157

 
4,335

 
3,747

Gain (loss) on interest rate derivative instruments, net
(167,816
)
 
53,314

 
(319,128
)
 
51,311

Realized and unrealized credit default swap income
292

 
180

 
621

 
531

Total other income (loss)
(184,396
)
 
61,343

 
(346,656
)
 
67,993

Expenses
 
 
 
 
 
 
 
Management fee – related party
9,327

 
10,807

 
18,662

 
21,161

General and administrative
3,739

 
3,043

 
6,935

 
4,587

Total expenses
13,066

 
13,850

 
25,597

 
25,748

Net income (loss)
(92,397
)
 
143,053

 
(164,946
)
 
230,718

Net income (loss) attributable to non-controlling interest
(1,057
)
 
1,493

 
(1,879
)
 
2,455

Net income (loss) attributable to Invesco Mortgage Capital Inc.
(91,340
)
 
141,560

 
(163,067
)
 
228,263

Dividends to preferred shareholders
2,712

 
2,713

 
5,425

 
5,425

Net income (loss) attributable to common shareholders
(94,052
)
 
138,847

 
(168,492
)
 
222,838

Earnings (loss) per share:
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
 
 
 
 
 
 
 
Basic
(0.76
)
 
1.03

 
(1.37
)
 
1.69

Diluted
(0.76
)
 
0.95

 
(1.37
)
 
1.61

Dividends declared per common share
0.50

 
0.65

 
1.00

 
1.30







Exhibit 99.1


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
As of
$ in thousands, except per share amounts
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
Mortgage-backed securities, at fair value
18,247,789

 
17,348,657

Residential loans, held-for-investment, net of loan loss reserve
2,310,686

 
1,810,262

Commercial loans, held-for-investment, net of loan loss reserve
95,585

 
64,599

Cash and cash equivalents
126,128

 
210,612

Due from counterparties
30,413

 
1,500

Investment related receivable
399,499

 
515,404

Investments in unconsolidated ventures, at fair value
44,030

 
44,403

Accrued interest receivable
69,261

 
68,246

Derivative assets, at fair value
70,190

 
262,059

Deferred securitization and financing costs
13,280

 
13,894

Other investments
18,500

 
10,000

Other assets
879

 
1,343

Total assets (1)
21,426,240

 
20,350,979

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
14,723,223

 
15,451,675

Secured loans
625,000

 
—

Asset-backed securities
2,016,923

 
1,643,741

Exchangeable senior notes
400,000

 
400,000

Derivative liability, at fair value
268,600

 
263,204

Dividends and distributions payable
64,972

 
66,087

Investment related payable
670,149

 
28,842

Accrued interest payable
25,393

 
26,492

Collateral held payable
14,199

 
52,698

Accounts payable and accrued expenses
2,266

 
4,304

Due to affiliate
9,904

 
10,701

Total liabilities (1)
18,820,629

 
17,947,744

Equity:
 
 
 
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized, 7.75% series A cumulative redeemable, 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference) at June 30, 2014 and December 31, 2013, respectively
135,356

 
135,356

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 123,094,376 and 124,510,246 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
1,231

 
1,245

Additional paid in capital
2,531,739

 
2,552,464

Accumulated other comprehensive income (loss)
355,093

 
(156,993
)
Retained earnings (distributions in excess of earnings)
(447,542
)
 
(155,957
)
Total shareholders’ equity
2,575,877

 
2,376,115

Non-controlling interest
29,734

 
27,120

Total equity
2,605,611

 
2,403,235

Total liabilities and equity
21,426,240

 
20,350,979

(1)
The Company's 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 primary beneficiary (IAS Asset I LLC, an indirect subsidiary of the Company). As of June 30, 2014 and December 31, 2013, total assets of the consolidated VIEs were $2,322,093 and $1,819,295, respectively, and total liabilities of the consolidated VIEs were $2,022,948 and $1,648,400, respectively.




Exhibit 99.1

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of "core earnings," "effective interest expense" (and by calculation, "effective cost of funds") and "effective net interest income (and by calculation, "effective interest rate margin"). The Company’s management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income attributable to common shareholders, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP. Additional reconciling items may be added to the non-GAAP measures if deemed appropriate.

The Company calculates core earnings as U.S. GAAP net income attributable to common shareholders adjusted for gain (loss) on sale of investments, net, realized gain on interest rate derivative instruments (excluding contractual net interest on interest rate swaps), unrealized loss on interest rate derivative instruments, amortization of deferred swap losses from de-designation and adjustments attributable to non-controlling interest.

The Company believes the presentation of core earnings allows investors to evaluate and compare the performance of the Company to that of its peers because core earnings measures investment portfolio performance over multiple reporting periods by removing realized and unrealized gains and losses. The Company records changes in the valuation of its investment portfolio, and through December 31, 2013 certain interest rate swaps, in other comprehensive income. Effective December 31, 2013, the Company elected to discontinue hedge accounting for its interest rate swaps. As a result of its election, starting January 1, 2014, the change in market value of its interest rate swaps and the amortization of deferred swap losses remaining in other comprehensive income at December 31, 2013 are included in U.S. GAAP net income. In addition, the Company uses swaptions, invests in to-be-announced securities and U.S. Treasury futures that do not qualify under U.S. GAAP for inclusion in other comprehensive income, and, as such, the changes in valuation are recorded in the period in which they occur. For internal portfolio analysis, the Company’s management deducts these gains and losses from U.S. GAAP net income to provide a consistent view of investment portfolio performance across reporting periods. As such, the Company believes that the disclosure of core earnings is useful and meaningful to its investors.

However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

Effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin include adjustments for the net interest component related to the Company's interest rate swaps and excludes amortization of deferred swap losses from de-designation. Although, as of January 1, 2014 the Company has elected to discontinue hedge accounting for its interest rate swaps, such derivative instruments are viewed by the Company as an economic hedge against increases in future market interest rates on its liabilities and therefore the effective cost of funds reflects interest expense adjusted to include the realized loss (i.e., the interest expense component) for all of its interest rate swaps and add back the unrealized loss from swap losses that were previously recorded in other comprehensive income and is being amortized into interest expense over the remaining swap lives. In addition, the Company views the cost of the associated repurchase agreements (interest expense), borrowing costs on its exchangeable senior notes, and borrowing costs on its asset-backed securities as a component of its effective cost of funds.



Exhibit 99.1

The Company believes the presentation of effective interest expense, effective costs of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs, as viewed by the Company.

The table below provides a reconciliation of U.S. GAAP net income attributable to common shareholders to core earnings for the following periods:
 
Three Months Ended
 
Six Months Ended
$ in thousands, except per share data
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Net income (loss) attributable to common shareholders
(94,052
)
 
(74,440
)
 
138,847

 
(168,492
)
 
222,838

Adjustments
 
 
 
 
 
 
 
 
 
(Gain) loss on sale of investments, net
20,766

 
11,718

 
(5,692
)
 
32,484

 
(12,404
)
Realized loss on interest rate derivative instruments (excluding contractual net interest on interest rate swaps of $52,205, $51,441, $0, $103,646 and $0, respectively)
15,037

 
18,824

 
(27,159
)
 
33,861

 
(27,159
)
Unrealized (gain) loss on interest rate derivative instruments
100,574

 
81,047

 
(26,155
)
 
181,621

 
(24,152
)
Amortization of deferred swap losses from de-designation
21,532

 
21,296

 
—

 
42,828

 
—

Subtotal
157,909

 
132,885

 
(59,006
)
 
290,794

 
(63,715
)
Adjustment attributable to non-controlling interest
(1,807
)
 
(1,511
)
 
613

 
(3,318
)
 
663

Core earnings
62,050

 
56,934

 
80,454

 
118,984

 
159,786

Basic earnings (loss) per common share
(0.76
)
 
(0.60
)
 
1.03

 
(1.37
)
 
1.69

Core earnings per share attributable to common shareholders
0.50

 
0.46

 
0.60

 
0.97

 
1.22


The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:
 
Three Months Ended 
 June 30, 2014
 
Three Months Ended 
 March 31, 2014
 
Three Months Ended 
 June 30, 2013
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
69,437

 
1.58
 %
 
68,613

 
1.60
 %
 
79,462

 
1.66
%
Less: Amortization of deferred swap losses from de-designation
(21,532
)
 
(0.49
)%
 
(21,296
)
 
(0.49
)%
 
—

 
—
%
Add: Net interest paid - interest rate swaps
52,205

 
1.19
 %
 
51,441

 
1.20
 %
 
—

 
—
%
Effective interest expense
100,110

 
2.28
 %
 
98,758

 
2.31
 %
 
79,462

 
1.66
%

 
Six Months Ended 
 June 30, 2014
 
Six Months Ended 
 June 30, 2013
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
138,050

 
1.59
 %
 
147,030

 
1.62
%
Less: Amortization of deferred swap losses from de-designation
(42,828
)
 
(0.49
)%
 
—

 
—
%
Add: Net interest paid - interest rate swaps
103,646

 
1.20
 %
 
—

 
—
%
Effective interest expense
198,868

 
2.30
 %
 
147,030

 
1.62
%




Exhibit 99.1

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:
 
Three Months Ended 
 June 30, 2014
 
Three Months Ended 
 March 31, 2014
 
Three Months Ended 
 June 30, 2013
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
105,015

 
1.90
 %
 
102,449

 
1.92
 %
 
96,223

 
1.59
%
Add: Amortization of deferred swap losses from de-designation
21,532

 
0.49
 %
 
21,296

 
0.49
 %
 
—

 
—
%
Less: Net interest paid - interest rate swaps
(52,205
)
 
(1.19
)%
 
(51,441
)
 
(1.20
)%
 
—

 
—
%
Effective net interest income
74,342

 
1.20
 %
 
72,304

 
1.21
 %
 
96,223

 
1.59
%

 
Six Months Ended 
 June 30, 2014
 
Six Months Ended 
 June 30, 2013
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
207,464

 
1.91
 %
 
189,136

 
1.61
%
Add: Amortization of deferred swap losses from de-designation
42,828

 
0.49
 %
 
—

 
—
%
Less: Net interest paid - interest rate swaps
(103,646
)
 
(1.20
)%
 
—

 
—
%
Effective net interest income
146,646

 
1.20
 %
 
189,136

 
1.61
%


Mortgage-Backed Securities

The following table summarizes certain characteristics of the Company’s MBS portfolio as of June 30, 2014:
$ in thousands
Principal
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Net
Weighted
Average
Coupon (1)
 
Period-
end
Weighted
Average
Yield (2)
 
Quarterly
Weighted
Average
Yield (3)
Agency RMBS*:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
1,395,263

 
69,737

 
1,465,000

 
30,999

 
1,495,999

 
4.04
%
 
2.60
%
 
2.57
%
30 year fixed-rate
5,848,240

 
394,803

 
6,243,043

 
(3,048
)
 
6,239,995

 
4.17
%
 
3.01
%
 
3.03
%
ARM
545,715

 
9,431

 
555,146

 
6,138

 
561,284

 
2.86
%
 
2.55
%
 
2.29
%
Hybrid ARM
2,555,585

 
37,078

 
2,592,663

 
20,674

 
2,613,337

 
2.79
%
 
2.52
%
 
2.23
%
Total Agency pass-through
10,344,803

 
511,049

 
10,855,852

 
54,763

 
10,910,615

 
3.74
%
 
2.81
%
 
2.75
%
Agency-CMO(4)
1,789,639

 
(1,270,882
)
 
518,757

 
(8,322
)
 
510,435

 
2.57
%
 
4.46
%
 
3.42
%
Non-Agency RMBS(5)(6)(7)
3,816,728

 
(632,014
)
 
3,184,714

 
97,811

 
3,282,525

 
3.63
%
 
4.14
%
 
4.70
%
GSE CRT(8)
431,000

 
28,798

 
459,798

 
46,837

 
506,635

 
5.17
%
 
4.07
%
 
4.04
%
CMBS(9)
4,928,396

 
(2,023,533
)
 
2,904,863

 
132,716

 
3,037,579

 
3.52
%
 
4.56
%
 
4.54
%
Total
21,310,566

 
(3,386,582
)
 
17,923,984

 
323,805

 
18,247,789

 
3.60
%
 
3.41
%
 
3.36
%
____________________
*
Residential mortgage-backed securities ("RMBS")

(1)
Net weighted average coupon (“WAC”) as of June 30, 2014 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of June 30, 2014 and incorporates future prepayment and loss assumptions.
(3)
Quarterly weighted average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.


Exhibit 99.1

(4)
Included in Agency-CMO are interest-only securities, which represent 23.6% of the balance based on fair value.
(5)
Included in Non-Agency RMBS are securities of $26.0 million for a future securitization not yet settled.
(6)
Non-Agency RMBS held by the Company is 63.4% variable rate, 30.9% fixed rate, and 5.7% floating rate based on fair value (excluding securities for a future securitization not yet settled).
(7)
Of the total discount in Non-Agency RMBS, $390.5 million is non-accretable.
(8)
GSE CRT are general obligations of Fannie Mae or Freddie Mac that are structured to provide credit protection to the GSE issuer with respect to defaults and other credit events within reference pools of residential mortgage loans that collateralize MBS issued and guaranteed by such GSE.
(9)
Included in the CMBS are interest-only securities and commercial real estate mezzanine loan pass-through certificates which represent 6.2% and 1.5% of the balance based on fair value, respectively.


Constant Prepayment Rates ("CPR")
The CPR of the Company's portfolio impacts the amount of premium and discount on the purchase of securities that is recognized into income. The Company's Agency, non-Agency RMBS and GSE CRT had a weighted average CPR of 10.0 and 8.2 for the for the three months ended June 30, 2014 and March 31, 2014, respectively. The table below shows the three month CPR for the Company's RMBS compared to bonds with similar characteristics (“Cohorts”):
 
 
June 30, 2014
 
March 31, 2014
 
Company
 
Cohorts
 
Company
 
Cohorts
15 year Agency RMBS
12.3

 
13.3

 
9.8

 
12.4

30 year Agency RMBS
9.4

 
9.8

 
7.2

 
8.2

Agency Hybrid ARM RMBS
9.4

 
NA

 
5.9

 
NA

Non-Agency RMBS
11.2

 
NA

 
10.5

 
NA

GSE CRT
4.5

 
NA

 
4.3

 
NA

Weighted average
10.0

 
NA

 
8.2

 
NA



Borrowings
The Company has entered into repurchase agreements, secured loans and issued exchangeable senior notes to finance the majority of its portfolio of investments. The following table summarizes certain characteristics of the Company’s borrowings at June 30, 2014 and December 31, 2013:
 
$ in thousands
June 30, 2014
 
December 31, 2013
 
Amount
Outstanding
 
Weighted
Average
Interest
Rate
 
Weighted
Average
Remaining
Maturity
(Days)
 
Amount
Outstanding
 
Weighted
Average
Interest
Rate
 
Weighted
Average
Remaining
Maturity
(Days)
Repurchase Agreements:
 
 
 
 
 
 
 
 
 
 
 
Agency RMBS
10,031,609

 
0.32
%
 
20

 
10,281,154

 
0.38
%
 
19

Non-Agency RMBS
2,711,799

 
1.54
%
 
30

 
3,066,356

 
1.55
%
 
33

GSE CRT
347,447

 
1.56
%
 
41

 
21,708

 
1.50
%
 
42

CMBS
1,632,368

 
1.37
%
 
22

 
2,082,457

 
1.39
%
 
23

Secured Loans
625,000

 
0.25
%
 
101

 
—

 
—
%
 
0

Exchangeable Senior Notes
400,000

 
5.00
%
 
1,354

 
400,000

 
5.00
%
 
1,535

Total
15,748,223

 
0.78
%
 
59

 
15,851,675

 
0.86
%
 
60





Exhibit 99.1

Interest Rate Swaps
As of June 30, 2014, the Company had the following interest rate swaps outstanding:
$ in thousands
Counterparty
 
 
 
 
Notional
 
Maturity Date
 
Fixed Interest
Rate
in Contract
SunTrust Bank
 
 
 
 
100,000

 
7/15/2014
 
2.79
%
Deutsche Bank AG
 
 
 
 
200,000

 
1/15/2015
 
1.08
%
Deutsche Bank AG
 
 
 
 
250,000

 
2/15/2015
 
1.14
%
Credit Suisse International
 
 
 
 
100,000

 
2/24/2015
 
3.26
%
Credit Suisse International
 
 
 
 
100,000

 
3/24/2015
 
2.76
%
Wells Fargo Bank, N.A.
 
 
 
 
100,000

 
7/15/2015
 
2.85
%
Wells Fargo Bank, N.A.
 
 
 
 
50,000

 
7/15/2015
 
2.44
%
Morgan Stanley Capital Services, LLC
 
 
 
 
300,000

 
1/24/2016
 
2.12
%
The Bank of New York Mellon
 
 
 
 
300,000

 
1/24/2016
 
2.13
%
Morgan Stanley Capital Services, LLC
 
 
 
 
300,000

 
4/5/2016
 
2.48
%
Citibank, N.A.
 
 
 
 
300,000

 
4/15/2016
 
1.67
%
Credit Suisse International
 
 
 
 
500,000

 
4/15/2016
 
2.27
%
The Bank of New York Mellon
 
 
 
 
500,000

 
4/15/2016
 
2.24
%
JPMorgan Chase Bank, N.A.
 
 
 
 
500,000

 
5/16/2016
 
2.31
%
Goldman Sachs Bank USA
 
 
 
 
500,000

 
5/24/2016
 
2.34
%
Goldman Sachs Bank USA
 
 
 
 
250,000

 
6/15/2016
 
2.67
%
Wells Fargo Bank, N.A.
 
 
 
 
250,000

 
6/15/2016
 
2.67
%
JPMorgan Chase Bank, N.A.
 
 
 
 
500,000

 
6/24/2016
 
2.51
%
Citibank, N.A.
 
 
 
 
500,000

 
10/15/2016
 
1.93
%
Deutsche Bank AG
 
 
 
 
150,000

 
2/5/2018
 
2.90
%
ING Capital Markets LLC
 
 
 
 
350,000

 
2/24/2018
 
0.95
%
Morgan Stanley Capital Services, LLC
 
 
 
 
100,000

 
4/5/2018
 
3.10
%
ING Capital Markets LLC
 
 
 
 
300,000

 
5/5/2018
 
0.79
%
JPMorgan Chase Bank, N.A.
 
 
 
 
200,000

 
5/15/2018
 
2.93
%
UBS AG
 
 
 
 
500,000

 
5/24/2018
 
1.10
%
ING Capital Markets LLC
 
 
 
 
400,000

 
6/5/2018
 
0.87
%
The Royal Bank of Scotland Plc
 
 
 
 
500,000

 
9/5/2018
 
1.04
%
CME Clearing House
 
(3
)
(4) 
 
300,000

 
2/5/2021
 
2.50
%
CME Clearing House
 
(3
)
(4) 
 
300,000

 
2/5/2021
 
2.69
%
Wells Fargo Bank, N.A.
 
 
 
 
200,000

 
3/15/2021
 
3.14
%
Citibank, N.A.
 
 
 
 
200,000

 
5/25/2021
 
2.83
%
HSBC Bank USA, National Association
 
(1
)
 
 
550,000

 
2/24/2022
 
2.45
%
The Royal Bank of Scotland Plc
 
(2
)
 
 
400,000

 
3/15/2023
 
2.39
%
UBS AG
 
(2
)
 
 
400,000

 
3/15/2023
 
2.51
%
HSBC Bank USA, National Association
 
 
 
 
250,000

 
6/5/2023
 
1.91
%
HSBC Bank USA, National Association
 
 
 
 
250,000

 
7/5/2023
 
1.97
%
The Royal Bank of Scotland Plc
 
 
 
 
500,000

 
8/15/2023
 
1.98
%
CME Clearing House
 
(4
)
 
 
600,000

 
8/24/2023
 
2.88
%
UBS AG
 
 
 
 
250,000

 
11/15/2023
 
2.23
%
HSBC Bank USA, National Association
 
 
 
 
500,000

 
12/15/2023
 
2.20
%
Total
 
 
 
 
12,800,000

 
 
 
2.12
%
 
(1)
Forward start date of February 2015
(2)
Forward start date of March 2015
(3)
Forward start date of February 2016
(4)
Beginning June 10, 2013, regulations promulgated under The Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that the Company clear new interest rate swap transactions through a central counterparty. Transactions that are centrally cleared result in the Company facing a clearing house, rather than a swap dealer, as counterparty. Central clearing requires the Company to post collateral in the form of initial and variation margin to the clearing house which reduces default risk.



Exhibit 99.1

Average Balances
The table below presents certain information for the Company's portfolio for the three and six month periods ending June 30, 2014 and 2013.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands
2014
 
2013
 
2014
 
2013
Average Balances*:
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
15 year fixed-rate, at amortized cost
1,490,857

 
1,949,617

 
1,544,072

 
1,997,076

30 year fixed-rate, at amortized cost
6,277,003

 
11,524,578

 
6,501,011

 
11,512,548

ARM, at amortized cost
526,816

 
69,149

 
407,650

 
83,227

Hybrid ARM, at amortized cost
2,441,988

 
447,599

 
2,154,029

 
487,269

MBS-CMO, at amortized cost
505,949

 
505,811

 
490,979

 
504,182

Non-Agency RMBS, at amortized cost (1)
3,241,721

 
3,815,772

 
3,382,454

 
3,530,088

GSE CRT, at amortized cost
418,635

 
—

 
366,914

 
—

CMBS, at amortized cost
2,788,361

 
2,491,250

 
2,677,553

 
2,275,552

Residential loans, at amortized cost
2,240,066

 
807,876

 
2,114,219

 
415,132

Commercial loans, at amortized cost
94,541

 
2,919

 
86,653

 
2,919

Average MBS and Loans portfolio
20,025,937

 
21,614,571

 
19,725,534

 
20,807,993

Average Portfolio Yields (2):
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
15 year fixed-rate
2.57
%
 
2.17
%
 
2.69
%
 
2.18
%
30 year fixed-rate
3.03
%
 
2.77
%
 
3.09
%
 
2.81
%
ARM
2.29
%
 
2.39
%
 
2.31
%
 
2.24
%
Hybrid ARM
2.23
%
 
2.41
%
 
2.28
%
 
2.37
%
MBS - CMO
3.42
%
 
1.84
%
 
3.77
%
 
1.65
%
Non-Agency RMBS
4.70
%
 
4.54
%
 
4.44
%
 
4.58
%
GSE CRT
4.04
%
 
—
%
 
4.37
%
 
—
%
CMBS
4.54
%
 
4.72
%
 
4.52
%
 
4.73
%
Residential loans
3.66
%
 
3.41
%
 
3.60
%
 
3.38
%
Commercial loans
8.72
%
 
11.21
%
 
8.49
%
 
11.21
%
Average MBS and Loans portfolio
3.48
%
 
3.25
%
 
3.50
%
 
3.23
%
Average Borrowings*:
 
 
 
 
 
 
 
Agency RMBS
10,040,134

 
13,185,918

 
9,865,448

 
13,063,927

Non-Agency RMBS
2,790,149

 
2,815,765

 
2,895,918

 
2,669,977

GSE CRT
307,237

 
—

 
261,052

 
—

CMBS (3)
2,033,655

 
1,989,660

 
2,032,975

 
1,832,302

Exchangeable senior notes
400,000

 
400,000

 
400,000

 
242,222

Asset-backed securities
1,975,573

 
747,883

 
1,870,367

 
382,257

Total borrowed funds
17,546,748

 
19,139,226

 
17,325,760

 
18,190,685

Maximum borrowings during the period (4)
17,765,146

 
19,710,901

 
17,765,146

 
19,710,901



Exhibit 99.1

Average Cost of Funds (5):
 
 
 
 
 
 
 
Agency RMBS
0.32
%
 
0.40
%
 
0.34
%
 
0.41
%
Non-Agency RMBS
1.55
%
 
1.54
%
 
1.53
%
 
1.63
%
GSE CRT
1.50
%
 
—
%
 
1.47
%
 
—
%
CMBS (3)
1.24
%
 
1.44
%
 
1.31
%
 
1.46
%
Exchangeable senior notes
5.61
%
 
5.62
%
 
5.61
%
 
5.60
%
Asset-backed securities
3.20
%
 
2.88
%
 
3.18
%
 
2.85
%
Unhedged cost of funds (6)
1.09
%
 
0.88
%
 
1.10
%
 
0.81
%
Hedged / Effective cost of funds (Non-GAAP measure)
2.28
%
 
1.66
%
 
2.30
%
 
1.62
%
Average Equity (7):
2,470,933

 
2,774,374

 
2,403,467

 
2,743,484

Average debt/equity ratio (average during period)
7.10x

 
6.90x

 
7.21x

 
6.63x

Debt/equity ratio (as of period end)
6.82x

 
7.63x

 
6.82x

 
7.63x

*
Average amounts for each period are based on weighted month-end balances; all percentages are annualized. For the three and six months ended June 30, 2014, the average balances are presented on an amortized cost basis.


(1)
Non-Agency RMBS average balance excludes securities of $26.0 million for a future securitization not yet settled.
(2)
Average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(3)
CMBS average borrowing and cost of funds include borrowings under repurchase agreements and secured loans.
(4)
Amount represents the maximum borrowings at month-end during each of the respective periods.
(5)
Average cost of funds is calculated by dividing annualized interest expense by the Company's average borrowings.
(6)
Excludes amortization of deferred swap losses from de-designation.
(7)
Average equity is calculated based on a weighted balance basis.