Western Asset Mortgage Capital Corporation Announces Fourth Quarter And Full Year 2015 Results

FOURTH QUARTER 2015 RESULTS

The below table reflects a summary of our operating results:

For the Three Months Ended

GAAP Results

December 31, 2015

September 30,2015

Net Interest Income

$                27,403

$                28,840

Other Income (Loss):

Realized gain (loss) on sale of investments, net

(988)

(2,482)

Other loss on securities

(4,907)

(5,917)

Unrealized gain (loss) on investments, net

(44,295)

24,723

Gain (loss) on derivative instruments, net

7,616

(41,363)

Other, net

574

(29)

Other Income (Loss), net

(42,000)

(25,068)

Total Operating Expenses

5,488

5,624

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

$              (20,085)

$                (1,852)

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

$                  (0.49)

$                  (0.05)

Non-GAAP Results

Core earnings plus drop income (1)

$                16,560

$                22,560

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

$                    0.39

$                    0.54

Weight average yield (2)

4.42%

4.03%

Effective cost of funds (3)

2.24%

1.58%

Annualized net interest spread (3)

2.18%

2.45%

Annualized constant prepayment rate (CPR) (4)

8.60%

10.10%

(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

(3)

Includes interest-only securities accounted for as derivatives and the cost of interest rate swaps

(4)

Annualized CPR on Agency RMBS

Portfolio

($ in millions)

Agency

Coupon

Principal

Balance

Amortized

Cost

Estimated Fair

Value

30-year fixed rate

3.5%

$108.0

$115.9

$111.8

4.0%

298.0

325.1

318.2

4.5%

382.2

410.2

419.9

5.0%

58.9

66.0

66.4

5.5%

2.9

3.3

3.2

6.0%

6.1

6.9

7.0

20-year fixed rate

3.5%

147.5

155.6

154.3

4.0%

497.8

524.9

533.0

Agency RMBS IOs and IIOs⁽¹⁾

3.3%

N/A

116.5

117.4

Agency CMBS

5.2%

24.5

24.5

24.7

Agency CMBS IOs and IIOs⁽²⁾

1.3%

N/A

13.0

13.2

Total Agency

3.5%

$1,525.9

$1,761.9

$1,769.1

Non-Agency

Non-Agency RMBS

3.7%

$601.2

$443.6

$445.4

Non-Agency RMBS IOs and IIOs⁽³⁾

5.8%

N/A

69.4

84.7

Non-Agency CMBS

5.0%

550.9

468.0

450.9

Total Non-Agency

4.7%

$1,152.1

$981.0

$981.0

Other Securities⁽⁴⁾

4.8%

81.5

102.8

101.1

Residential Whole-Loans

4.9%

212.6

214.9

218.5

Securitized Commercial Loan⁽⁵⁾

9.0%

25.0

25.0

25.0

Total Portfolio

4.0%

$2,997.1

$3,085.6

$3,094.7

(1)

Includes $44.8 million of amortized cost and $45.4 million of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(2)

Includes $11.1 million of amortized cost and $11.1 million of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.

(3)

Includes $2.8 million of amortized cost and $3.6 million 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 $22.8 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

$1,601.7

0.66%

41

Non-Agency RMBS

380.2

1.91%

44

Agency and Non-Agency CMBS

356.3

1.84%

35

Whole-Loans and securitized commercial loan

180.9

2.38%

26

Other Securities

66.7

2.33%

60

Total

$2,585.8

1.17%

38

Fixed Pay Rate Swap Transactions

($ in millions)

Remaining Term to Maturity

Notional Value

Average Fixed Pay Rate

Average Maturity (Years)

1 year or less

$1,286.0

0.6%

0.6

> 1 year to 3 years

1,131.8

1.1%

1.4

> 3 years to 5 years

1,345.2

2.1%

4.6

> 5 years

2,404.6

2.8%

10.2

Total Fixed Pay Rate

$6,167.6

1.9%

5.4

Variable Pay Rate Swap Transactions

($ in millions)

Remaining Term to Maturity

Notional Value

Average Variable Pay Rate

Average Maturity (Years)

> 3 years to 5 years

$1,170.7

0.4%

4.5

> 5 years

1,102.2

0.4%

12.3

Total 

$2,272.9

0.4%

8.2

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 $1.5 million and $13.9 million for the three and twelve months ended December 31, 2015

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 dividing by the beginning book value.

⁴ 5.1x leverage calculation does not reflect net To-Be Announced ("TBA") mortgage pass-through certificates position. As of December 31, 2015, the net long position in TBAs was $825.0 million in notional value.

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)

December 31, 2015

December 31, 2014

Assets:

Cash and cash equivalents

$

24,711

$

47,222

Mortgage-backed securities and other securities, at fair value

($2,777,717 and $4,362,532 pledged as collateral, at fair value, respectively)

2,851,127

4,385,723

Residential Whole-Loans, at fair value ($218,538 and $7,220 pledged as collateral, at fair value, respectively)

218,538

7,220

Securitized commercial loan, at fair value

25,000

-

Linked transactions, net, at fair value

-

20,627

Investment related receivable

572

162,837

Accrued interest receivable

22,621

27,309

Due from counterparties

249,563

184,757

Derivative assets, at fair value

21,915

73,256

Other assets

516

326

Total Assets ⁽¹⁾

$

3,414,563

$

4,909,277

Liabilities and Stockholders' Equity:

Liabilities:

Borrowings under repurchase agreements

$

2,585,801

$

3,875,721

Securitized debt, at fair value

11,000

-

Accrued interest payable

20,431

17,573

Investment related payables

66,146

166,608

Due to counterparties

9,950

12,180

Derivative liability, at fair value

180,177

180,280

Accounts payable and accrued expenses

2,078

1,794

Payable to related party

3,019

2,705

Dividend payable

24,313

29,204

Total Liabilities ⁽²⁾

2,902,915

4,286,065

Commitments and contingencies

Stockholders' Equity:

Common stock, $0.01 par value, 500,000,000 shares authorized, 41,919,801 and 41,719,801 shares issued and outstanding, respectively

419

417

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

-

-

Additional paid-in capital

763,283

760,925

Retained earnings (accumulated deficit)

(252,054)

(138,130)

Total Stockholders' Equity

511,648

623,212

Total Liabilities and Stockholders' Equity

$

3,414,563

$

4,909,277

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)

December 31, 2015

December 31, 2014

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

Residential Whole-Loans, at fair value ($218,538 and 7,220 pledged as collateral, at fair value, respectively)

$

218,538

$

7,220

Securitized commercial loan, at fair value  

25,000

-

Accrued interest receivable

1,836

40

Total assets of consolidated VIEs

$

245,374

$

7,260

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

Securitized debt, at fair value

$

11,000

$

-

Accrued interest payable

85

-

Accounts payable and accrued expenses

2

153

Total liabilities of consolidated VIEs

$

11,087

$

153

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

For the three months ended December 31, 2015

For the three months ended December 31, 2014

For the year

ended

December 31, 2015

For the year

ended

December 31, 2014

(Unaudited)

(Unaudited)

Net Interest Income:

Interest income

$

35,048

$

40,358

$

152,704

$

149,110

Interest expense

7,645

6,434

27,605

22,263

Net Interest Income

27,403

33,924

125,099

126,847

Other Income (Loss):

Realized gain (loss) on sale of investments, net

(988)

472

8,279

(2,178)

Other loss on securities

(4,907)

(9,449)

(19,791)

(17,014)

Unrealized gain (loss) on investments, net

(44,295)

48,256

(34,011)

189,011

Gain on linked transactions, net

-

204

-

1,870

Gain (loss) on derivative instruments, net

7,616

(53,512)

(68,895)

(180,496)

Other, net

574

479

2,318

1,433

Other Income (Loss), net

(42,000)

(13,550)

(112,100)

(7,374)

Operating Expenses:

General and administrative (includes $332, $549, $2,301 and $2,203 non-cash stock based compensation, respectively)

2,747

2,424

11,609

9,127

Management fee – related party

2,741

2,506

10,874

9,633

Total Operating Expenses

5,488

4,930

22,483

18,760

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

$

(20,085)

$

15,444

$

(9,484)

$

100,713

Net income (loss) per Common Share – Basic

$

(0.49)

$

0.37

$

(0.25)

$

2.67

Net income (loss) per Common Share – Diluted

$

(0.49)

$

0.37

$

(0.25)

$

2.67

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 and interest income on linked transactions prior to January 1, 2015 (Non-GAAP financial measure) for the three months and the years ended December 31, 2015 and December 31, 2014:

(dollars in thousands)

For the three months ended December 31, 2015

For the three months ended December 31, 2014

For the year

 ended

December 31,

2015

For the year

ended

December 31,

2014

Coupon interest income

$

43,837

$

57,132

$

205,672

$

209,146

Premium accretion, discount amortization  and  amortization of basis, net

(8,789)

(16,774)

(52,968)

(60,036)

Interest income

$

35,048

$

40,358

$

152,704

$

149,110

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

Coupon interest income

$

5,172

$

5,809

$

21,872

$

26,097

Amortization of basis (Non-GAAP Financial Measure)

(4,388)

(4,582)

(17,265)

(18,868)

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

210

176

795

317

Contractual interest income, net of premium amortization, discount accretion and amortization of basis on Linked transactions ^(2):

 Coupon interest income

-

996

-

5,998

  Premium amortization, discount accretion and amortization of basis, net

-

(218)

-

(3,119)

Subtotal

994

2,181

5,402

10,425

Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and Linked transactions - Non-GAAP Financial Measure

$

36,042

$

42,539

$

158,106

$

159,535

(1)

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

(2)

Reported in gain (loss) on linked transactions 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 months and the years ended December 31, 2015 and December 31, 2014:

For the three months ended December 31, 2014

(dollars in thousands)

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Interest expense

$

7,645

1.07

%

$

6,434

0.65

%

Interest expense on linked transactions

-

-

132

1.76

%

Net interest paid - interest rate swaps

8,320

1.17

%

4,162

0.43

%

Effective Borrowing Costs

$

15,965

2.24

%

$

10,728

1.08

%

Weighted average borrowings ⁽¹⁾

$

2,826,152

$

3,935,531

(1)

 Includes average repurchase borrowings under linked transactions.

For the year ended December 31, 2015

For the year ended December 31, 2014

(dollars in thousands)

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Reconciliation

Cost of

Funds/Effective

Borrowing

Costs

Interest expense

$

27,605

0.82

%

$

22,263

0.60

%

Interest expense on linked transactions

-

-

546

1.75

%

Net interest paid - interest rate swaps

19,116

0.57

%

29,946

0.81

%

Effective Borrowing Costs

$

46,721

1.39

%

$

52,755

1.41

%

Weighted average borrowings ⁽¹⁾

$

3,357,445

$

3,730,206

(1)

Includes average repurchase borrowings under linked transactions.