Western Asset Mortgage Capital Corporation Announces Second Quarter 2016 Results

For the Three Months Ended

GAAP Results

June 30, 2016

March 31, 2016

Net Interest Income

$                21,493

$                21,639

Other Income (Loss):

Realized gain (loss) on sale of investments, net

(352)

(6,055)

Other than temporary impairment

(6,356)

(10,797)

Unrealized gain (loss), net

21,510

10,769

Gain (loss) on derivative instruments, net

(14,165)

(45,170)

Other, net

234

(332)

Other Income (Loss), net

871

(51,585)

Total Expenses

5,061

6,358

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

$                 17,303

$              (36,304)

Net income (loss) per Common Share – Basic/Diluted

$                     0.41

$                  (0.88)

Non-GAAP Results

Core earnings plus drop income⁽¹⁾

$                 12,676

$                  9,486

Core earnings plus drop income per Common Share – Basic/Diluted

$                     0.30

$                    0.23

Weight average yield⁽²⁾

4.45%

4.26%

Effective cost of funds⁽³⁾

2.44%

2.73%

Annualized net interest spread⁽³⁾

2.01%

1.53%

Annualized constant prepayment rate (CPR)⁽⁴⁾

12.1%

7.1%

(1)

For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core earnings at the end of this press release.

(2)

Includes interest-only securities accounted for as derivatives, foreign currency swaps and total return swaps.

(3)

Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.

(4)

Annualized CPR on Agency RMBS.

Investment Portfolio

(dollars in thousands)

Agency

Coupon

Principal
Balance

Amortized
Cost

Fair Value

30-year fixed rate

3.5%

$227,007

$238,806

$240,277

4.0%

269,046

291,531

294,134

4.5%

343,479

367,468

383,637

5.0%

54,192

60,780

61,767

5.5%

2,389

2,727

2,686

6.0%

2,461

2,732

2,863

20-year fixed rate

3.5%

135,835

142,882

145,303

4.0%

389,784

410,509

421,802

Agency RMBS IOs and IIOs⁽¹⁾

3.1%

N/A

53,159

52,690

Agency CMBS

5.1%

13,178

13,178

12,870

Agency CMBS IOs and IIOs⁽²⁾

1.2%

N/A

10,875

10,664

Total Agency

3.5%

$1,437,371

$1,594,647

$1,628,693

Non-Agency

Non-Agency RMBS

3.8%

$454,376

$315,863

$326,611

Non-Agency RMBS IOs and IIOs⁽³⁾

5.8%

N/A

63,627

88,771

Non-Agency CMBS

5.0%

498,546

414,672

381,593

Total Non-Agency

4.8%

$952,922

$794,162

$796,975

Other Securities⁽⁴⁾

6.4%

30,607

49,523

49,265

Residential Whole-Loans

4.8%

184,312

185,471

189,696

Securitized Commercial Loan⁽⁵⁾

9.0%

25,000

25,000

23,688

Total Portfolio

4.0%

$2,630,212

$2,648,803

$2,688,317

(1)

Includes $28,729 of amortized cost and $27,451 of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(2)

Includes $9,813 of amortized cost and $9,482 of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.

(3)

Includes $2,406 of amortized cost and $3,906 of fair value for Non-Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(4)

Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.0 million.

(5)

The $25.0 million securitized commercial loan is from a consolidated variable interest entity in which the Company owns a $14.0 million first loss position in a CMBS Securitized Trust.

Repurchase agreements

Balance

Weighted

Average Interest Rate (end of period)

Weighted

Average Remaining Maturity (days)

Agency RMBS

$1,547,407

0.75%

34

Agency CMBS

20,258

1.81%

7

Non-Agency RMBS

279,591

2.17%

32

Non-Agency CMBS

275,021

2.25%

32

Whole-Loans and securitized commercial loan

161,732

2.47%

8

Other Securities

26,710

2.71%

10

Total

$2,310,719

1.25%

Fixed Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity

Notional Value

Average Fixed Pay Rate

Average Maturity (Years)

Greater than 1 year and less than 3 years

$980,900

1.1%

1.7

Greater than 3 years and less than 5 years

2,225,000

1.8%

4.4

Greater than 5 years

2,683,100

2.6%

9.4

Total

$5,889,000

2.0%

6.2

Variable Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity

Notional Value

Average Variable Pay Rate

Average Maturity (Years)

Greater than 3 year and less than 5 years

$2,265,400

0.6%

4.3

Greater than 5 years

1,753,200

0.6%

10.3

Total 

$4,018,600

0.6%

6.9

¹

Non – GAAP measure.

²  

Drop income is income derived from the use of 'to-be-announced' forward contract ("TBA") dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $1.3 million for the three months ended June 30, 2016.

³  

Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and divided by the beginning book value.

⁴  

As of June 30, 2016, the net long position in TBAs was $240.0 million in notional value.

⁵  

Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

June 30, 2016

(Unaudited)

December 31, 2015

Assets:

Cash and cash equivalents

$

33,869

$

24,711

Mortgage-backed securities and other securities, at fair value

($2,469,503 and $2,777,717 pledged as collateral, at fair value, respectively)

2,474,933

2,851,127

Residential Whole-Loans, at fair value ($189,696 and $218,538 pledged as collateral, at fair value, respectively)

189,696

218,538

Securitized commercial loan, at fair value

23,688

25,000

Investment related receivable

11,598

572

Accrued interest receivable

24,292

22,621

Due from counterparties

306,070

249,563

Derivative assets, at fair value

172,962

21,915

Other assets

878

382

Total Assets ⁽¹⁾

$

3,237,986

$

3,414,429

Liabilities and Stockholders' Equity:

Liabilities:

Borrowings under repurchase agreements, net

$

2,310,719

$

2,585,667

Securitized debt, at fair value

10,423

11,000

Accrued interest payable

17,211

20,431

Investment related payables

1,581

66,146

Due to counterparties

16,664

9,950

Derivative liability, at fair value

401,674

180,177

Accounts payable and accrued expenses

2,112

2,078

Payable to related party

2,901

3,019

Dividend payable

12,995

24,313

Total Liabilities ⁽²⁾

2,776,280

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

764,230

763,283

Retained earnings (accumulated deficit)

(302,943)

(252,054)

Total Stockholders' Equity

461,706

511,648

Total Liabilities and Stockholders' Equity

$

3,237,986

$

3,414,429

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

June 30, 2016

(Unaudited)

December 31, 2015

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

Residential Whole-Loans, at fair value ($189,696 and $218,538 pledged as collateral, at fair value, respectively)  

$

189,696

$

218,538

Securitized commercial loan, at fair value

23,688

25,000

Investment related receivable

6,370

-

Accrued interest receivable

1,656

1,836

Total assets of consolidated VIEs

$

221,410

$

245,374

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

Securitized debt, at fair value

$

10,423

$

11,000

Accrued interest payable

82

85

Accounts payable and accrued expenses

2

2

Total liabilities of consolidated VIEs

$

10,507

$

11,087

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 June 30, 2016

For the three months ended June 30, 2015

For the six months ended June 30, 2016

For the six months ended June 30, 2015

Net Interest Income

Interest income

$

29,220

$

41,029

$

58,838

$

81,835

Interest expense

7,727

6,577

15,706

12,979

Net Interest Income

21,493

34,452

43,132

68,856

Other Income (Loss)

Realized gain (loss) on sale of investments, net

(352)

4,281

(6,407)

11,749

Other than temporary impairment

(6,356)

(4,316)

(17,153)

(8,967)

Unrealized gain (loss), net

21,510

(42,849)

32,278

(14,439)

Gain (loss) on derivative instruments, net

(14,165)

13,154

(59,335)

(35,148)

Other, net

234

(611)

(98)

1,773

Other Income (Loss)

871

(30,341)

(50,715)

(45,032)

Expenses

Management fee to affiliate

2,588

2,679

5,340

5,372

Other operating expenses

183

260

621

673

General and administrative expenses

Compensation expense (including non-cash stock based compensation of $346, $781, $918 and $1,460, respectively)

649

1,176

1,386

2,149

Professional fees

1,222

1,244

3,224

2,379

Other general and administrative expenses

419

445

847

798

Total general and administrative expenses

2,290

2,865

5,457

5,326

Total Expenses

5,061

5,804

11,418

11,371

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

$

17,303

$

(1,693)

$

(198,001)

$

12,453

Net income (loss) per Common Share – Basic

$

0.41

$

(0.05)

$

(0.46)

$

0.29

Net income (loss) per Common Share – Diluted

$

0.41

$

(0.05)

$

(0.46)

$

0.29

Dividends Declared per Share of Common Stock

$

0.31

$

0.64

$

0.76

$

1.31

Reconciliation of Interest Income and Effective Cost of Funds

(Unaudited, in thousands)

The following table reconciles total interest income to interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and six months ended June 30, 2016 and June 30, 2015:

(dollars in thousands)

For the three months ended June 30, 2016

For the three months ended June 30, 2015

For the six months ended June 30, 2016

For the six months ended June 30, 2015

Coupon interest income

$

36,171

$

54,868

$

74,570

$

112,548

Premium accretion, discount amortization  and  amortization of basis, net

(6,951)

(13,839)

(15,732)

(30,713)

Interest income

$

29,220

$

41,029

$

58,838

$

81,835

Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):

Coupon interest income

$

3,464

5,610

7,610

11,264

Amortization of basis (Non-GAAP Financial Measure)

(2,720)

(4,236)

(6,103)

(8,714)

Contractual interest income, net on Foreign currency swaps(1)

94

179

207

395

Contractual interest income, net on Total return swaps⁽¹⁾

307

-

528

-

Subtotal

1,145

1,553

2,242

2,945

Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and other derivative instruments - Non-GAAP Financial Measure

$

30,365

$

42,582

$

61,080

$

84,780

(1)

Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.

The following tables reconcile the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and six months ended June 30, 2016 and June 30, 2015:

For the three months ended June 30, 2016

For the six months ended June 30, 2016

(dollars in thousands)

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Interest expense

$

7,727

1.30

%

$

15,706

1.32

%

Net interest paid - interest rate swaps

6,743

1.14

%

15,171

1.27

%

Effective Borrowing Costs

$

14,470

2.44

%

$

30,877

2.59

%

Weighted average repurchase borrowings

$

2,387,337

$

2,401,074

For the three months ended June 30, 2015

For the six months ended June 30, 2015

(dollars in thousands)

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Interest expense

$

6,577

0.71

%

$

12,979

0.68

%

Net interest paid - interest rate swaps

4,159

0.48

%

5,572

0.31

%

Effective Borrowing Costs

$

10,736

1.19

%

$

18,551

0.99

%

Weighted average repurchase borrowings

$

3,633,691

$

3,775,263