Maryland | 27-0312904 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
601 Carlson Parkway, Suite 150 Minnetonka, Minnesota | 55305 | |
(Address of Principal Executive Offices) | (Zip Code) |
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o |
Page | |||
PART I - FINANCIAL INFORMATION | |||
PART II - OTHER INFORMATION | |||
September 30, 2011 | December 31, 2010 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Available-for-sale securities, at fair value | $ | 6,412,895 | $ | 1,354,405 | |||
Trading securities, at fair value | 1,526,330 | 199,523 | |||||
Cash and cash equivalents | 409,947 | 163,900 | |||||
Total earning assets | 8,349,172 | 1,717,828 | |||||
Restricted cash | 164,276 | 22,548 | |||||
Accrued interest receivable | 25,510 | 5,383 | |||||
Due from counterparties | 33,918 | 12,304 | |||||
Derivative assets, at fair value | 245,314 | 38,109 | |||||
Other assets | 619 | 1,260 | |||||
Total Assets | $ | 8,818,809 | $ | 1,797,432 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Liabilities | |||||||
Repurchase agreements | $ | 7,300,613 | $ | 1,169,803 | |||
Derivative liabilities, at fair value | 46,182 | 158 | |||||
Accrued interest payable | 5,442 | 785 | |||||
Due to counterparties | 90,880 | 231,724 | |||||
Accrued expenses and other liabilities | 7,747 | 2,063 | |||||
Dividends payable | 56,235 | 10,450 | |||||
Other liabilities | 4,579 | 1 | |||||
Total liabilities | 7,511,678 | 1,414,984 | |||||
Stockholders’ Equity | |||||||
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares issued and outstanding | — | — | |||||
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 140,586,736 and 40,501,212 shares issued and outstanding, respectively | 1,406 | 405 | |||||
Additional paid-in capital | 1,372,944 | 366,974 | |||||
Accumulated other comprehensive (loss) income | (26,325 | ) | 22,619 | ||||
Cumulative earnings | 106,022 | 30,020 | |||||
Cumulative distributions to stockholders | (146,916 | ) | (37,570 | ) | |||
Total stockholders’ equity | 1,307,131 | 382,448 | |||||
Total Liabilities and Stockholders’ Equity | $ | 8,818,809 | $ | 1,797,432 |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||||
Interest income: | |||||||||||||||
Available-for-sale securities | $ | 65,919 | $ | 11,823 | $ | 125,413 | $ | 27,064 | |||||||
Trading securities | 1,706 | 15 | 2,783 | 15 | |||||||||||
Cash and cash equivalents | 114 | 27 | 241 | 70 | |||||||||||
Total interest income | 67,739 | 11,865 | 128,437 | 27,149 | |||||||||||
Interest expense | 7,218 | 1,395 | 13,580 | 2,777 | |||||||||||
Net interest income | 60,521 | 10,470 | 114,857 | 24,372 | |||||||||||
Other-than-temporary impairments: | |||||||||||||||
Total other-than-temporary impairment losses | (3,371 | ) | — | (3,665 | ) | — | |||||||||
Non-credit portion of loss recognized in other comprehensive income (loss) | — | — | — | — | |||||||||||
Net other-than-temporary credit impairment losses | (3,371 | ) | — | (3,665 | ) | — | |||||||||
Other income: | |||||||||||||||
Gain on investment securities, net | 31,432 | 2,577 | 36,159 | 4,608 | |||||||||||
Loss on interest rate swap and swaption agreements | (39,311 | ) | (4,436 | ) | (88,180 | ) | (10,037 | ) | |||||||
Gain on other derivative instruments | 22,361 | 3,098 | 37,474 | 4,197 | |||||||||||
Total other income (loss) | 14,482 | 1,239 | (14,547 | ) | (1,232 | ) | |||||||||
Expenses: | |||||||||||||||
Management fees | 4,785 | 862 | 9,063 | 2,068 | |||||||||||
Other operating expenses | 2,850 | 1,213 | 6,516 | 3,332 | |||||||||||
Total expenses | 7,635 | 2,075 | 15,579 | 5,400 | |||||||||||
Net income before income taxes | 63,997 | 9,634 | 81,066 | 17,740 | |||||||||||
Benefit from (provision for) income taxes | (9,388 | ) | 246 | (5,064 | ) | 1,555 | |||||||||
Net income attributable to common stockholders | $ | 54,609 | $ | 9,880 | $ | 76,002 | $ | 19,295 | |||||||
Basic and diluted earnings per weighted average common share | $ | 0.42 | $ | 0.38 | $ | 0.90 | $ | 0.93 | |||||||
Dividends declared per common share | $ | 0.40 | $ | 0.39 | $ | 1.20 | $ | 1.08 | |||||||
Basic and diluted weighted average number of shares of common stock | 130,607,566 | 26,126,212 | 84,751,854 | 20,691,461 |
Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Cumulative Earnings | Cumulative Distributions to Stockholders | Total Stockholders' Equity | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
Balance, January 1, 2010 | 13,401,368 | $ | 134 | $ | 131,756 | $ | (950 | ) | $ | (5,735 | ) | $ | (3,484 | ) | $ | 121,721 | ||||||||||
Net income | — | — | — | — | 19,295 | — | 19,295 | |||||||||||||||||||
Net change in unrealized gain on available-for-sale securities | — | — | — | 17,001 | — | — | 17,001 | |||||||||||||||||||
Total other comprehensive income | — | — | — | 17,001 | — | — | — | |||||||||||||||||||
Total comprehensive income | 36,296 | |||||||||||||||||||||||||
Net proceeds from issuance of common stock, net of offering costs | 12,688,381 | 127 | 106,699 | — | — | — | 106,826 | |||||||||||||||||||
Common dividends declared | — | — | — | — | — | (23,635 | ) | (23,635 | ) | |||||||||||||||||
Non-cash equity award compensation | 36,463 | — | 145 | — | — | — | 145 | |||||||||||||||||||
Balance, September 30, 2010 | 26,126,212 | $ | 261 | $ | 238,600 | $ | 16,051 | $ | 13,560 | $ | (27,119 | ) | $ | 241,353 | ||||||||||||
Balance, January 1, 2011 | 40,501,212 | $ | 405 | $ | 366,974 | $ | 22,619 | $ | 30,020 | $ | (37,570 | ) | $ | 382,448 | ||||||||||||
Net income | — | — | — | — | 76,002 | — | 76,002 | |||||||||||||||||||
Net change in unrealized losses on available-for-sale securities | — | — | — | (48,944 | ) | — | — | (48,944 | ) | |||||||||||||||||
Total other comprehensive loss | — | — | — | (48,944 | ) | — | — | — | ||||||||||||||||||
Total comprehensive income | 27,058 | |||||||||||||||||||||||||
Net proceeds from issuance of common stock, net of offering costs | 100,077,925 | 1,001 | 1,005,754 | — | — | — | 1,006,755 | |||||||||||||||||||
Common dividends declared | — | — | — | — | — | (109,346 | ) | (109,346 | ) | |||||||||||||||||
Non-cash equity award compensation | 7,599 | — | 216 | — | — | — | 216 | |||||||||||||||||||
Balance, September 30, 2011 | 140,586,736 | $ | 1,406 | $ | 1,372,944 | $ | (26,325 | ) | $ | 106,022 | $ | (146,916 | ) | $ | 1,307,131 |
Nine Months Ended | |||||||
September 30, | |||||||
2011 | 2010 | ||||||
(unaudited) | |||||||
Cash Flows From Operating Activities: | |||||||
Net income | $ | 76,002 | $ | 19,295 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Amortization of premiums and discounts on RMBS, net | (57 | ) | 1,987 | ||||
Other-than-temporary impairment losses | 3,665 | — | |||||
Gain on investment securities, net | (36,159 | ) | (4,608 | ) | |||
Loss on termination of interest rate swaps and swaptions | 18,074 | 2,486 | |||||
Unrealized loss on interest rate swaps and swaptions | 51,474 | 5,357 | |||||
Unrealized gain on other derivative instruments | (20,144 | ) | (1,025 | ) | |||
Equity based compensation expense | 216 | 145 | |||||
Net change in: | |||||||
Increase in accrued interest receivable | (20,127 | ) | (1,671 | ) | |||
Decrease/(increase) in deferred income taxes, net | 4,136 | (1,162 | ) | ||||
Increase in prepaid tax asset | — | 400 | |||||
Decrease in prepaid and fixed assets | 155 | 432 | |||||
Increase in accrued interest payable, net | 4,657 | 526 | |||||
Increase in income taxes payable, net | 928 | — | |||||
Increase in accrued expenses and other liabilities | 5,684 | 752 | |||||
Net cash provided by operating activities | 88,504 | 22,914 | |||||
Cash Flows From Investing Activities: | |||||||
Purchases of available-for-sale securities | (6,295,100 | ) | (888,466 | ) | |||
Proceeds from sales of available-for-sale securities | 1,004,248 | 247,858 | |||||
Principal payments on available-for-sale securities | 208,965 | 78,520 | |||||
Purchases of other derivative instruments | (233,764 | ) | (38,896 | ) | |||
Proceeds from sales of other derivative instruments | 23,179 | 26,632 | |||||
Purchases of trading securities | (2,019,959 | ) | (58,189 | ) | |||
Proceeds from sales of trading securities | 700,156 | 58,516 | |||||
Decrease in due to/from counterparties, net | (162,458 | ) | (10,978 | ) | |||
Increase in restricted cash | (141,728 | ) | (18,814 | ) | |||
Net cash used in investing activities | (6,916,461 | ) | (603,817 | ) | |||
Cash Flows From Financing Activities: | |||||||
Proceeds from repurchase agreements | 19,621,767 | 3,043,458 | |||||
Principal payments on repurchase agreements | (13,490,957 | ) | (2,512,357 | ) | |||
Proceeds from issuance of common stock, net of offering costs | 1,006,755 | 106,826 | |||||
Dividends paid on common stock | (63,561 | ) | (16,930 | ) | |||
Net cash provided by financing activities | 7,074,004 | 620,997 | |||||
Net increase in cash and cash equivalents | 246,047 | 40,094 | |||||
Cash and cash equivalents at beginning of period | 163,900 | 26,105 | |||||
Cash and cash equivalents at end of period | $ | 409,947 | $ | 66,199 | |||
Supplemental Disclosure of Cash Flow Information: | |||||||
Cash paid for interest | $ | 8,923 | $ | 2,251 | |||
Cash paid for taxes | $ | 1 | $ | (497 | ) | ||
Non-Cash Financing Activity: | |||||||
Dividends declared but not paid at end of period | $ | 56,235 | $ | 10,189 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Mortgage-backed securities: | |||||||
Agency | |||||||
Federal Home Loan Mortgage Corporation | $ | 1,656,815 | $ | 396,888 | |||
Federal National Mortgage Association | 2,460,994 | 556,609 | |||||
Government National Mortgage Association | 1,038,885 | 62,972 | |||||
Non-Agency | 1,256,201 | 337,936 | |||||
Total mortgage-backed securities | $ | 6,412,895 | $ | 1,354,405 |
September 30, 2011 | |||||||||||
(in thousands) | Agency | Non-Agency | Total | ||||||||
Face Value | $ | 5,858,947 | $ | 2,667,159 | $ | 8,526,106 | |||||
Unamortized premium | 292,879 | — | 292,879 | ||||||||
Unamortized discount | |||||||||||
Designated credit reserve | — | (772,938 | ) | (772,938 | ) | ||||||
Net, unamortized | (1,051,498 | ) | (555,329 | ) | (1,606,827 | ) | |||||
Amortized Cost | 5,100,328 | 1,338,892 | 6,439,220 | ||||||||
Gross unrealized gains | 83,727 | 16,624 | 100,351 | ||||||||
Gross unrealized losses | (27,361 | ) | (99,315 | ) | (126,676 | ) | |||||
Carrying Value | $ | 5,156,694 | $ | 1,256,201 | $ | 6,412,895 |
December 31, 2010 | |||||||||||
(in thousands) | Agency | Non-Agency | Total | ||||||||
Face Value | $ | 1,306,655 | $ | 594,306 | $ | 1,900,961 | |||||
Unamortized premium | 41,651 | — | 41,651 | ||||||||
Unamortized discount | |||||||||||
Designated credit reserve | — | (145,855 | ) | (145,855 | ) | ||||||
Net, unamortized | (334,979 | ) | (129,992 | ) | (464,971 | ) | |||||
Amortized Cost | 1,013,327 | 318,459 | 1,331,786 | ||||||||
Gross unrealized gains | 9,308 | 21,503 | 30,811 | ||||||||
Gross unrealized losses | (6,166 | ) | (2,026 | ) | (8,192 | ) | |||||
Carrying Value | $ | 1,016,469 | $ | 337,936 | $ | 1,354,405 |
September 30, 2011 | |||||||||||
(in thousands) | Agency | Non-Agency | Total | ||||||||
Adjustable Rate | $ | 239,229 | $ | 1,046,844 | $ | 1,286,073 | |||||
Fixed Rate | 4,917,465 | 209,357 | 5,126,822 | ||||||||
Total | $ | 5,156,694 | $ | 1,256,201 | $ | 6,412,895 |
December 31, 2010 | |||||||||||
(in thousands) | Agency | Non-Agency | Total | ||||||||
Adjustable Rate | $ | 269,512 | $ | 245,517 | $ | 515,029 | |||||
Fixed Rate | 746,957 | 92,419 | 839,376 | ||||||||
Total | $ | 1,016,469 | $ | 337,936 | $ | 1,354,405 |
Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||
(in thousands) | Designated credit reserve | Unamortized net discount | Total | Designated credit reserve | Unamortized net discount | Total | |||||||||||||||||
Beginning balance at January 1 | $ | (145,855 | ) | $ | (129,992 | ) | $ | (275,847 | ) | $ | (50,187 | ) | $ | (41,050 | ) | $ | (91,237 | ) | |||||
Acquisitions | (640,451 | ) | (483,479 | ) | (1,123,930 | ) | (105,897 | ) | (98,264 | ) | (204,161 | ) | |||||||||||
Accretion of net discount | — | 32,305 | 32,305 | — | 6,654 | 6,654 | |||||||||||||||||
Realized credit losses | 3,011 | — | 3,011 | 1,409 | 8 | 1,417 | |||||||||||||||||
Reclassification adjustment for other-than-temporary impairments | (3,665 | ) | — | (3,665 | ) | — | — | — | |||||||||||||||
Transfers from (to) | 579 | (579 | ) | — | 705 | (705 | ) | — | |||||||||||||||
Sales, calls, other | 13,443 | 26,416 | 39,859 | 18,630 | 17,779 | 36,409 | |||||||||||||||||
Ending balance at September 30 | $ | (772,938 | ) | $ | (555,329 | ) | $ | (1,328,267 | ) | $ | (135,340 | ) | $ | (115,578 | ) | $ | (250,918 | ) |
Unrealized Loss Position for | ||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
(in thousands) | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||
September 30, 2011 | $ | 1,895,965 | $ | (125,479 | ) | $ | 3,103 | $ | (1,197 | ) | $ | 1,899,068 | $ | (126,676 | ) | |||||
December 31, 2010 | $ | 310,445 | $ | (7,183 | ) | $ | 1,405 | $ | (1,009 | ) | $ | 311,850 | $ | (8,192 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Cumulative credit loss at beginning of period | $ | (294 | ) | $ | — | $ | — | $ | — | ||||||
Additions: | |||||||||||||||
Other-than-temporary impairments not previously recognized | (3,371 | ) | — | (3,665 | ) | — | |||||||||
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments | — | — | — | — | |||||||||||
Cumulative credit loss at September 30 | $ | (3,665 | ) | $ | — | $ | (3,665 | ) | $ | — |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Gross realized gains | $ | 27,472 | $ | 2,276 | $ | 29,422 | $ | 4,582 | |||||||
Gross realized losses | — | (27 | ) | (265 | ) | (303 | ) | ||||||||
Total realized gains (losses) on sales, net | $ | 27,472 | $ | 2,249 | $ | 29,157 | $ | 4,279 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Restricted cash balances held by: | |||||||
Broker counterparties for securities trading activity | $ | 9,000 | $ | 9,000 | |||
Broker counterparties for derivatives trading activity | 71,220 | 1,914 | |||||
Repurchase counterparties as restricted collateral | 84,056 | 11,634 | |||||
Total | $ | 164,276 | $ | 22,548 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Accrued Interest Receivable: | |||||||
U.S. Treasuries | $ | 2,516 | $ | 192 | |||
Mortgage-backed securities: | |||||||
Agency | |||||||
Federal Home Loan Mortgage Corporation | 6,114 | 1,509 | |||||
Federal National Mortgage Association | 10,104 | 2,201 | |||||
Government National Mortgage Association | 4,479 | 532 | |||||
Non-Agency | 2,297 | 949 | |||||
Total mortgage-backed securities | 22,994 | 5,191 | |||||
Total | $ | 25,510 | $ | 5,383 |
(notional in thousands) | ||||||||||||
September 30, 2011 | ||||||||||||
Swaps Maturities | Notional Amounts | Average Fixed Pay Rate | Average Receive Rate | Average Maturity (Years) | ||||||||
2012 | 25,000 | 0.868 | % | 0.295 | % | 1.23 | ||||||
2013 | 1,275,000 | 0.795 | % | 0.292 | % | 1.63 | ||||||
2014 | 1,275,000 | 0.670 | % | 0.355 | % | 2.97 | ||||||
2015 | 820,000 | 1.575 | % | 0.299 | % | 3.77 | ||||||
2016 | 240,000 | 2.156 | % | 0.276 | % | 4.57 | ||||||
Total | 3,635,000 | 1.017 | % | 0.315 | % | 2.77 |
(notional in thousands) | ||||||||||||
December 31, 2010 | ||||||||||||
Swaps Maturities | Notional Amount | Average Fixed Pay Rate | Average Receive Rate | Average Maturity (Years) | ||||||||
2011 | 100,000 | 1.168 | % | 0.343 | % | 0.96 | ||||||
2012 | 25,000 | 0.868 | % | 0.308 | % | 1.98 | ||||||
2013 | 175,000 | 1.376 | % | 0.306 | % | 2.61 | ||||||
2014 | 175,000 | 1.671 | % | 0.303 | % | 3.96 | ||||||
2015 | 175,000 | 1.830 | % | 0.287 | % | 4.84 | ||||||
Total | 650,000 | 1.526 | % | 0.306 | % | 3.29 |
(notional in thousands) | |||||||||||
September 30, 2011 | |||||||||||
Swaps Maturities | Notional Amounts | Average Fixed Pay Rate | Average Receive Rate | Average Maturity (Years) | |||||||
2013 | 1,750,000 | 0.659 | % | 0.28433 | % | 1.75 | |||||
Total | 1,750,000 |
(notional in thousands) | |||||||||||
December 31, 2010 | |||||||||||
Swaps Maturities | Notional Amounts | Average Fixed Pay Rate | Average Receive Rate | Average Maturity (Years) | |||||||
2012 | 200,000 | 0.557 | % | 0.278 | % | 1.80 | |||||
Total | 200,000 |
(notional in thousands) | |||||||||||
September 30, 2011 | |||||||||||
Swaps Maturities | Notional Amounts | Average Pay Rate | Average Fixed Receive Rate | Average Maturity (Years) | |||||||
2016 | 325,000 | 0.264 | % | 1.772 | % | 4.83 | |||||
Total | 325,000 |
September 30, 2011 | |||||||||||||||||||||||
(notional and dollars in thousands) | Option | Underlying Swap | |||||||||||||||||||||
Swaption | Expiration | Cost | Fair Value | Average Months to Expiration | Notional Amount | Average Fixed Pay Rate | Average Receive Rate | Average Term (Years) | |||||||||||||||
Payer | < 6 Months | $ | 10,511 | $ | 97 | 5.30 | 575,000 | 3.18 | % | 3M Libor | 4.65 | ||||||||||||
Payer | ≥ 6 Months | 14,646 | 2,749 | 11.65 | 1,875,000 | 3.09 | % | 3M Libor | 4.04 | ||||||||||||||
Total Payer | $ | 25,157 | $ | 2,846 | 11.60 | 2,450,000 | 3.11 | % | 3M Libor | 4.18 |
December 31, 2010 | ||||||||||||||||||||||
(notional and dollars in thousands) | Option | Underlying Swap | ||||||||||||||||||||
Swaption | Expiration | Cost | Fair Value | Average Months to Expiration | Notional Amount | Average Fixed Pay Rate | Average Receive Rate | Average Term (Years) | ||||||||||||||
Payer | ≥ 6 Months | $ | 3,348 | $ | 4,028 | 11.25 | 100,000 | 3.52 | % | 3M Libor | 8.50 |
(notional and dollars in thousands) | ||||||||||||||||||||
September 30, 2011 | ||||||||||||||||||||
Protection | Maturity Date | Average Implied Credit Spread | Current Notional Amount | Fair Value | Upfront (Payable)/Receivable | Unrealized Gain/(Loss) | ||||||||||||||
Receive | 9/20/2013 | 460.00 | (45,000 | ) | $ | 2,802 | $ | (3,126 | ) | $ | (324 | ) | ||||||||
12/20/2013 | 370.00 | (5,000 | ) | $ | 346 | $ | (294 | ) | $ | 52 | ||||||||||
6/20/2016 | 264.23 | (250,000 | ) | $ | 12,649 | $ | (480 | ) | $ | 12,169 | ||||||||||
5/25/2046 | 356.00 | (95,954 | ) | $ | 54,413 | $ | (42,930 | ) | $ | 11,483 | ||||||||||
Total | 310.06 | (395,954 | ) | $ | 70,210 | $ | (46,830 | ) | $ | 23,380 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Face Value | $ | 1,167,563 | $ | 219,459 | |||
Unamortized premium | — | — | |||||
Unamortized discount | |||||||
Designated credit reserve | — | — | |||||
Net, unamortized | (1,005,236 | ) | (190,162 | ) | |||
Amortized Cost | 162,327 | 29,297 | |||||
Gross unrealized gains | 5,888 | 1,902 | |||||
Gross unrealized losses | (7,742 | ) | (665 | ) | |||
Carrying Value | $ | 160,473 | $ | 30,534 |
(notional and dollars in thousands) | ||||||||||||||||||||
September 30, 2011 | ||||||||||||||||||||
Protection | Maturity Date | Average Implied Credit Spread | Current Notional Amount | Fair Value | Upfront (Payable)/Receivable | Unrealized Gain/(Loss) | ||||||||||||||
Provide | 7/25/2036 | 359.94 | 117,043 | $ | 7,372 | $ | (12,232 | ) | $ | (4,860 | ) | |||||||||
5/25/2046 | 146.18 | 57,355 | $ | (17,836 | ) | $ | 13,574 | $ | (4,262 | ) | ||||||||||
Total | 289.64 | 174,398 | $ | (10,464 | ) | $ | 1,342 | $ | (9,122 | ) |
(notional and dollars in thousands) | ||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||
Protection | Maturity Date | Average Implied Credit Spread | Current Notional Amount | Fair Value | Upfront (Payable)/Receivable | Unrealized Gain/(Loss) | ||||||||||||||
Provide | 7/25/2036 | 378.47 | 41,576 | $ | 3,137 | $ | (3,554 | ) | $ | (417 | ) |
(in thousands) | September 30, 2011 | December 31, 2010 | ||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
Trading instruments | Fair Value | Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | Notional | ||||||||||||||||
Inverse interest-only securities | $ | 162,703 | 1,167,563 | $ | — | — | $ | 30,944 | 219,459 | $ | — | — | ||||||||||||
Interest rate swap agreements | — | — | (33,726 | ) | 5,060,000 | — | — | (158 | ) | 850,000 | ||||||||||||||
Credit default swap agreements | 70,210 | 395,954 | (10,464 | ) | 174,398 | 3,137 | 41,576 | — | — | |||||||||||||||
Swaptions | 2,846 | 2,450,000 | — | — | 4,028 | 100,000 | — | — | ||||||||||||||||
TBAs | 9,555 | 875,000 | (1,992 | ) | 750,000 | — | — | — | — | |||||||||||||||
Total | $ | 245,314 | 4,888,517 | $ | (46,182 | ) | 5,984,398 | $ | 38,109 | 361,035 | $ | (158 | ) | 850,000 |
(in thousands) | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||||
Trading instruments | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||
Inverse interest-only securities | 1,135,141 | — | 771,476 | — | ||||||||
Interest rate swap agreements | — | 4,267,609 | — | 2,809,212 | ||||||||
Credit default swaps | 385,824 | 177,461 | 138,119 | 117,610 | ||||||||
Swaptions | 2,129,348 | — | 1,117,563 | — | ||||||||
TBAs | 545,109 | 1,230,435 | 85,834 | 132,621 |
(in thousands) | ||||||||||||||||||
Trading Instruments | Location of Gain/(Loss) Recognized in Income on Derivatives | Amount of Gain/(Loss) Recognized in Income on Derivatives | Amount of Gain/(Loss) Recognized in Income on Derivatives | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||
Risk Management Instruments | ||||||||||||||||||
Interest Rate Contracts | ||||||||||||||||||
Investment securities - RMBS | Gain on other derivative instruments | $ | 5,729 | $ | 1,214 | $ | 5,091 | $ | 1,631 | |||||||||
Investment securities - U.S. Treasuries and TBA contracts | Loss on interest rate swap and swaption agreements | 6,544 | (1,251 | ) | 2,733 | (2,299 | ) | |||||||||||
Repurchase agreements | Loss on interest rate swap and swaption agreements | (45,855 | ) | (3,184 | ) | (90,913 | ) | (7,738 | ) | |||||||||
Credit default swaps - Receive protection | Gain on other derivative instruments | 21,994 | — | 22,267 | — | |||||||||||||
Non-Risk Management Instruments | ||||||||||||||||||
Credit default swaps - Provide protection | Gain on other derivative instruments | (4,414 | ) | — | (5,589 | ) | — | |||||||||||
Inverse interest-only securities | Gain on other derivative instruments | (948 | ) | 1,884 | 15,705 | 2,566 | ||||||||||||
Total | $ | (16,950 | ) | $ | (1,337 | ) | $ | (50,706 | ) | $ | (5,840 | ) |
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity. |
Level 2 | Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. |
Level 3 | Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management's best assumptions of how market participants would price the assets and liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation. |
Recurring Fair Value Measurements | |||||||||||||||
At September 30, 2011 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets | |||||||||||||||
Available-for-sale securities | $ | — | $ | 6,402,075 | $ | 10,820 | $ | 6,412,895 | |||||||
Trading securities | 1,526,330 | — | — | 1,526,330 | |||||||||||
Derivative assets | 9,555 | 235,759 | — | 245,314 | |||||||||||
Total assets | $ | 1,535,885 | $ | 6,637,834 | $ | 10,820 | $ | 8,184,539 | |||||||
Liabilities | |||||||||||||||
Derivative liabilities | $ | 1,992 | $ | 44,190 | $ | — | $ | 46,182 | |||||||
Total liabilities | $ | 1,992 | $ | 44,190 | $ | — | $ | 46,182 |
Recurring Fair Value Measurements | |||||||||||||||
At December 31, 2010 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets | |||||||||||||||
Available-for-sale securities | $ | — | $ | 1,345,805 | $ | 8,600 | $ | 1,354,405 | |||||||
Trading securities | 199,523 | — | — | 199,523 | |||||||||||
Derivative assets | — | 38,109 | — | 38,109 | |||||||||||
Total assets | $ | 199,523 | $ | 1,383,914 | $ | 8,600 | $ | 1,592,037 | |||||||
Liabilities | |||||||||||||||
Derivative liabilities | $ | — | $ | 158 | $ | — | $ | 158 | |||||||
Total liabilities | $ | — | $ | 158 | $ | — | $ | 158 |
Level 3 Recurring Fair Value Measurements | |||||||||||||||||||||||||||||||
Three Months Ended September 30, 2011 | |||||||||||||||||||||||||||||||
Total Net Gains/(Losses) Included in Net Income | |||||||||||||||||||||||||||||||
(in thousands) | Beginning of Period Level 3 Fair Value | Realized Gains/(Losses) | Unrealized Gains | Other Comprehensive Income | Gross Purchases, Sales and Settlements (b) | Gross Transfers Into Level 3 | Gross Transfers Out of Level 3 | End of Period Level 3 Fair Value | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Available-for-sale securities | $ | 9,200 | $ | (254 | ) | $ | — | $ | 40 | (a) | $ | 1,834 | $ | — | $ | — | $ | 10,820 | |||||||||||||
Total assets | $ | 9,200 | $ | (254 | ) | $ | — | $ | 40 | $ | 1,834 | $ | — | $ | — | $ | 10,820 |
Level 3 Recurring Fair Value Measurements | |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2011 | |||||||||||||||||||||||||||||||
Total Net Gains/(Losses) Included in Net Income | |||||||||||||||||||||||||||||||
(in thousands) | Beginning of Period Level 3 Fair Value | Realized Gains/(Losses) | Unrealized Gains | Other Comprehensive Income | Gross Purchases, Sales and Settlements (b) | Gross Transfers Into Level 3 | Gross Transfers Out of Level 3 | End of Period Level 3 Fair Value | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Available-for-sale securities | $ | 8,600 | $ | (208 | ) | $ | — | $ | 594 | (a) | $ | 1,834 | $ | — | $ | — | $ | 10,820 | |||||||||||||
Total assets | $ | 8,600 | $ | (208 | ) | $ | — | $ | 594 | $ | 1,834 | $ | — | $ | — | $ | 10,820 |
(b) | The Company purchased one Level 3 asset during the three and nine months ended September 30, 2011. However, there were no sales or settlements of the Company's Level 3 assets and liabilities during the three and nine months ended September 30, 2011. |
• | AFS securities, trading securities, derivative assets and liabilities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the Fair Value Measurements section of this footnote. |
• | Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. |
• | The carrying value of repurchase agreements approximates fair value due to the maturities of less than one year of these financial instruments. The Company's repurchase agreements have floating rates based on an index plus a spread. These borrowings have been recently entered into and the credit spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these borrowings are at market and thus carrying value approximates fair value. |
(dollars in thousands) | September 30, 2011 | December 31, 2010 | ||||||||||||
Collateral Type | Amount Outstanding | Weighted Average Borrowing Rate | Amount Outstanding | Weighted Average Borrowing Rate | ||||||||||
U.S. Treasuries | $ | 1,529,550 | 0.11 | % | $ | 198,750 | 0.28 | % | ||||||
Agency RMBS | 4,863,534 | 0.32 | % | 745,861 | 0.37 | % | ||||||||
Non-Agency RMBS | 782,395 | 2.37 | % | 201,976 | 2.05 | % | ||||||||
Agency derivatives | 125,134 | 0.78 | % | 23,216 | 1.07 | % | ||||||||
Total | $ | 7,300,613 | 0.50 | % | $ | 1,169,803 | 0.66 | % |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Within 30 days | $ | 1,581,588 | $ | 197,286 | |||
30 to 59 days | 1,308,112 | 211,556 | |||||
60 to 89 days | 803,521 | 117,621 | |||||
90 to 119 days | 678,377 | 152,433 | |||||
Over 120 days (1) | 1,399,465 | 292,157 | |||||
Open maturity (2) | 1,529,550 | 198,750 | |||||
Total | $ | 7,300,613 | $ | 1,169,803 |
(1) | Over 120 days includes the amounts outstanding under the Wells Fargo 364-day borrowing facility. |
(2) | Repurchase agreements collateralized by U.S. Treasuries include an open maturity period (i.e., rolling 1-day maturity) renewable at the discretion of either party to the agreements. |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Available-for-sale securities, at fair value | $ | 6,267,036 | $ | 1,090,598 | |||
Trading securities, at fair value | 1,526,330 | 199,523 | |||||
Cash and cash equivalents | 15,000 | 14,467 | |||||
Restricted cash | 84,056 | 11,634 | |||||
Due from counterparties | 13,032 | 10,508 | |||||
Derivative assets, at fair value | 150,774 | 30,534 | |||||
Total | $ | 8,056,228 | $ | 1,357,264 |
September 30, 2011 | December 31, 2010 | ||||||||||||||||||||||||||
(dollars in thousands) | Amount Outstanding | Net Counterparty Exposure(1) | Percent of Equity | Weighted Average Days to Maturity | Amount Outstanding | Net Counterparty Exposure(1) | Percent of Equity | Weighted Average Days to Maturity | |||||||||||||||||||
JP Morgan Chase | $ | 2,779,109 | $ | 184,843 | 14 | % | 47.5 | $ | 289,321 | $ | 8,687 | 2 | % | 53.0 | |||||||||||||
Barclays Capital Inc. | 314,120 | 77,469 | 6 | % | 127.1 | 168,291 | 45,060 | 12 | % | 44.7 | |||||||||||||||||
All other counterparties | 4,207,384 | 495,928 | 38 | % | 73.6 | 712,191 | 123,439 | 32 | % | 104.3 | |||||||||||||||||
Total | $ | 7,300,613 | $ | 758,240 | $ | 1,169,803 | $ | 177,186 |
(in thousands) | |||||||
September 30, 2011 | December 31, 2010 | ||||||
Prepaid expenses | $ | 447 | $ | 706 | |||
Current tax receivable | 68 | — | |||||
Deferred tax assets | — | 554 | |||||
Fixed assets | 104 | — | |||||
Total other assets | $ | 619 | $ | 1,260 |
(in thousands) | |||||||
September 30, 2011 | December 31, 2010 | ||||||
Deferred tax liabilities | $ | 3,582 | $ | — | |||
Income taxes payable | 997 | 1 | |||||
Total other liabilities | $ | 4,579 | $ | 1 |
Declaration Date | Record Date | Payment Date | Cash Dividend Per Share | |||||
September 14, 2011 | September 26, 2011 | October 20, 2011 | $ | 0.40 | ||||
June 14, 2011 | June 24, 2011 | July 20, 2011 | $ | 0.40 | ||||
March 2, 2011 | March 14, 2011 | April 14, 2011 | $ | 0.40 | ||||
December 8, 2010 | December 17, 2010 | January 20, 2011 | $ | 0.40 | ||||
September 13, 2010 | September 30, 2010 | October 21, 2010 | $ | 0.39 | ||||
June 14, 2010 | June 30, 2010 | July 22, 2010 | $ | 0.33 | ||||
March 12, 2010 | March 31, 2010 | April 23, 2010 | $ | 0.36 | ||||
December 21, 2009 | December 31, 2009 | January 26, 2010 | $ | 0.26 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Available-for-sale securities, at fair value | |||||||
Unrealized gains | $ | 100,351 | $ | 30,811 | |||
Unrealized losses | (126,676 | ) | (8,192 | ) | |||
Accumulated other comprehensive income | $ | (26,325 | ) | $ | 22,619 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
Other operating expenses: | |||||||||||||||
General and administrative | $ | 2,155 | $ | 795 | $ | 4,787 | $ | 2,188 | |||||||
Directors and officers' insurance | 141 | 91 | 422 | 330 | |||||||||||
Professional fees | 554 | 327 | 1,307 | 814 | |||||||||||
Total other operating expenses | $ | 2,850 | $ | 1,213 | $ | 6,516 | $ | 3,332 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Current tax provision (benefit): | |||||||||||||||
Federal | $ | 923 | $ | 46 | $ | 928 | $ | (96 | ) | ||||||
State | — | — | — | — | |||||||||||
Total current tax provision (benefit) | 923 | 46 | 928 | (96 | ) | ||||||||||
Deferred tax provision (benefit) | 8,465 | (292 | ) | 4,136 | (1,459 | ) | |||||||||
Total provision for (benefit from) income taxes | $ | 9,388 | $ | (246 | ) | $ | 5,064 | $ | (1,555 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
(dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
Computed income tax expense at federal rate | $ | 21,759 | 34 | % | $ | 3,275 | 34 | % | $ | 27,563 | 34 | % | $ | 6,031 | 34 | % | |||||||||||
State taxes, net of federal benefit, if applicable | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||
Permanent differences in taxable income from GAAP income (loss) | 2 | — | % | 1 | — | % | 6 | — | % | 1 | — | % | |||||||||||||||
Dividends paid deduction | (12,373 | ) | (19 | )% | (3,522 | ) | (37 | )% | (22,505 | ) | (28 | )% | (7,587 | ) | (43 | )% | |||||||||||
Effective Tax Rate | $ | 9,388 | 15 | % | $ | (246 | ) | (3 | )% | $ | 5,064 | 6 | % | $ | (1,555 | ) | (9 | )% |
(in thousands) | September 30, 2011 | December 31, 2010 | ||||||
Current tax | ||||||||
Federal income tax payable, net | $ | (929 | ) | $ | (1 | ) | ||
State and local income tax payable | — | — | ||||||
Deferred tax (liabilities) assets | ||||||||
Deferred tax asset | 7,894 | 723 | ||||||
Deferred tax liability | (11,476 | ) | (169 | ) | ||||
Deferred tax (liability) asset | (3,582 | ) | 554 | |||||
$ | (4,511 | ) | $ | 553 |
(in thousands) | September 30, 2011 | December 31, 2010 | ||||||
Unrealized (gain) loss on derivative assets | $ | (1,707 | ) | $ | 392 | |||
Unrealized (gain) loss on trading securities | (1,875 | ) | 162 | |||||
Total net deferred tax (liabilities) assets | $ | (3,582 | ) | $ | 554 |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(in thousands, except share data) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Numerator: | |||||||||||||||
Net income to common stockholders for basic and diluted earnings per share | $ | 54,609 | $ | 9,880 | $ | 76,002 | $ | 19,295 | |||||||
Denominator: | |||||||||||||||
Weighted average common shares | 130,548,732 | 26,067,590 | 84,695,559 | 20,654,958 | |||||||||||
Weighted average restricted stock shares | 58,834 | 58,622 | 56,295 | 36,503 | |||||||||||
Basic and diluted weighted average shares outstanding | 130,607,566 | 26,126,212 | 84,751,854 | 20,691,461 | |||||||||||
Basic and Diluted Earnings Per Share: | $ | 0.42 | $ | 0.38 | $ | 0.90 | $ | 0.93 |
• | Agency RMBS, meaning RMBS whose principal and interest payments are guaranteed by the Government National Mortgage Association (or Ginnie Mae), the Federal National Mortgage Association (or Fannie Mae), or the Federal Home Loan Mortgage Corporation (or Freddie Mac); |
• | Non-Agency RMBS, meaning RMBS that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac; |
• | Residential mortgage loans; and |
• | Financial assets other than RMBS, comprising approximately 5% to 10% of the portfolio. |
September 30, 2011 | June 30, 2011 | March 31, 2011 | December 31, 2010 | September 30, 2010 | ||||||||||
Agency RMBS (1) | 80.9 | % | 83.7 | % | 82.3 | % | 75.6 | % | 71.2 | % | ||||
Non-Agency RMBS | 19.1 | % | 16.3 | % | 17.7 | % | 24.4 | % | 28.8 | % |
(1) | Agency RMBS includes inverse interest-only securities which are classified as derivatives for purposes of U.S. GAAP. |
Three Months Ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | March 31, 2011 | December 31, 2010 | September 30, 2010 | ||||||||||
Average annualized yields | ||||||||||||||
Agency RMBS (1) | 4.3 | % | 4.7 | % | 3.9 | % | 3.8 | % | 4.3 | % | ||||
Non-Agency RMBS | 9.8 | % | 8.8 | % | 9.7 | % | 11.4 | % | 10.4 | % | ||||
Aggregate RMBS | 5.5 | % | 5.4 | % | 5.2 | % | 5.8 | % | 5.9 | % | ||||
Cost of financing (2) | 1.3 | % | 1.3 | % | 1.4 | % | 1.2 | % | 1.1 | % | ||||
Net interest spread | 4.2 | % | 4.1 | % | 3.8 | % | 4.6 | % | 4.8 | % |
(1) | Agency RMBS includes inverse interest-only securities which are classified as derivatives under U.S. GAAP. |
(2) | Cost of financing includes swap interest rate spread. |
As of | ||||||||||||||
September 30, 2011 | June 30, 2011 | March 31, 2011 | December 31, 2010 | September 30, 2010 | ||||||||||
Average annualized yields (3) | ||||||||||||||
Agency RMBS (1) | 3.4 | % | 3.9 | % | 3.9 | % | 3.6 | % | 3.1 | % | ||||
Non-Agency RMBS | 9.6 | % | 9.2 | % | 9.7 | % | 10.7 | % | 11.0 | % | ||||
Aggregate RMBS | 4.7 | % | 4.8 | % | 5.2 | % | 5.2 | % | 5.3 | % | ||||
Cost of financing (2) | 1.3 | % | 1.3 | % | 1.4 | % | 1.2 | % | 1.1 | % | ||||
Net interest spread | 3.4 | % | 3.5 | % | 3.8 | % | 4.0 | % | 4.2 | % |
(1) | Agency RMBS includes inverse interest-only securities which are classified as derivatives for purposes of U.S. GAAP. |
(2) | Cost of financing includes swap interest rate spread. |
(3) | Average annualized yield incorporates future prepayment, credit loss and other assumptions, all of which are estimates and subject to change. |
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity. |
Level 2 | Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. |
Level 3 | Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management's best assumptions of how market participants would price the assets and liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation. |
(dollars in thousands) | September 30, 2011 | December 31, 2010 | |||||||||||
Agency Bonds | |||||||||||||
Fixed Rate Bonds | $ | 4,917,465 | 76.7 | % | $ | 746,957 | 55.1 | % | |||||
Hybrid ARMs | 239,229 | 3.7 | % | 269,512 | 19.9 | % | |||||||
Total Agency | 5,156,694 | 80.4 | % | 1,016,469 | 75.0 | % | |||||||
Non-Agency Bonds | |||||||||||||
Senior Bonds | 994,883 | 15.5 | % | 268,161 | 19.8 | % | |||||||
Mezzanine Bonds | 261,318 | 4.1 | % | 69,775 | 5.2 | % | |||||||
Total Non-Agency | 1,256,201 | 19.6 | % | 337,936 | 25.0 | % | |||||||
Total | $ | 6,412,895 | $ | 1,354,405 |
As of September 30, 2011 | ||||||||||||||
(dollars in thousands) | Fixed Rate | Hybrid ARMs | Total Agency RMBS | |||||||||||
Lower loan balances | $ | 2,838,635 | $ | — | $ | 2,838,635 | 55 | % | ||||||
Home equity conversion mortgages | 927,754 | — | 927,754 | 18 | % | |||||||||
Seasoned (2005 and prior vintages) | 349,305 | 151,392 | 500,697 | 10 | % | |||||||||
Pre-pay lock-out or penalty-based | 260,886 | 35,758 | 296,644 | 6 | % | |||||||||
High LTV | 219,607 | — | 219,607 | 4 | % | |||||||||
2006 and subsequent vintages | 141,638 | 52,079 | 193,717 | 4 | % | |||||||||
2006 and subsequent vintages - Discount | 179,640 | — | 179,640 | 3 | % | |||||||||
Total | $ | 4,917,465 | $ | 239,229 | $ | 5,156,694 | 100 | % |
As of September 30, 2011 | |||||||||||
(in thousands) | Senior | Mezzanine | Total | ||||||||
Face Value | $ | 2,148,645 | $ | 518,514 | $ | 2,667,159 | |||||
Unamortized discount | |||||||||||
Designated credit reserve | (666,029 | ) | (106,909 | ) | (772,938 | ) | |||||
Unamortized net discount | (418,851 | ) | (136,478 | ) | (555,329 | ) | |||||
Amortized Cost | $ | 1,063,765 | $ | 275,127 | $ | 1,338,892 |
Three Months Ended | Nine Months Ended | |||||||||||||||
(in thousands, except share data) | September 30, | September 30, | ||||||||||||||
Income Statement Data: | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest income: | ||||||||||||||||
Available-for-sale securities | $ | 65,919 | $ | 11,823 | $ | 125,413 | $ | 27,064 | ||||||||
Trading securities | 1,706 | 15 | 2,783 | 15 | ||||||||||||
Cash and cash equivalents | 114 | 27 | 241 | 70 | ||||||||||||
Total interest income | 67,739 | 11,865 | 128,437 | 27,149 | ||||||||||||
Interest expense | 7,218 | 1,395 | 13,580 | 2,777 | ||||||||||||
Net interest income | 60,521 | 10,470 | 114,857 | 24,372 | ||||||||||||
Other-than-temporary impairments: | ||||||||||||||||
Total other-than-temporary impairment losses | (3,371 | ) | — | (3,665 | ) | — | ||||||||||
Non-credit portion of loss recognized in other comprehensive income (loss) | — | — | — | — | ||||||||||||
Net other-than-temporary credit impairment losses | (3,371 | ) | — | (3,665 | ) | — | ||||||||||
Other income: | ||||||||||||||||
Gain on sale of investment securities, net | 31,432 | 2,577 | 36,159 | 4,608 | ||||||||||||
Loss on interest rate swap and swaption agreements | (39,311 | ) | (4,436 | ) | (88,180 | ) | (10,037 | ) | ||||||||
Gain on other derivative instruments | 22,361 | 3,098 | 37,474 | 4,197 | ||||||||||||
Total other income (loss) | 14,482 | 1,239 | (14,547 | ) | (1,232 | ) | ||||||||||
Expenses: | ||||||||||||||||
Management fees | 4,785 | 862 | 9,063 | 2,068 | ||||||||||||
Other operating expenses | 2,850 | 1,213 | 6,516 | 3,332 | ||||||||||||
Total expenses | 7,635 | 2,075 | 15,579 | 5,400 | ||||||||||||
Net income before income taxes | 63,997 | 9,634 | 81,066 | 17,740 | ||||||||||||
Benefit from (provision for) income taxes | (9,388 | ) | 246 | (5,064 | ) | 1,555 | ||||||||||
Net income attributable to common stockholders | $ | 54,609 | $ | 9,880 | $ | 76,002 | $ | 19,295 | ||||||||
Basic and diluted earnings per weighted average common share | $ | 0.42 | $ | 0.38 | $ | 0.90 | $ | 0.93 | ||||||||
Dividends declared per common share | $ | 0.40 | $ | 0.39 | $ | 1.20 | $ | 1.08 | ||||||||
Basic and diluted weighted average number of shares of common stock | 130,607,566 | 26,126,212 | 84,751,854 | 20,691,461 |
Balance Sheet Data: | September 30, 2011 | December 31, 2010 | ||||||
Available-for-sale securities | $ | 6,412,895 | $ | 1,354,405 | ||||
Total assets | $ | 8,818,809 | $ | 1,797,432 | ||||
Repurchase agreements | $ | 7,300,613 | $ | 1,169,803 | ||||
Total stockholders' equity | $ | 1,307,131 | $ | 382,448 |
(in thousands, except share data) | Three Months Ended | Nine Months Ended | ||||||||||||||
Reconciliation of net income attributable to common | September 30, | September 30, | ||||||||||||||
stockholders to Adjusted GAAP Earnings | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net income attributable to common stockholders | $ | 54,609 | $ | 9,880 | $ | 76,002 | $ | 19,295 | ||||||||
Adjustments to GAAP Net Income: | ||||||||||||||||
Unrealized loss, net of tax, on interest rate swap and swaptions economically hedging repurchase agreements and available-for-sale securities (1) | 16,650 | 361 | 49,186 | 3,795 | ||||||||||||
Adjusted GAAP Earnings | $ | 71,259 | $ | 10,241 | $ | 125,188 | $ | 23,090 | ||||||||
Weighted average shares outstanding - basic and diluted | 130,607,566 | 26,126,212 | 84,751,854 | 20,691,461 | ||||||||||||
Adjusted GAAP Earnings per weighted average share outstanding - basic and diluted | $ | 0.55 | $ | 0.39 | $ | 1.48 | $ | 1.12 |
(1) | Amounts include tax benefit of $3.6 million and $7.5 million for the three and nine months ended September 30, 2011 and tax benefit of $0.6 million and $1.6 million for the three and nine months ended September 30, 2010, respectively. |
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||||||||||
Agency | Non-Agency | Consolidated | Agency | Non-Agency | Consolidated | ||||||||||||
Gross Yield/Stated Coupon | 5.2 | % | 3.0 | % | 4.7 | % | 5.3 | % | 3.4 | % | 4.9 | % | |||||
Net accretion/amortization of discount/premium | (1.5 | )% | 6.8 | % | 0.4 | % | (1.6 | )% | 6.1 | % | — | % | |||||
Net Yield | 3.7 | % | 9.8 | % | 5.1 | % | 3.7 | % | 9.5 | % | 4.9 | % |
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||||||
Agency | Non-Agency | Consolidated | Agency | Non-Agency | Consolidated | ||||||||||||
Gross Yield/Stated Coupon | 5.6 | % | 5.1 | % | 5.4 | % | 5.8 | % | 5.2 | % | 5.6 | % | |||||
Net accretion/amortization of discount/premium | (2.1 | )% | 5.3 | % | (0.1 | )% | (2.3 | )% | 5.5 | % | (0.4 | )% | |||||
Net Yield | 3.5 | % | 10.4 | % | 5.3 | % | 3.5 | % | 10.7 | % | 5.2 | % |
(1) | These yields have not been adjusted for cost of delay and cost to carry purchase premiums. |
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||||||||||||||||
(dollars in thousands) | Agency | Non-Agency | Total | Agency | Non-Agency | Total | |||||||||||||||||
Average Amortized Cost | $ | 4,041,828 | $ | 1,175,766 | $ | 5,217,594 | $ | 2,709,742 | $ | 702,871 | $ | 3,412,613 | |||||||||||
Coupon Interest | 52,354 | 8,815 | 61,169 | 107,397 | 17,959 | 125,356 | |||||||||||||||||
Net (Premium Amortization)/Discount Accretion | (15,145 | ) | 19,895 | 4,750 | (32,248 | ) | 32,305 | 57 | |||||||||||||||
Interest Income | $ | 37,209 | $ | 28,710 | $ | 65,919 | $ | 75,149 | $ | 50,264 | $ | 125,413 | |||||||||||
Net Asset Yield | 3.7 | % | 9.8 | % | 5.1 | % | 3.7 | % | 9.5 | % | 4.9 | % |
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||||||||||||
(dollars in thousands) | Agency | Non-Agency | Total | Agency | Non-Agency | Total | |||||||||||||||||
Average Amortized Cost | $ | 633,916 | $ | 231,094 | $ | 865,010 | $ | 517,929 | $ | 161,081 | $ | 679,010 | |||||||||||
Coupon Interest | 8,831 | 2,929 | 11,760 | 22,376 | 6,293 | 28,669 | |||||||||||||||||
Net (Premium Amortization)/Discount Accretion | (3,297 | ) | 3,084 | (213 | ) | (8,641 | ) | 6,654 | (1,987 | ) | |||||||||||||
Interest Income | $ | 5,534 | $ | 6,013 | $ | 11,547 | $ | 13,735 | $ | 12,947 | $ | 26,682 | |||||||||||
Net Asset Yield | 3.5 | % | 10.4 | % | 5.3 | % | 3.5 | % | 10.7 | % | 5.2 | % |
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||||||||||||||||
(dollars in thousands) | Agency (1) | Non-Agency | Total | Agency (1) | Non-Agency | Total | |||||||||||||||||
Average available-for-sale securities held (2) | $ | 4,041,828 | $ | 1,175,766 | $ | 5,217,594 | $ | 2,709,742 | $ | 702,871 | $ | 3,412,613 | |||||||||||
Total interest income | $ | 37,209 | $ | 28,710 | $ | 65,919 | $ | 75,149 | $ | 50,264 | $ | 125,413 | |||||||||||
Yield on average investment securities | 3.7 | % | 9.8 | % | 5.1 | % | 3.7 | % | 9.5 | % | 4.9 | % | |||||||||||
Average balance of repurchase agreements | $ | 3,840,036 | $ | 684,224 | $ | 4,524,260 | $ | 2,574,701 | $ | 417,415 | $ | 2,992,116 | |||||||||||
Total interest expense (3) (4) | $ | 3,113 | $ | 3,601 | $ | 6,714 | $ | 6,289 | $ | 6,396 | $ | 12,685 | |||||||||||
Average cost of funds | 0.3 | % | 2.1 | % | 0.6 | % | 0.3 | % | 2.0 | % | 0.6 | % | |||||||||||
Net interest income | $ | 34,096 | $ | 25,109 | $ | 59,205 | $ | 68,860 | $ | 43,868 | $ | 112,728 | |||||||||||
Net interest rate spread | 3.4 | % | 7.7 | % | 4.5 | % | 3.4 | % | 7.5 | % | 4.3 | % |
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||||||||||||
(dollars in thousands) | Agency (1) | Non-Agency | Total | Agency (1) | Non-Agency | Total | |||||||||||||||||
Average available-for-sale securities held (2) | $ | 633,916 | $ | 231,094 | $ | 865,010 | $ | 517,929 | $ | 161,081 | $ | 679,010 | |||||||||||
Total interest income | $ | 5,534 | $ | 6,013 | $ | 11,547 | $ | 13,735 | $ | 12,947 | $ | 26,682 | |||||||||||
Yield on average investment securities | 3.5 | % | 10.4 | % | 5.3 | % | 3.5 | % | 10.7 | % | 5.2 | % | |||||||||||
Average balance of repurchase agreements | $ | 609,365 | $ | 133,204 | $ | 742,569 | $ | 498,207 | $ | 79,529 | $ | 577,736 | |||||||||||
Total interest expense (3) (4) | $ | 621 | $ | 640 | $ | 1,261 | $ | 1,443 | $ | 1,127 | $ | 2,570 | |||||||||||
Average cost of funds | 0.4 | % | 1.9 | % | 0.7 | % | 0.4 | % | 1.9 | % | 0.6 | % | |||||||||||
Net interest income | $ | 4,913 | $ | 5,373 | $ | 10,286 | $ | 12,292 | $ | 11,820 | $ | 24,112 | |||||||||||
Net interest rate spread | 3.1 | % | 8.5 | % | 4.6 | % | 3.1 | % | 8.8 | % | 4.6 | % |
(1) | Excludes inverse interest-only securities which are classified as derivatives under U.S. GAAP. For the three and nine months ended September 30, 2011, our average annualized yield on our Agency RMBS, including inverse interest-only securities, was 4.3% and 4.4%, respectively, compared to 4.3% and 3.9% for the same periods in 2010. |
(2) | Excludes change in realized and unrealized gains/(losses). |
(3) | Cost of funds by investment type is based off the underlying investment type of the RMBS AFS assigned as collateral. |
(4) | Cost of funds does not include accrual and settlement of interest associated with interest rate swaps. In accordance with GAAP, those costs are included in loss on interest rate swap and swaption agreements in the condensed consolidated statement of income. For the three and nine months ended September 30, 2011, our average annualized cost of funds, including interest spread expense associated with interest rate swaps and including inverse interest-only securities (see footnote 1 above), was 1.3% and 1.4%, respectively, compared to 1.1% and 0.4% for the same period in 2010. |
(in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
Net interest spread | $ | (8,341 | ) | $ | (985 | ) | $ | (18,632 | ) | $ | (2,194 | ) | |||
Early termination losses | (17,847 | ) | (2,486 | ) | (18,074 | ) | (2,486 | ) | |||||||
Change in unrealized gain on interest rate swap and swaption agreements, at fair value | (13,123 | ) | (965 | ) | (51,474 | ) | (5,357 | ) | |||||||
Loss on interest rate swap and swaption agreements | $ | (39,311 | ) | $ | (4,436 | ) | $ | (88,180 | ) | $ | (10,037 | ) |
(dollars in thousands) | Other Operating Expenses | Other Operating Expenses/Average Equity | ||||
(Ratios for the quarter have been annualized) | ||||||
For the Three Months Ended September 30, 2011 | $ | 2,850 | 0.9 | % | ||
For the Three Months Ended September 30, 2010 | $ | 1,213 | 2.0 | % | ||
For the Nine Months Ended September 30, 2011 | $ | 6,516 | 1.0 | % | ||
For the Nine Months Ended September 30, 2010 | $ | 3,332 | 2.4 | % |
September 30, 2011 | ||||||||||||||||||||||||||||||
(dollars in thousands, except purchase price) | Principal/Current Face | Net (Discount)/ Premium | Amortized Cost | Unrealized Gain | Unrealized Loss | Carrying Value | Weighted Average Coupon Rate | Weighted Average Purchase Price | ||||||||||||||||||||||
Principal and interest securities: | ||||||||||||||||||||||||||||||
Fixed | $ | 4,480,947 | $ | 270,853 | $ | 4,751,800 | $ | 79,574 | $ | (4,084 | ) | $ | 4,827,290 | 4.62 | % | $ | 106.29 | |||||||||||||
Hybrid/ARM | 223,999 | 11,748 | 235,747 | 3,553 | (71 | ) | 239,229 | 4.12 | % | $ | 106.04 | |||||||||||||||||||
Total P&I Securities | 4,704,946 | 282,601 | 4,987,547 | 83,127 | (4,155 | ) | 5,066,519 | 4.60 | % | $ | 106.28 | |||||||||||||||||||
Interest-only securities: | ||||||||||||||||||||||||||||||
Fixed | 539,323 | (463,810 | ) | 75,513 | 68 | (22,646 | ) | 52,935 | 5.28 | % | $ | 16.01 | ||||||||||||||||||
Fixed Other (1) | 614,678 | (577,410 | ) | 37,268 | 532 | (560 | ) | 37,240 | 1.31 | % | $ | 6.35 | ||||||||||||||||||
Total | $ | 5,858,947 | $ | (758,619 | ) | $ | 5,100,328 | $ | 83,727 | $ | (27,361 | ) | $ | 5,156,694 |
(in thousands) | Carrying Value | ||
0-12 months | $ | 202,813 | |
13-36 months | 11,632 | ||
37-64 months | 24,784 | ||
Greater than 64 months | — | ||
Total | $ | 239,229 |
As of September 30, 2011 | |||||||||||||||||||||||||||
(in thousands) | Principal/Current Face | Accretable Purchase Discount | Credit Reserve Purchase Discount | Amortized Cost | Unrealized Gain | Unrealized Loss | Carrying Value | ||||||||||||||||||||
Senior | $ | 2,148,645 | $ | (418,851 | ) | $ | (666,029 | ) | $ | 1,063,765 | $ | 10,925 | $ | (79,807 | ) | $ | 994,883 | ||||||||||
Mezzanine | 518,514 | (136,478 | ) | (106,909 | ) | 275,127 | 5,699 | (19,508 | ) | 261,318 | |||||||||||||||||
Total | $ | 2,667,159 | $ | (555,329 | ) | $ | (772,938 | ) | $ | 1,338,892 | $ | 16,624 | $ | (99,315 | ) | $ | 1,256,201 |
September 30, 2011 | ||
AAA | — | % |
AA | — | % |
A | 2.0 | % |
BBB | 4.9 | % |
BB | 9.4 | % |
B | 8.7 | % |
Below B | 74.4 | % |
Not rated | 0.6 | % |
Total | 100.0 | % |
At September 30, 2011 | |||||||||||
Non-Agency Principal and Interest (P&I) RMBS Characteristics | Senior Bonds | Mezzanine Bonds | Total P&I Bonds | ||||||||
Carrying Value (in thousands) | $ | 994,585 | $ | 261,318 | $ | 1,255,903 | |||||
% of Non-Agency Portfolio | 79.2 | % | 20.8 | % | 100.0 | % | |||||
Average Purchase Price | $ | 55.06 | $ | 58.57 | $ | 55.79 | |||||
Average Coupon | 2.2 | % | 1.3 | % | 2.0 | % | |||||
Average Fixed Coupon | 5.6 | % | 5.8 | % | 5.7 | % | |||||
Average Floating Coupon | 1.3 | % | 0.9 | % | 1.2 | % | |||||
Average Hybrid Coupon | 4.6 | % | 2.7 | % | 4.6 | % | |||||
Collateral Attributes | |||||||||||
Avg Loan Age (months) | 64 | 82 | 68 | ||||||||
Avg Original Loan-to-Value | 78.3 | % | 77.5 | % | 78.1 | % | |||||
Avg Original FICO (1) | 648 | 642 | 647 | ||||||||
Current Performance | |||||||||||
60+ day delinquencies | 41.3 | % | 32.8 | % | 39.5 | % | |||||
Average Credit Enhancement (2) | 22.4 | % | 31.4 | % | 24.3 | % | |||||
3-Month CPR (3) | 2.2 | % | 3.0 | % | 2.4 | % |
(1) | FICO represents a mortgage industry accepted credit score of a borrower, which was developed by Fair Isaac Corporation. |
(2) | Average credit enhancement remaining on our non-Agency RMBS portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying collateral. |
(3) | 3-Month CPR is reflective of the prepayment speed on the underlying securitization; however, it does not necessarily indicate the proceeds received on our investment tranche. Proceeds received for each security are dependent on the position of the individual security within the structure of each deal. |
Non-Agency RMBS Characteristics | September 30, 2011 | |||||||||||||||||||
(dollars in thousands) | Senior Bonds | Mezzanine Bonds | Total Bonds | |||||||||||||||||
Loan Type | Carrying Value | % of Senior Bonds | Carrying Value | % of Mezzanine Bonds | Carrying Value | % of Non-Agency Portfolio | ||||||||||||||
Prime | $ | 15,996 | 1.6 | % | $ | 1,548 | 0.6 | % | $ | 17,544 | 1.4 | % | ||||||||
Alt-A | 68,407 | 6.9 | % | 8,075 | 3.1 | % | 76,482 | 6.1 | % | |||||||||||
POA | 199,926 | 20.1 | % | 22,067 | 8.4 | % | 221,993 | 17.7 | % | |||||||||||
Subprime | 710,256 | 71.4 | % | 229,628 | 87.9 | % | 939,884 | 74.8 | % | |||||||||||
$ | 994,585 | 100.0 | % | $ | 261,318 | 100.0 | % | $ | 1,255,903 | 100.0 | % |
Non-Agency RMBS Characteristics | September 30, 2011 | |||||||||||||||||||
(dollars in thousands) | Senior Bonds | Mezzanine Bonds | Total Bonds | |||||||||||||||||
Coupon Type | Carrying Value | % of Senior Bonds | Carrying Value | % of Mezzanine Bonds | Carrying Value | % of Non-Agency Portfolio | ||||||||||||||
Fixed Rate | $ | 191,627 | 19.3 | % | $ | 17,730 | 6.8 | % | $ | 209,357 | 16.7 | % | ||||||||
Hybrid or Floating | 802,958 | 80.7 | % | 243,588 | 93.2 | % | 1,046,546 | 83.3 | % | |||||||||||
$ | 994,585 | 100.0 | % | $ | 261,318 | 100.0 | % | $ | 1,255,903 | 100.0 | % |
Non-Agency RMBS Characteristics | September 30, 2011 | |||||||||||||||||||
(dollars in thousands) | Senior Bonds | Mezzanine Bonds | Total Bonds | |||||||||||||||||
Loan Origination Year | Carrying Value | % of Senior Bonds | Carrying Value | % of Mezzanine Bonds | Carrying Value | % of Non-Agency Portfolio | ||||||||||||||
2006+ | $ | 771,416 | 77.6 | % | $ | 24,828 | 9.5 | % | $ | 796,244 | 63.4 | % | ||||||||
2002-2005 | 217,905 | 21.9 | % | 236,091 | 90.3 | % | 453,996 | 36.1 | % | |||||||||||
Pre-2002 | 5,264 | 0.5 | % | 399 | 0.2 | % | 5,663 | 0.5 | % | |||||||||||
$ | 994,585 | 100.0 | % | $ | 261,318 | 100.0 | % | $ | 1,255,903 | 100.0 | % |
(dollars in thousands) | September 30, 2011 | December 31, 2010 | ||||||||||||
Collateral Type | Amount Outstanding | Weighted Average | Amount Outstanding | Weighted Average | ||||||||||
U.S. Treasuries | $ | 1,529,550 | 0.11 | % | $ | 198,750 | 0.28 | % | ||||||
Agency RMBS | 4,863,534 | 0.32 | % | 745,861 | 0.37 | % | ||||||||
Non-Agency RMBS | 782,395 | 2.37 | % | 201,976 | 2.05 | % | ||||||||
Agency derivatives | 125,134 | 0.78 | % | 23,216 | 1.07 | % | ||||||||
Total | $ | 7,300,613 | 0.50 | % | $ | 1,169,803 | 0.66 | % |
(dollars in thousands) | Quarterly Average RMBS Repurchase Balances (1) | End of Period Balance RMBS Repurchase Agreements (1) | Maximum Balance of Any Month-End for RMBS Repurchase Agreements (1) | RMBS Repurchase Agreements to equity ratio | |||||||
For the Three Months Ended September 30, 2011 | 4,640,801 | 5,771,063 | 5,771,063 | 4.4:1.0 | (5) | ||||||
For the Three Months Ended June 30, 2011 | 3,050,424 | 3,807,802 | 3,807,802 | 4.2:1.0 | (4) | ||||||
For the Three Months Ended March 31, 2011 | 1,516,076 | 2,317,156 | 2,317,156 | 3.4:1.0 | (3) | ||||||
For the Three Months Ended December 31, 2010 | 850,945 | 971,053 | 971,053 | 2.5:1.0 | (2) | ||||||
For the Three Months Ended September 30, 2010 | 761,151 | 797,449 | 797,449 | 3.3:1.0 |
(1) | RMBS repurchase agreements include repurchase agreements for Agency derivatives and exclude repurchase agreements collateralized by U.S. Treasuries. |
(2) | On December 22, 2010, the Company completed its capital raise of approximately $128.5 million in net proceeds. Due to the timing of the capital raise within the quarter, the net proceeds were not fully invested, on a leveraged basis, until the end of January 2011 resulting in a decline in the debt-to-equity ratio as of December 31, 2010. With a higher targeted allocation to Agency RMBS for additional capital, the Company targeted a fully deployed debt-to-equity ratio of 3.5:1.0 to 4.0:1.0. |
(3) | On March 16, 2011, the Company completed its capital raise of approximately $287.8 million in net proceeds. Due to the timing of the capital raise within the quarter, the net proceeds were not fully invested, on a leveraged basis, until the end of April 2011. With a higher targeted allocation to Agency RMBS for additional capital, the Company targeted a fully deployed debt-to-equity ratio of 4.5:1.0 to 5.0:1.0. |
(4) | On May 25, 2011, the Company completed its capital raise of approximately $235.2 million in net proceeds, which was invested on a leveraged basis. With a higher targeted allocation to non-Agency RMBS for additional capital, the Company targeted a fully deployed debt-to-equity ratio of 4.0:1.0 to 4.5:1.0. |
(5) | On July 15, 2011, the Company completed its capital raise of approximately $483.6 million, which was invested on a leveraged basis. With a higher targeted allocation to non-Agency RMBS for additional capital, the Company targeted a fully deployed debt-to-equity ratio of 4.0:1.0 to 4.5:1.0. |
(dollars in thousands, except per share amounts) | Book Value | Book Value Per Diluted Share (2) | ||||||
Stockholders' equity at June 30, 2011 | $ | 897,581 | $ | 9.73 | ||||
GAAP net income: | ||||||||
Core Earnings, net of tax benefit of $0.3 million (1) | 51,801 | 0.37 | ||||||
Realized gains and losses, net of tax expense of $1.2 million | 9,848 | 0.07 | ||||||
Unrealized mark-to-market gains and losses, net of tax expense of $8.5 million | (7,039 | ) | (0.05 | ) | ||||
Other comprehensive income | (72,573 | ) | (0.52 | ) | ||||
Dividend declaration | (56,235 | ) | (0.40 | ) | ||||
Net proceeds from common stock issuance | 483,679 | 0.10 | ||||||
Other | 69 | — | ||||||
Stockholders' equity at September 30, 2011 | $ | 1,307,131 | $ | 9.30 |
(1) | Core Earnings is a non-GAAP measure that we define as net income, excluding impairment losses, gains or losses on sales of securities and termination of interest rate swaps, unrealized gains or losses on trading securities, interest rate swaps and swaptions, certain gains or losses on other derivative instruments and non-recurring business combination expenses. As defined, Core Earnings includes interest income associated with our inverse interest-only securities ("Agency derivatives") and premium income on credit default swaps. Core Earnings is provided for purposes of comparability to other peer issuers. |
(2) | Diluted shares outstanding at end of period are used as the denominator in book value per share calculation. |
September 30, 2011 | December 31, 2010 | ||||||||||||||||||||
(dollars in thousands) | Amount Outstanding | Net Counterparty Exposure(1) | Percent of Funding | Amount Outstanding | Net Counterparty Exposure(1) | Percent of Funding | |||||||||||||||
North America | $ | 5,720,983 | $ | 564,524 | 74.5 | % | $ | 825,766 | $ | 96,391 | 54.4 | % | |||||||||
Europe (2) | 786,560 | 153,395 | 20.2 | % | 253,029 | 71,279 | 40.2 | % | |||||||||||||
Asia (2) | 793,070 | 40,321 | 5.3 | % | 91,008 | 9,516 | 5.4 | % | |||||||||||||
Total | $ | 7,300,613 | $ | 758,240 | 100.0 | % | $ | 1,169,803 | $ | 177,186 | 100.0 | % |
(a) | As of last Business Day of each calendar quarter, Total Indebtedness to Net Worth must be less than the specified Threshold Ratio in the Repurchase Agreement. As of September 30, 2011, our debt to net worth, as defined, was 4.5:1.0 while our threshold ratio, as defined, was 6.5:1.0. |
(b) | As of the last Business Day of each calendar quarter, Liquidity must be greater than $25 million and the aggregate amount of Unrestricted Cash or Cash Equivalents must be greater than $15 million. As of September 30, 2011, our liquidity, as defined, was $409.9 million and our total unrestricted cash or cash equivalents, as defined was $36.7 million. |
(c) | As of the last Business Day of each calendar quarter, Net Worth must be greater than $450 million. As of September 30, 2011, our net worth, as defined, was $1.3 billion. |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Available-for-sale securities, at fair value | $ | 6,267,036 | $ | 1,090,598 | |||
Trading securities, at fair value | 1,526,330 | 199,523 | |||||
Cash and cash equivalents | 15,000 | 14,467 | |||||
Restricted cash | 84,056 | 11,634 | |||||
Due to/from counterparties | 13,032 | 10,508 | |||||
Derivative assets, at fair value | 150,774 | 30,534 | |||||
Total | $ | 8,056,228 | $ | 1,357,264 |
(in thousands) | September 30, 2011 | December 31, 2010 | |||||
Within 30 days | $ | 1,581,588 | $ | 197,286 | |||
30 to 59 days | 1,308,112 | 211,556 | |||||
60 to 89 days | 803,521 | 117,621 | |||||
90 to 119 days | 678,377 | 152,433 | |||||
Over 120 days (1) | 1,399,465 | 292,157 | |||||
Open maturity (2) | 1,529,550 | 198,750 | |||||
Total | $ | 7,300,613 | $ | 1,169,803 |
(1) | Over 120 days includes the amounts outstanding under the Wells Fargo 364-day borrowing facility. |
(2) | Repurchase agreements collateralized by U.S. Treasuries include an open maturity period (i.e., rolling 1-day maturity) renewable at the discretion of either party to the agreements. |
• | Cash flows from operating activities. For the three months ended September 30, 2011, operating activities increased our cash balances by approximately $45.6 million, primarily driven by our strong interest yield and financial results for the quarter. |
• | Cash flows from investing activities. For the three months ended September 30, 2011, investing activities reduced our cash balances by approximately $2.7 billion. The reduction was driven by the increase in our RMBS portfolio as we deployed capital from our common stock offerings. |
• | Cash flows from financing activities. For the three months ended September 30, 2011, financing activities increased our cash balance by approximately $2.9 billion, resulting from the net borrowings under repurchase agreements to fund our AFS portfolio as well as net proceeds of $483.6 million obtained from our common stock offering. |
As of September 30, 2011 | |||||||||||||||
Index Type | Floating | Hybrid (1) | Total | Index Percentage | |||||||||||
CMT | $ | — | $ | 180,483 | $ | 180,483 | 14 | % | |||||||
LIBOR | 1,027,339 | 44,801 | 1,072,140 | 83 | % | ||||||||||
Other (2) | 16,240 | 17,210 | 33,450 | 3 | % | ||||||||||
Total | $ | 1,043,579 | $ | 242,494 | $ | 1,286,073 | 100 | % |
Changes in Interest Rates | |||||||||||||||
(dollars in thousands) | -100 bps | -50 bps | +50 bps | +100 bps | |||||||||||
Change in value of financial position: | |||||||||||||||
Available-for-sale securities, at fair value | $ | 121,122 | $ | 71,958 | $ | (77,732 | ) | $ | (167,751 | ) | |||||
As a % of September 30, 2011 equity | 9.3 | % | 5.5 | % | (5.9 | )% | (12.8 | )% | |||||||
Trading securities, at fair value | $ | 6,094 | $ | 6,094 | $ | (12,784 | ) | $ | (25,429 | ) | |||||
As a % of September 30, 2011 equity | 0.5 | % | 0.5 | % | (1.0 | )% | (1.9 | )% | |||||||
Derivatives, at fair value, net | $ | (96,286 | ) | $ | (72,231 | ) | $ | 70,647 | $ | 150,132 | |||||
As a % of September 30, 2011 equity | (7.4 | )% | (5.5 | )% | 5.4 | % | 11.5 | % | |||||||
Repurchase Agreements | $ | (5,784 | ) | $ | (5,784 | ) | $ | 6,093 | $ | 12,185 | |||||
As a % of September 30, 2011 equity | (0.4 | )% | (0.4 | )% | 0.5 | % | 0.9 | % | |||||||
Total Net Assets | $ | 25,146 | $ | 37 | $ | (13,776 | ) | $ | (30,863 | ) | |||||
As a % of September 30, 2011 total assets | 0.3 | % | — | % | (0.2 | )% | (0.3 | )% | |||||||
As a % of September 30, 2011 equity | 2.0 | % | 0.1 | % | (1.0 | )% | (2.3 | )% | |||||||
-100 bps | -50 bps | +50 bps | +100 bps | ||||||||||||
Change in annualized net interest income: | $ | 5,635 | $ | 5,292 | $ | (2,255 | ) | $ | (4,510 | ) | |||||
% change in net interest income | 2.4 | % | 2.2 | % | (1.0 | )% | (1.9 | )% |
TWO HARBORS INVESTMENT CORP. | |||
Dated: | November 4, 2011 | By: | /s/ Thomas Siering |
Thomas Siering Chief Executive Officer, President and Director (principal executive officer) | |||
Dated: | November 4, 2011 | By: | /s/ Jeffrey Stolt |
Jeffrey Stolt Chief Financial Officer and Treasurer (principal accounting and financial officer) |
Exhibit Number | Exhibit Index | |
2.1 | Agreement and Plan of Merger, dated as of June 11, 2009, by and among Capitol Acquisition Corp., Two Harbors Investment Corp., Two Harbors Merger Corp. and Pine River Capital Management L.P. (incorporated by reference to Annex A filed with Pre Effective Amendment No. 4 to the Registrant's Registration Statement on Form S-4 (File No. 333-160199) filed with the Securities and Exchange Commission on October 8, 2009 (“Amendment No. 4”)). | |
2.2 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 17, 2009, by and among Capitol Acquisition Corp., Two Harbors Investment Corp., Two Harbors Merger Corp. and Pine River Capital Management L.P. (incorporated by reference to Annex A-2 filed with Amendment No. 4). | |
2.3 | Amendment No. 2 to Agreement and Plan of Merger, dated as of September 20, 2009, by and among Capitol Acquisition Corp., Two Harbors Investment Corp., Two Harbors Merger Corp. and Pine River Capital Management L.P. (incorporated by reference to Annex A-3 filed with Amendment No. 4). | |
3.1 | Articles of Amendment and Restatement of Two Harbors Investment Corp. (incorporated by reference to Annex B filed with Amendment No. 4). | |
3.2 | Bylaws of Two Harbors Investment Corp. (incorporated by reference to Annex C filed with Amendment No. 4). | |
4.1 | Warrant Agreement between Continental Stock Transfer & Trust Company and Capitol Acquisition Corp. (incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission on March 4, 2010 ("2010 Form 10-K")). | |
4.2 | Specimen Common Stock Certificate of Two Harbors Investment Corp. (incorporated by reference to Exhibit 4.2 to Amendment No. 4). | |
4.3 | Specimen Warrant Certificate of Two Harbors Investment Corp. (incorporated by reference to Exhibit 4.3 filed with Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (File No. 333-160199) filed with the Securities and Exchange Commission on August 5, 2009). | |
4.4 | Supplement and Amendment to Warrant Agreement between Continental Stock Transfer & Trust Company, Capitol Acquisition Corp. and Two Harbors Investment Corp. (incorporated by reference to Exhibit 4.4 to the Registrant's 2010 Form 10-K). | |
4.5 | Second Amendment to Warrant Agreement between Two Harbors Investment Corp. and Mellon Investors Services LLC (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2010). | |
10.1 | Amendment Number 2 to Master Repurchase and Securities Contract dated as of July 26, 2011 between Two Harbors Asset I, LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2011). | |
10.2 | Amendment Number 2 to Guaranty Agreement dated as of July 26, 2011 between Two Harbors Investment Corp. in favor of Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2011). | |
31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934. | |
31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934. | |
32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Financial statements from the quarterly report on Form 10-Q of Two Harbors Investment Corp. for the quarter ended June 30, 2011, filed on August 4, 2011, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income (Loss), (iii) the Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements tagged as blocks of text. |
Date: | November 4, 2011 | /s/ Thomas Siering | ||
Thomas Siering | ||||
Chief Executive Officer and President |
Date: | November 4, 2011 | /s/ Jeffrey Stolt | ||
Jeffrey Stolt | ||||
Chief Financial Officer and Treasurer |
Date: | November 4, 2011 | /s/ Thomas Siering | ||
Thomas Siering | ||||
Chief Executive Officer and President |
Date: | November 4, 2011 | /s/ Jeffrey Stolt | ||
Jeffrey Stolt | ||||
Chief Financial Officer and Treasurer |
CONDENSED CONSOLIDATED BALANCE SHEETS Parenthetical (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Stockholders' Equity | ||
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 450,000,000 | 450,000,000 |
Common stock, shares issued | 140,586,736 | 40,501,212 |
Common stock, shares outstanding | 140,586,736 | 40,501,212 |
Preferred stock, par value | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized | 50,000,000 | 50,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Subsequent Events | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Subsequent Events [Abstract] | |
Subsequent Events | Subsequent Events On October 5, 2011, the Company's Board of Directors authorized the Company to repurchase up to 10,000,000 shares of its common stock through a share repurchase program. The shares are expected to be repurchased from time to time through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The manner, price, number and timing of share repurchases will be subject a variety of factors, including market conditions and applicable U.S. Securities and Exchange Commission rules. Events subsequent to September 30, 2011 were evaluated through the date these financial statements were issued. |
Document and Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Nov. 03, 2011 | |
Document Information | ||
Entity Registrant Name | TWO HARBORS INVESTMENT CORP. | |
Entity Central Index Key | 0001465740 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Accelerated Filer | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 140,593,845 |
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Accrued Interest Receivable | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Accrued Interest Receivable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Interest Receivable | Accrued Interest Receivable The following table presents the Company's accrued interest receivable by collateral type:
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Other Liabilities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Liabilities | Other Liabilities Other liabilities as of September 30, 2011 and December 31, 2010 are summarized in the following table:
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Basis of Presentation and Significant Accounting Policies | 9 Months Ended |
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Sep. 30, 2011 | |
Basis of Presentation and Significant Accounting Policies [Abstract] | |
Basis of Presentation and Significant Accounting Policies | Basis of Presentation and Significant Accounting Policies Consolidation and Basis of Presentation The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2011 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2011 should not be construed as indicative of the results to be expected for the full year. The condensed consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make a number of significant estimates and assumptions. These estimates include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company's estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material. The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. Recently Issued and/or Adopted Accounting Standards Comprehensive Income In June 2011, the Financial Accounting Standards Board issued ASU No. 2011-05, Comprehensive Income (Topic 220), and Amendments to IAS 1, Presentation of Financial Statements, which provides guidance on the presentation of other comprehensive income, or OCI. The amendment requires companies to present OCI separately in the statement of operations and comprehensive income rather than include in the statement of stockholders' equity. The components of OCI have not changed. ASU 2011-05 is effective for the first interim or annual period beginning on or after December 15, 2011. The impact of adopting this ASU will not have a material impact on the Company's consolidated financial condition or results of operations. |
Fair Value | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value | Fair Value Fair Value Measurements ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity's own credit standing, when measuring fair value of a liability. ASC 820 establishes a three level hierarchy to be used when measuring and disclosing fair value. An instrument's categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:
Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Investment securities - The Company holds a portfolio of AFS and trading securities that are carried at fair value in the condensed consolidated balance sheet. AFS securities are primarily composed of Agency and non-Agency RMBS while the Company's U.S. Treasuries are classified as trading securities. The Company determines the fair value of its U.S. Treasuries and Agency RMBS based upon prices obtained from third-party pricing providers or broker quotes received using bid price, which are deemed indicative of market activity. In determining the fair value of its non-Agency RMBS, management judgment is used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due to principally illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company classified 100% of its U.S. Treasuries as Level 1 fair value assets at September 30, 2011. The Company classified 99.8% of its RMBS AFS securities reported at fair value as Level 2 at September 30, 2011. AFS and trading securities account for 78.4% and 18.6%, respectively, of all assets reported at fair value at September 30, 2011. Derivative instruments - The Company may enter into a variety of derivative financial instruments as part of its hedging strategies. The Company principally executes over-the-counter, or OTC, derivative contracts, such as interest rate swaps. The Company utilizes internally developed models that are widely accepted in the market to value its OTC derivative contracts. The specific terms of the contract are entered into the model as well as market observable inputs such as interest rate forward curves and interpolated volatility assumptions. As all significant inputs into these models are market observable, the Company classified 100% of the interest rate swaps, swaptions and credit default swaps reported at fair value as Level 2 at September 30, 2011. The Company also enters into certain other derivative financial instruments, such as TBAs and inverse interest-only securities. These instruments are similar in form to the Company's AFS securities and the Company utilizes broker quotes to value these instruments. The Company classified 100% of its inverse interest-only securities at fair value as Level 2 at September 30, 2011. The Company reported 100% of its TBAs as Level 1 as of September 30, 2011. The Company's Risk Management Committee governs trading activity relating to derivative instruments. The Company's policy is to minimize credit exposure related to financial derivatives used for hedging, by limiting the hedge counterparties to major banks, financial institutions, exchanges, and private investors who meet established capital and credit guidelines, as well as by limiting the amount of exposure to any individual counterparty. The Company has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA. Additionally, both the Company and the counterparty are required to post cash collateral based upon the net underlying market value of the Company's open positions with the counterparty. Posting of cash collateral typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateral posting at low posting thresholds, credit exposure to the Company and/or to the counterparty is considered materially mitigated. Based on the Company's assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit. Recurring Fair Value The following tables display the Company's assets and liabilities measured at fair value on a recurring basis. The Company often economically hedges the fair value change of its assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items, and therefore do not directly display the impact of the Company's risk management activities.
The valuation of Level 3 instruments requires significant judgment by the third-party pricing providers and/or management. The third-party pricing providers and/or management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the third-party pricing provider in the absence of market information. Assumptions used by the third-party pricing provider due to lack of observable inputs may significantly impact the resulting fair value and therefore the Company's financial statements. The Company's Valuation Committee reviews all valuations that are based on pricing information received from a third-party pricing provider. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable. In addition, the Company performs back-testing of pricing information to validate price information and identify any pricing trends of a third-party price provider. In determining fair value, third-party pricing providers use various valuation approaches, including market and income approaches. Inputs that are used in determining fair value of an instrument may include pricing information, credit data, volatility statistics, and other factors. In addition, inputs can be either observable or unobservable. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. The third-party pricing provider uses prices and inputs that are current as of the measurement date, including during periods of market dislocations. In periods of market dislocation, the availability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified to or from various levels within the fair value hierarchy. Securities for which market quotations are readily available are valued at the bid price (in the case of long positions) or the ask price (in the case of short positions) at the close of trading on the date as of which value is determined. Exchange-traded securities for which no bid or ask price is available are valued at the last traded price. OTC derivative contracts, including interest rate swaps, are valued by the Company using observable inputs, such as quotations received from the counterparty, dealers or brokers, whenever available and considered reliable. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability and reliability of observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, volatility measures, prepayment rates and correlation of such inputs. Certain OTC derivatives, such as swaps, have inputs which can generally be corroborated by market data and are therefore classified within Level 2. The table below presents the reconciliation for all of the Company's Level 3 assets and liabilities measured at fair value on a recurring basis. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the table below does not fully reflect the impact of the Company's risk management activities.
____________________ (a) Change in unrealized gains on AFS securities is recorded in equity as accumulated other comprehensive income.
The Company did not incur transfers between Level 1 and Level 2 or Level 2 and Level 3 for the three and nine months ended September 30, 2011. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. Nonrecurring Fair Value The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of September 30, 2011, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. Fair Value of Financial Instruments In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheet, for which fair value can be estimated. The following describes the Company's methods for estimating the fair value for financial instruments. Descriptions are not provided for those items that have zero balances as of the current balance sheet date.
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Other Operating Expenses | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating Expenses [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Operating Expenses | Other Operating Expenses Components of the Company's other operating expenses for the three and nine months ended September 30, 2011 and 2010 are presented in the following table:
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Repurchase Agreements | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Repurchase Agreements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase Agreements | Repurchase Agreements The Company had outstanding $7.3 billion of repurchase agreements, including repurchase agreements funding the Company's U.S. Treasuries of $1.5 billion. Excluding the debt associated with the Company's U.S. Treasuries and the effect of the Company's interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 0.61% and weighted average remaining maturities of 84 days as of September 30, 2011. The Company had outstanding $1.2 billion of repurchase agreements with a weighted average borrowing rate of 0.74% excluding the effect of the Company's interest rate swaps, and weighted average remaining maturities of 90 days as of December 31, 2010. As of September 30, 2011 and December 31, 2010, the debt associated with the Company's U.S. Treasuries had a weighted average borrowing rate of 0.11% and 0.28%, respectively. At September 30, 2011 and December 31, 2010, the repurchase agreements had the following characteristics:
As of September 30, 2011, the Company's amounts outstanding under repurchase agreements includes $140.4 million of borrowings under the 364-day repurchase facility with Wells Fargo Bank National Association, or Wells Fargo. As of September 30, 2011, the facility provided an aggregate maximum borrowing capacity of $150 million and it is set to mature on July 25, 2012. The facility is collateralized by non-Agency RMBS and its weighted average borrowing rate as of September 30, 2011 was 1.97%. The facility also subjects the Company to maintain certain financial covenants under the guaranty agreement with Wells Fargo. As of September 30, 2011, the Company is in compliance with these covenants. As of September 30, 2011, the Company does not have any borrowings outstanding under the 364-day repurchase facility with Barclays Bank PLC, or Barclays. The facility provides an aggregate maximum borrowing capacity of $100 million and it is set to mature on May 16, 2012, unless extended pursuant to its terms. The facility will be collateralized by eligible residential mortgage loans, which will be subject to margin call provisions that provide Barclays with certain rights when there has been a decline in the market value of the purchased mortgage loans. The facility also subjects the Company to maintain certain financial covenants under the guaranty agreement with Barclays. As of September 30, 2011, the Company is in compliance with these covenants. At September 30, 2011 and December 31, 2010, the repurchase agreements had the following remaining maturities:
____________________
The following table summarizes assets at carrying value that are pledged or restricted as collateral for the future payment obligations of repurchase agreements:
Although the repurchase agreements are committed borrowings until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. The following table summarizes certain characteristics of the Company's repurchase agreements and counterparty concentration at September 30, 2011 and December 31, 2010:
____________________ (1) Represents the net carrying value of the securities sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, over the amount of the repurchase liability, including accrued interest. At September 30, 2011 and December 31, 2010, the Company had $90.9 million and $231.7 million, respectively, in payables due to broker counterparties for unsettled security purchases. The payables are not included in the amounts presented above. The Company does not anticipate any defaults by its repurchase agreement counterparties. |
Derivative Instruments and Hedging Activities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Derivative Instruments and Hedging Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities The Company enters into a variety of derivative and non-derivative instruments in connection with its risk management activities. The Company's primary objective for executing these derivatives and non-derivative instruments is to mitigate the Company's economic exposure to future events that are outside its control. The Company's derivative financial instruments are utilized principally to manage market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk) related to certain assets and liabilities. As part of its risk management activities, the Company may, at times, enter into various forward contracts including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps and caps. In executing on the Company's current risk management strategy, the Company has entered into interest rate swap and swaption agreements, TBA positions, and credit default swaps. The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally U.S. Treasuries and Agency interest-only securities. The following summarizes the Company's significant asset and liability classes, the risk exposure for these classes, and the Company's risk management activities used to mitigate certain of these risks. The discussion includes both derivative and non-derivative instruments used as part of these risk management activities. While the Company uses non-derivative and derivative instruments to achieve the Company's risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company's market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements. Interest Rate Sensitive Assets/Liabilities Available-for-sale Securities - The Company's RMBS investment securities are generally subject to change in value when mortgage rates decline or increase, depending on the type of investment. Rising mortgage rates generally result in a slowing of refinancing activity, which slows prepayments and results in a decline in the value of the Company's fixed-rate Agency pools. To mitigate the impact of this risk, the Company maintains a portfolio of financial instruments, primarily fixed-rate interest-only securities, which increase in value when interest rates increase. In addition, the Company has initiated TBA positions to further mitigate its exposure to increased prepayment speeds. The objective is to reduce the risk of losses to the portfolio caused by interest rate changes and changes in prepayment speeds. As of September 30, 2011 and December 31, 2010, the Company had outstanding fair value of $53.2 million and $18.4 million, respectively, of interest-only securities in place to economically hedge its investment securities. These interest-only securities are included in AFS securities, at fair value, in the condensed consolidated balance sheets. In addition, the Company holds TBA positions with $375.0 million in long notional and $2.0 billion in short notional as of September 30, 2011. The Company discloses these on a gross basis according to the unrealized gain or loss position of each TBA contract regardless of long or short notional position. As of September 30, 2011, these contracts held a fair market value of $9.6 million, included in derivative assets, at fair value, and $2.0 million, included in derivative liabilities, at fair value, in the condensed consolidated balance sheet as of September 30, 2011. The Company did not hold any long or short notional TBA positions as of December 31, 2010. Repurchase Agreements - The Company monitors its repurchase agreements, which are generally floating rate debt, in relationship to the rate profile of its investment securities. When it is cost effective to do so, the Company may enter into interest rate swap arrangements to align the interest rate composition of its investment securities and debt portfolios, specifically repurchase agreements with maturities of less than 6 months. Typically, the interest receivable terms (i.e., LIBOR) of the interest rate swaps match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchase agreement from floating to fixed. As of September 30, 2011 and December 31, 2010, the Company had the following outstanding interest rate swaps that were utilized as economic hedges of interest rate risk associated with the Company's short-term repurchase agreements:
The Company has also entered into interest rate swaps in combination with U.S. Treasuries and other RMBS to economically hedge funding cost and macro-financing risk. As of September 30, 2011 and December 31, 2010, the Company held $1.5 billion and $199.5 million, respectively, in fair value of U.S. Treasuries classified as trading securities and the following outstanding interest rate swaps:
All of the Company's interest rate swap contracts receive interest at a 1-month or 3-month LIBOR rate, except the following interest rate swap entered in combination with TBA contracts to economically hedge mortgage basis widening where the Company pays interest at a 3-month LIBOR rate:
The Company did not hold any interest rate swaps in combination with TBA contracts as of December 31, 2010. Additionally, as of September 30, 2011 and December 31, 2010, the Company had the following outstanding interest rate swaptions (agreements to enter into interest rate swaps in the future for which the Company would pay a fixed rate) that were utilized as macro-economic hedges:
The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its interest rate swaps and its other derivative instruments. Foreign Currency Risk In compliance with the Company's REIT requirements, the Company does not have exposure to foreign denominated assets or liabilities. As such, the Company is not subject to foreign currency risk. Credit Risk The Company has limited exposure to credit losses on its U.S. Treasuries and Agency portfolio of investment securities because these securities are issued by the U.S. Department of the Treasury or government sponsored entities, or GSEs. The payment of principal and interest on the FHLMC and FNMA mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. Government. For non-Agency investment securities, the Company currently enters into credit default swaps to specifically hedge credit risk. In future periods, the Company could enhance its credit risk protection, enter into further paired derivative positions, including both long and short credit default swaps and/or seek opportunistic trades in the event of a market disruption (see "Non-Risk Management Activities" section). The Company also has processes and controls in place to monitor, analyze, manage and mitigate its credit risk with respect to non-Agency RMBS. As of September 30, 2011, the Company held credit default swaps where the Company receives credit protection for a fixed premium. The maximum payouts for these credit default swaps are limited to the current notional amounts of each swap contract. Maximum payouts for credit default swaps do not represent the expected future cash requirements, as the Company's credit default swaps are typically liquidated or expire and are not exercised by the holder of the credit default swaps. The following table presents credit default swaps where the Company is receiving protection held as of September 30, 2011:
The Company did not hold any credit default swaps where the Company receives credit protection as of December 31, 2010. Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe the Company under contracts completely fail to perform under the terms of these contracts, assuming there are no recoveries of underlying collateral, as measured by the market value of the derivative financial instruments. As of September 30, 2011, the fair value of derivative financial instruments as an asset and liability position was $245.3 million and $46.2 million, respectively. The Company mitigates the credit risk exposure on derivative financial instruments by limiting the counterparties to those major banks and financial institutions that meet established credit guidelines, and the Company seeks to transact with several different counterparties in order to reduce the exposure to any single counterparty. Additionally, the Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty upon occurrence of certain events. To further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain of its counterparties. The agreements require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments exceed established thresholds. As of September 30, 2011, the Company has received cash deposits from counterparties of $34.0 million and placed cash deposits of $89.2 million in accounts maintained by counterparties, of which the amounts are netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties on the condensed consolidated balance sheet. In accordance with ASC 815, as amended and interpreted, the Company records derivative financial instruments on its condensed consolidated balance sheet as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they qualify for hedge accounting treatment. Due to the volatility of the credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat all current derivative contracts as trading instruments. Non-Risk Management Activities The Company has entered into certain financial instruments that are considered derivative contracts under ASC 815 that are not for purposes of hedging. These contracts are currently limited to inverse interest-only residential mortgage securities and credit default swaps. Inverse interest-only securities with a carrying value of $162.7 million, including accrued interest receivable of $2.2 million, are accounted for as derivative financial instruments in the condensed consolidated financial statements. The following table presents the amortized cost and carrying value (which approximates fair value) of inverse interest-only securities as of September 30, 2011 and December 31, 2010:
As of September 30, 2011 and December 31, 2010, the Company also held credit default swaps where the Company provides credit protection for a fixed premium. The maximum payouts for these credit default swaps are limited to the current notional amounts of each swap contract. Maximum payouts for credit default swaps do not represent the expected future cash requirements, as the Company's credit default swaps are typically liquidated or expire and are not exercised by the holder of the credit default swaps. The following tables present credit default swaps where the Company is providing protection held as of September 30, 2011 and December 31, 2010:
Balance Sheet Presentation The following table represents the gross fair value and notional amounts of the Company's derivative financial instruments treated as trading instruments as of September 30, 2011 and December 31, 2010.
The following table provides the average monthly outstanding notional amounts of the Company's derivative financial instruments treated as trading instruments for the three and nine months ended September 30, 2011:
Income Statement Presentation The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statement of income on its derivative instruments.
For the three and nine months ended September 30, 2011, the Company terminated 24 and 29 notional interest rate swap and swaption positions of $1.9 billion and $2.5 billion, respectively. Upon settlement of the early terminations, the Company paid $4.2 million and $5.1 million in full settlement of its net interest spread liability and recorded $17.8 million and $18.1 million in realized losses on the swaps and swaptions, respectively, including an early termination penalty. |
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Available-for-Sale Securities, at Fair Value | Available-for-Sale Securities, at Fair Value The following table presents the Company's available-for-sale, or AFS, investment securities by collateral type, which were carried at their fair value as of September 30, 2011 and December 31, 2010:
At September 30, 2011 and December 31, 2010, the Company pledged investment securities with a carrying value of $6.3 billion and $1.1 billion, respectively, as collateral for repurchase agreements. See Note 9 - Repurchase Agreements. At September 30, 2011 and December 31, 2010, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, to be considered linked transactions and therefore classified as derivatives. The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2011 and December 31, 2010:
The following tables present the carrying value of the Company's AFS investment securities by rate type as of September 30, 2011 and December 31, 2010:
When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because it does not expect to collect it due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time using the interest method in accordance with ASC 320. The following table presents the changes for the nine months ended September 30, 2011 and September 30, 2010 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time the securities had an unrealized loss position as of September 30, 2011 and December 31, 2010. At September 30, 2011, the Company held 1,081 AFS securities, of which 338 were in an unrealized loss position for less than twelve consecutive months and 15 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2010, the Company held 373 AFS securities, of which 108 were in an unrealized loss position for less than twelve months and 5 were in an unrealized loss position for more than twelve consecutive months.
Evaluating AFS Securities for Other-than-Temporary Impairments The Company has adopted the provisions of ASC 320 to evaluate AFS securities for OTTI. This evaluation requires us to determine whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and is not more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in other comprehensive income (loss). If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings. The Company recorded a $3.4 million and a $3.7 million other-than-temporary credit impairment during the three and nine months ended September 30, 2011 on a total of eight non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost. As of September 30, 2011, the impaired securities had weighted average cumulative losses of 5.2%, weighted average three-month prepayment speed of 4.54, weighted average 60+ day delinquency of 35.0% of the pool balance, and weighted average FICO score of 643. The following table presents the OTTI included in earnings for the three and nine months ended September 30, 2011 and September 30, 2010:
Gross Realized Gains and Losses Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain on investment securities, net in the Company's condensed consolidated statements of income. For the three and nine months ended September 30, 2011, the Company sold AFS securities for $908.5 million and $1.0 billion with an amortized cost of $881.0 million and $975.1 million, for a net realized gain of $27.5 million and $29.2 million, respectively. The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2011 and 2010:
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Trading Securities, at Fair Value | 9 Months Ended |
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Sep. 30, 2011 | |
Trading Securities, at Fair Value [Abstract] | |
Trading Securities, at Fair Value | Trading Securities, at Fair Value During the nine months ended September 30, 2011, the Company acquired and sold U.S. Treasuries in its taxable REIT subsidiary and classified these securities as trading instruments due to its short-term investment objectives. As of September 30, 2011 and December 31, 2010, the Company held U.S. Treasuries with an amortized cost of $1.5 billion and $200.0 million and a fair value $1.5 billion and $199.5 million, respectively. The unrealized gains and losses included within trading securities was a positive $5.5 million as of September 30, 2011 and a negative $0.5 million as of December 31, 2010. For the three and nine months ended September 30, 2011, the Company sold trading securities for $200.0 million and $700.1 million with an amortized cost of $199.7 million and $699.1 million resulting in realized gains of $0.3 million and $1.0 million, respectively, on the sale of these investment securities. For the three and nine months ended September 30, 2011, trading securities experienced unrealized gains of $3.7 million and $6.0 million, respectively. Both realized and unrealized gains are recorded as a component of gains on investment securities, net in the Company's condensed consolidated statement of income. At September 30, 2011, the Company pledged trading securities with a carrying value of $1.5 billion as collateral for repurchase agreements. See Note 9 - Repurchase Agreements. |
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Stockholders' Equity | Stockholders' Equity Distributions to stockholders On September 14, 2011, the Company declared dividends to common stockholders totaling $56.2 million, or $0.40 per share. The following table presents cash dividends declared by the Company on its common stock from October 28, 2009 through September 30, 2011:
The Company's dividends declared in 2011, 2010 and 2009 are characterized as ordinary non-qualified dividends. Accumulated Other Comprehensive Income Accumulated other comprehensive income at September 30, 2011 and December 31, 2010 was as follows:
Public offerings On March 16, 2011, the Company completed a follow-on public offering of 25,000,000 shares of its common stock and subsequently issued an additional 3,750,000 shares of common stock pursuant to the underwriters' over-allotments at a price of $10.25 per share, for gross proceeds of approximately $294.7 million. On May 25, 2011, the Company completed a follow-on public offering of 20,000,000 shares of its common stock and subsequently issued an additional 3,000,000 shares of common stock pursuant to the underwriters' over-allotments at a price of $10.40 per share, for gross proceeds of approximately $239.2 million. On July 15, 2011, the Company completed a follow-on public offering of 42,000,000 shares of its common stock and subsequently issued an additional 6,300,000 shares of common stock pursuant to the underwriters' over-allotments at a price of $10.15 per share, for gross proceeds of approximately $490.2 million. Net proceeds to the Company from the three offerings were approximately $1.0 billion, net of issuance costs of approximately $17.6 million. Dividend Reinvestment and Share Purchase Plan The Company sponsors a dividend reinvestment and share purchase plan through which stockholders may purchase additional shares of the Company's common stock by reinvesting some or all of the cash dividends received on shares of the Company's common stock. Stockholders may also make optional cash purchases of shares of the Company's common stock subject to certain limitation detailed in the plan prospectus. An aggregate of 7,500,000 shares of our common stock has been reserved for issuance under the plan. As of September 30, 2011, 15,774 shares have been issued under the plan for total proceeds of $0.2 million |
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Restricted Cash | Restricted Cash As of September 30, 2011 and December 31, 2010, the Company is required to maintain certain cash balances with counterparties for broker activity and collateral for the Company's repurchase agreements in non-interest bearing accounts. The following table presents the Company's restricted cash balances:
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Earnings Per Share | Earnings Per Share The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share, or EPS, for the three and nine months ended September 30, 2011 and 2010:
For the three and nine months ended September 30, 2011 and 2010, the Company has assumed that no warrants would be exercised as the weighted average market value per share of the Company's common stock was below the strike price of the warrants and the warrants would be anti-dilutive. |
Related Party Transactions | 9 Months Ended |
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Sep. 30, 2011 | |
Related Party Transactions [Abstract] | |
Related Party Transactions | Related Party Transactions The following summary provides disclosure of the material transactions with affiliates of the Company. In accordance with the Management Agreement with PRCM Advisers LLC, the Company incurred $4.8 million and $9.1 million as a management fee to PRCM Advisers LLC for the three and nine months ended September 30, 2011, respectively, which represents approximately 1.5% of stockholders' equity on an annualized basis as defined by the Management Agreement. In addition, the Company reimbursed PRCM Advisers LLC for direct and allocated costs incurred by PRCM Advisers LLC on behalf of the Company. These direct and allocated costs totaled approximately $2.2 million and $5.1 million for the three and nine months ended September 30, 2011, respectively. Approximately $1.8 million and $4.1 million was expensed for the three and nine months ended September 30, 2011, respectively. Approximately $0.2 million was classified as prepaid expense on the condensed consolidated balance sheet for both the three and nine months ended September 30, 2011 and approximately $0.2 million and $0.8 million in out-of-pocket expenses was charged against equity as a cost of raising capital for the three and nine months ended September 30, 2011, respectively. The Company recognized $68,925 and $215,569 of compensation expense during the three and nine months ended September 30, 2011, respectively, associated with the amortization of shares of restricted stock issued to the independent directors. As of September 30, 2011, there were 33,249,000 publicly-held registered warrants to purchase up to 33,249,000 shares of common stock issued and outstanding. Of the 33,249,000 warrants, 7,000,000 are beneficially owned by the founders of Capitol, and 2,906,918 are beneficially owned by Pine River Master Fund Ltd. and Nisswa Acquisition Master Fund Ltd., which are investment funds managed by Pine River. The Company is required to maintain a resale registration statement for the warrants and common stock issuable upon exercise thereof that are held by Pine River Master Fund Ltd., Nisswa Acquisition Master Fund Ltd., and the founders of Capitol. |
Organization and Operations | 9 Months Ended |
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Sep. 30, 2011 | |
Organization and Operations [Abstract] | |
Organization and Operations | Organization and Operations Two Harbors Investment Corp., or the Company, is a Maryland corporation focused on investing in, financing and managing residential mortgage-backed securities, or RMBS, residential mortgage loans and other financial assets. The Company is externally managed and advised by PRCM Advisers LLC, a subsidiary of Pine River Capital Management L.P., or Pine River, a global multi-strategy asset management firm. The Company's common stock is listed on the NYSE and its warrants are listed on the NYSE Amex under the symbols “TWO” and “TWO.WS,” respectively. On May 18, 2011, the Company announced that it had taken the first step toward setting up a securitization issuance program by partnering with Barclays Bank PLC, or Barclays, to close on a $100 million mortgage loan warehouse facility, or Barclays facility, subject to future increase. The Barclays facility will be used to aggregate prime jumbo residential mortgage loans that the Company will acquire from select mortgage loan originators with whom the Company has chosen to build strategic relationships, including those with a nationwide presence. The Company is targeting a $250 million deal size for its initial securitization, with Barclays Capital acting as underwriter. As of September 30, 2011, the Company has neither purchased any mortgage loan assets nor established the securitization program as a distinct operational business segment. As anticipated, the Company's initiatives in the three months ended September 30, 2011 continued to focus on establishing underwriting guidelines and originator relationships, addressing regulatory requirements and building an infrastructure to support a sustainable program. The Company has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with its initial taxable period ended December 31, 2009. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income tax to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. Certain activities the Company performs may cause us to earn income which will not be qualifying income for REIT purposes. For these activities, the Company utilizes its taxable REIT subsidiaries, which are subject to U.S. federal income tax. |
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Other Assets | Other Assets Other assets as of September 30, 2011 and December 31, 2010 are summarized in the following table:
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Income Taxes | Income Taxes For the three and nine months ended September 30, 2011 and 2010, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. So long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, does not engage in prohibited transactions, and maintains its intended qualification as a REIT. The majority of states also recognize the Company's REIT status. The Company also owns taxable REIT subsidiaries (TRS), Capitol Acquisition Corp., or Capitol, and TH TRS Corp., which are fully taxed as U.S. C-Corporations. The tables below reflect the net taxes accrued at the TRS level and the tax attributes included in the condensed consolidated financial statements. It is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements. Certain activities the Company performs may produce income which will not be qualifying income for REIT purposes. These activities include holding swaptions, credit default swaps, TBAs, and other risk-management instruments. We have designated Capitol to engage in such activities. The following table summarizes the tax provision (benefit) recorded at the taxable subsidiary level for the three and nine months ended September 30, 2011 and 2010:
The Company's taxable income before dividend distributions differed from our GAAP net income primarily due to the accounting for projected credit losses in our GAAP recognition of secondary market discount accretion income not recognized for tax, amortization of original issue discount on our Agency RMBS, and unrealized gains and losses recognized in income not recognized for tax. These before tax differences are not reflected in the financial statements as we believe we will retain REIT status. The following is a reconciliation of the statutory federal and state rates to the effective rates, for the three and nine months ended September 30, 2011 and 2010:
The Company's condensed consolidated balance sheet, as of September 30, 2011 and December 31, 2010, contains the following current and deferred tax assets and liabilities:
Deferred Tax Assets and Liabilities Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company's deferred tax assets and liabilities as of September 30, 2011 and December 31, 2010 are as follows:
At September 30, 2011, the Company has not recorded a valuation allowance for any portion of its deferred tax assets as it does not believe, at a more likely than not level, that any portion of its deferred tax assets will not be realized. The Company estimates, based on existence of sufficient evidence, the ability to realize the remainder of its deferred tax assets. Any adjustments to such estimates will be made in the period such determination is made. Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these condensed consolidated financial statements. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. As of September 30, 2011, the AFS securities, at fair value, had a U.S. federal tax basis of approximately $6.4 billion. |