EX-99.1 2 wmcq3fy16ex991.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1


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WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES THIRD QUARTER 2016 RESULTS
 
Conference Call and Webcast Scheduled for Tomorrow, Thursday, November 3, 2016 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
 
Pasadena, CA, November 2, 2016 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the third quarter ended September 30, 2016.
 
THIRD QUARTER 2016 HIGHLIGHTS
 
▪
$0.31 per share common dividend declared.

▪
GAAP net income of $32.3 million, or $0.77 per basic and diluted share.

▪
Core earnings plus drop income of $14.8 million, or $0.35 per basic and diluted share.1,2  

▪
1.85% annualized net interest spread on our investment portfolio.1,5 

▪
Constant prepayment rate on the Company’s Agency RMBS portfolio of 11.4% for the quarter.

▪
$11.48 per share net book value as of September 30, 2016, net of third quarter common dividend.

▪
Economic return on book value was 7.1%1,3 for the quarter.

▪
5.2x leverage as of September 30, 2016 (7.1x leverage when adjusted for net TBA position1,4).
 




                                                                                                                                                                                                                                                                                             
1  Non – GAAP measure.
2  Drop income is income derived from the use of ‘to-be-announced’ forward contract (“TBA”) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $3.1 million for the three months ended September 30, 2016.
3  Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value.
4  As of September 30, 2016, the net long position in TBAs was $890.0 million in notional value.
5  Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.

1



MANAGEMENT COMMENTARY
 
“I am pleased to report that we delivered another solid performance in the third quarter, generating an economic return on book value of 7.1% and higher sequential core earnings plus drop income of $14.8 million, or $0.35 per share. We remained focused on our long-term goal of generating strong total return for our shareholders through attractive dividends derived from sustainable core earnings and appreciation in the value of our portfolio. In our view, WMC's strategic advantage in pursuing this goal is its ability to draw on the deep investment experience and team at Western Asset Management Company, our Manager, as well as the breadth of its global investment, risk management, and operational infrastructure," said Jennifer Murphy, Chief Executive Officer of the Company. "Our third quarter dividend of $0.31 per share reflects our commitment to paying an attractive dividend based on the sustainable earnings power of the portfolio balanced with our focus on maintaining greater stability in our book value.”
 
Anup Agarwal, Chief Investment Officer of the Company, commented, “Despite interest rate volatility during the quarter, our portfolio performed well, driven by tightening spreads across all of our sector holdings and a positive contribution from our hedge positions, and as a result, our book value increased sequentially by 4.3%, net of our third quarter dividend. In addition, we increased our Agency RMBS, Whole-Loans and TBA exposure during the third quarter, enabling us to increase our core earnings plus drop income by approximately $2.2 million, or $0.05 per share, when compared to the second quarter 2016."
 
"We are pleased with our financial results for the quarter and remain optimistic going forward. Our current expectations are for ongoing, yet slow economic growth and a “lower for longer” interest rate environment in the U.S. Given these conditions, we believe that a balanced portfolio consisting of both Agency RMBS and credit-sensitive investments continues to be appropriate. We continually monitor the relative value of opportunities across the broad mortgage universe, in an effort to achieve an optimal risk-adjusted total economic return for our shareholders,” Mr. Agarwal concluded.

2


THIRD QUARTER 2016 RESULTS
 
The below table reflects a summary of our operating results:
 
 
 
For the Three Months Ended
GAAP Results
 
September 30, 2016
 
June 30, 2016
 
 
 
 
 
Net Interest Income
 
$
21,469

 
$
21,493

Other Income (Loss):
 
 

 
 

Realized gain (loss) on sale of investments, net
 
1,439

 
(352
)
Other than temporary impairment
 
(4,978
)
 
(6,356
)
Unrealized gain (loss), net
 
15,292

 
21,510

Gain (loss) on derivative instruments, net
 
6,121

 
(14,165
)
Other, net
 
(60
)
 
234

Other Income (loss)
 
17,814

 
871

Total Expenses
 
4,762

 
5,061

Income before income taxes
 
34,521

 
17,303

Income tax provision (benefit)
 
2,239

 
—

Net income (loss)
 
$
32,282

 
$
17,303

 
 
 
 
 
Net income (loss) per Common Share – Basic/Diluted
 
$
0.77

 
$
0.41

Non-GAAP Results
 
 

 
 

Core earnings plus drop income(1)
 
$
14,838

 
$
12,676

Core earnings plus drop income per Common Share – Basic/Diluted
 
$
0.35

 
$
0.30

Weight average yield(2)
 
4.28
%
 
4.45
%
Effective cost of funds(3)
 
2.43
%
 
2.44
%
Annualized net interest spread(2)(3)
 
1.85
%
 
2.01
%
Annualized constant prepayment rate (CPR)(4)
 
11.4
%
 
12.1
%
 
(1)          For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core earnings at the end of this press release.
(2)          Includes interest-only securities accounted for as derivatives, foreign currency swaps and total return swaps.
(3)          Includes the net amount paid, including accrued amounts for interest rate swaps and premium amortization for MAC interest rate swaps during the periods.
(4)          Annualized CPR on Agency RMBS.

3


PORTFOLIO COMPOSITION
 
As of September 30, 2016, the Company owned an aggregate investment portfolio equaling $2.9 billion in market value. The following table sets forth additional information regarding the Company’s portfolio as of September 30, 2016:
 
Investment Portfolio
(dollars in thousands)
 
Coupon
 
Principal
Balance
 
Amortized
Cost
 
Fair Value
Agency
 
 
 
 
 
 
 
 
30-year fixed rate
 
3.0%
 
$
226,157

 
$
234,817

 
$
235,260

 
 
3.5%
 
214,969

 
226,091

 
227,788

 
 
4.0%
 
326,886

 
354,379

 
357,758

 
 
4.5%
 
329,114

 
351,870

 
368,843

 
 
5.0%
 
51,330

 
57,598

 
58,461

 
 
5.5%
 
2,369

 
2,708

 
2,669

 
 
6.0%
 
2,444

 
2,703

 
2,861

20-year fixed rate
 
3.5%
 
130,342

 
137,010

 
139,557

 
 
4.0%
 
372,681

 
392,188

 
404,926

Agency RMBS IOs and IIOs(1)
 
3.2%
 
N/A

 
52,463

 
53,445

Agency CMBS
 
4.5%
 
4,553

 
4,553

 
4,283

Agency CMBS IOs and IIOs(2)
 
1.2%
 
N/A

 
9,739

 
9,455

Total Agency
 
3.4%
 
$
1,660,845

 
$
1,826,119

 
$
1,865,306

Non-Agency
 
 
 
 

 
 

 
 

Non-Agency RMBS
 
4.0%
 
$
422,498

 
$
294,221

 
$
309,495

Non-Agency RMBS IOs and IIOs(3)
 
5.7%
 
N/A

 
61,304

 
85,647

Non-Agency CMBS
 
5.0%
 
479,405

 
393,994

 
368,898

Total Non-Agency
 
4.0%
 
$
901,903

 
$
749,519

 
$
764,040

Other Securities(4)
 
7.7%
 
42,384

 
64,384

 
63,326

Residential Whole-Loans
 
4.8%
 
198,651

 
199,832

 
204,882

Securitized Commercial Loan(5)
 
9.0%
 
25,000

 
25,000

 
24,138

Total Portfolio
 
4.0%
 
$
2,828,783

 
$
2,864,854

 
$
2,921,692

 
(1)  Includes $25,274 of amortized cost and $25,438 of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.
(2)  Includes $9,182 of amortized cost and $8,850 of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.
(3)  Includes $2,279 of amortized cost and $4,170 of fair value for Non-Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.
(4)  Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.4 million.
(5)  The $25.0 million securitized commercial loan is from a consolidated variable interest entity in which the Company owns a $14.0 million first loss position in a
CMBS Securitized Trust.

4


PORTFOLIO FINANCING AND HEDGING
 
Financing
 
At September 30, 2016, the Company financed its portfolio with $2.5 billion of borrowings under master repurchase agreements with 18 of its 28 approved counterparties, bearing fixed interest rates with maturities of six months or less. The following table sets forth additional information regarding the Company’s portfolio financing as of September 30, 2016 (dollars in thousands):
 
Repurchase Agreements
 
Balance
 
Weighted
Average
Interest Rate
(end of
period)
 
Weighted
Average
Remaining
Maturity
(days)
Agency RMBS
 
$
1,784,448

 
0.75
%
 
31
Agency CMBS
 
10,725

 
1.66
%
 
31
Non-Agency RMBS
 
270,060

 
2.32
%
 
33
Non-Agency CMBS
 
256,544

 
2.36
%
 
33
Whole-Loans and securitized commercial loan
 
173,901

 
2.78
%
 
15
Other Securities
 
27,858

 
3.05
%
 
22
Total
 
$
2,523,536

 
1.25
%
 
30
 
Hedging
 
The Company has entered into $3.7 billion notional value of pay-fixed interest rate swaps, excluding forward starting swaps of $1.8 billion (approximately 7.0 months forward), which have variable maturities between October 2, 2017 and February 12, 2044, and $4.0 billion notional value of pay-variable interest rate swaps, which have variable maturities between February 5, 2020 and February 5, 2045.
 
The following tables summarize the average pay rate and average maturity for the Company’s interest rate swaps as of September 30, 2016:
  
Fixed Pay Rate Swap Transactions
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Remaining Term to Maturity
 
Notional Value

 
Average
Fixed Pay
Rate
 
Average
Maturity
(Years)
Greater than 1 year and less than 3 years
 
$
1,098,900

 
1.1
%
 
1.6
Greater than 3 years and less than 5 years
 
2,006,200

 
1.8
%
 
4.2
Greater than 5 years
 
2,358,300

 
2.6
%
 
9.9
Total
 
$
5,463,400

 
2.0
%
 
6.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable Pay Rate Swap Transactions
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Remaining Term to Maturity
 
Notional Value

 
Average
Variable
Pay Rate
 
Average
Maturity
(Years)
Greater than 3 years and less than 5 years
 
$
2,036,500

 
0.7
%
 
4.1
Greater than 5 years
 
1,936,500

 
0.8
%
 
10.1
Total 
 
$
3,973,000

 
0.8
%
 
7.0

5


DIVIDEND
 
On September 22, 2016, the Company declared a regular cash dividend of $0.31 per share for each common share. Since its inception in May 2012, the Company has declared and paid total dividends of $13.75 per share in a combination of cash and stock.
 
CONFERENCE CALL
 
The Company will host a conference call with a live webcast tomorrow, November 3rd, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the Third Quarter 2016.
 
Individuals interested in participating in the conference call may do so by dialing (866) 235-9914 from the United States, or (412) 902-4115 from outside the United States and referencing “Western Asset Mortgage Capital Corporation.” Those interested in listening to the conference call live via the Internet may do so by visiting the Investor Relations section of the Company’s website at www.westernassetmcc.com.
 
The Company is enabling investors to pre-register for the earnings conference call so that they can expedite their entry into the call and avoid the need to wait for a live operator. In order to pre-register for the call, investors can visit http://dpregister.com/10093817 and enter in their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call. Individuals can pre-register any time prior to the start of the conference call tomorrow.
 
A telephone replay will be available through November 17, 2016 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10093817. A webcast replay will be available for 90 days.
 
ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION
 
Western Asset Mortgage Capital Corporation is a real estate investment trust that invests in, acquires and manages a diverse portfolio assets consisting of Agency RMBS, Non-Agency RMBS, CMBS, ABS, Residential and Commercial Whole-Loans and other financial assets. The Company’s investment strategy may change, subject to the Company’s stated investment guidelines, and is based on its manager Western Asset Management Company’s perspective of which mix of portfolio assets it believes provide the Company with the best risk-reward opportunities at any given time. The Company is externally managed and advised by Western Asset Management Company, an investment advisor registered with the Securities and Exchange Commission and a wholly-owned subsidiary of Legg Mason, Inc. Please visit the Company’s website at www.westernassetmcc.com

FORWARD-LOOKING STATEMENTS
 
This press release contains statements that constitute “forward-looking statements.”  Operating results are subject to numerous conditions, many of which are beyond the control of the Company, including, without limitation, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability and terms of financing; general economic conditions; market conditions; conditions in the market for mortgage related investments; legislative and regulatory changes that could adversely affect the business of the Company; and other factors, including those set forth in the Risk Factors section of the Company’s annual report on Form 10-K for the period ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”). The Company undertakes no obligation to update these statements for revisions or changes after the date of this release, except as required by law.
 

6


USE OF NON-GAAP FINANCIAL INFORMATION
 
In addition to the results presented in accordance with GAAP, this release includes certain non-GAAP financial information, including core earnings, core earnings per share, drop income and drop income per share and certain financial metrics derived from non-GAAP information, such as weighted average yield, including IO securities; weighted average effective cost of financing, including swaps; weighted average net interest spread, including IO securities and swaps, which constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that these measures presented in this release, when considered together with GAAP financial measures, provide information that is useful to investors in understanding our borrowing costs and net interest income, as viewed by us.  An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.
 
###
 
Investor Relations Contact:
Media Contact:
Larry Clark
Tricia Ross
Financial Profiles, Inc.
Financial Profiles, Inc.
(310) 622-8223
(310) 622-8226
lclark@finprofiles.com
tross@finprofiles.com
 
-Financial Tables to Follow-

7


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
 
 
 
September 30, 2016 (Unaudited)
 
December 31, 2015
Assets:
 
 

 
 

Cash and cash equivalents
 
$
30,965

 
$
24,711

Mortgage-backed securities and other securities, at fair value ($2,660,129 and $2,777,717 pledged as collateral, at fair value, respectively)
 
2,692,672

 
2,851,127

Residential Whole-Loans, at fair value ($204,882 and $218,538 pledged as collateral, at fair value, respectively)
 
204,882

 
218,538

Securitized commercial loan, at fair value
 
24,138

 
25,000

Investment related receivable
 
12,123

 
572

Accrued interest receivable
 
25,285

 
22,621

Due from counterparties
 
270,398

 
249,563

Derivative assets, at fair value
 
127,862

 
21,915

Other assets
 
756

 
382

Total Assets (1)
 
$
3,389,081

 
$
3,414,429

Liabilities and Stockholders’ Equity:
 
 

 
 

Liabilities:
 
 

 
 

Borrowings under repurchase agreements, net
 
$
2,523,480

 
$
2,585,667

Securitized debt, at fair value
 
10,621

 
11,000

Accrued interest payable
 
18,311

 
20,431

Investment related payables
 
—

 
66,146

Due to counterparties
 
6,047

 
9,950

Derivative liability, at fair value
 
330,799

 
180,177

Accounts payable and accrued expenses
 
2,689

 
2,078

Payable to related party
 
2,714

 
3,019

Dividend payable
 
12,995

 
24,313

Total Liabilities (2)
 
2,907,656

 
2,902,781

Commitments and contingencies
 
 

 
 

Stockholders’ Equity:
 
 

 
 

Common stock: $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively
 
419

 
419

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

 
—

Additional paid-in capital
 
764,678

 
763,283

Retained earnings (accumulated deficit)
 
(283,672
)
 
(252,054
)
Total Stockholders’ Equity
 
481,425

 
511,648

Total Liabilities and Stockholders’ Equity
 
$
3,389,081

 
$
3,414,429

 
See notes to unaudited consolidated financial statements.

8


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
 
 
 
September 30, 2016 (Unaudited)
 
December 31, 2015
(1) Assets of consolidated VIEs included in the total assets above:
 
 

 
 

Residential Whole-Loans, at fair value ($204,882 and $218,538 pledged as collateral, at fair value, respectively)
 
$
204,882

 
$
218,538

Securitized commercial loan, at fair value
 
24,138

 
25,000

Investment related receivable
 
3,230

 
—

Accrued interest receivable
 
1,745

 
1,836

Total assets of consolidated VIEs
 
$
233,995

 
$
245,374

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

 
 

Securitized debt, at fair value
 
$
10,621

 
$
11,000

Accrued interest payable
 
82

 
85

Accounts payable and accrued expenses
 
2

 
2

Total liabilities of consolidated VIEs
 
$
10,705

 
$
11,087

 
See notes to unaudited consolidated financial statements.


9


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands—except share and per share data)
 
 
 
For the three months ended September 30, 2016
 
For the three months ended September 30, 2015
 
For the nine months ended September 30, 2016
 
For the nine months ended September 30, 2015
Net Interest Income
 
 
 
 
 
 
 
 

Interest income
 
$
29,154

 
$
35,821

 
$
87,992

 
$
117,656

Interest expense
 
7,685

 
6,981

 
23,391

 
19,960

Net Interest Income
 
21,469

 
28,840

 
64,601

 
97,696

Other Income (Loss)
 
 
 
 

 
 

 
 

Realized gain (loss) on sale of investments, net
 
1,439

 
(2,482
)
 
(4,968
)
 
9,267

Other than temporary impairment
 
(4,978
)
 
(5,917
)
 
(22,131
)
 
(14,884
)
Unrealized gain (loss), net
 
15,292

 
24,723

 
47,571

 
10,284

Gain (loss) on derivative instruments, net
 
6,121

 
(41,363
)
 
(53,214
)
 
(76,511
)
Other, net
 
(60
)
 
(29
)
 
(158
)
 
1,744

Other Income (Loss)
 
17,814

 
(25,068
)
 
(32,900
)
 
(70,100
)
Expenses
 
 
 
 

 
 

 
 

Management fee to affiliate
 
2,604

 
2,761

 
7,945

 
8,133

Other operating expenses
 
188

 
799

 
809

 
1,472

General and administrative expenses
 
 
 
 

 
 

 
 

Compensation expense (including non-cash stock based compensation of $433, $509, $1,351 and $1,969, respectively)
 
868

 
857

 
2,254

 
3,006

Professional fees
 
723

 
882

 
3,947

 
3,261

Other general and administrative expenses
 
379

 
325

 
1,226

 
1,123

Total general and administrative expenses
 
1,970

 
2,064

 
7,427

 
7,390

Total Expenses
 
4,762

 
5,624

 
16,181

 
16,995

Income (loss) before income taxes
 
34,521

 
(1,852
)
 
15,520

 
10,601

Income tax provision (benefit)
 
2,239

 
—

 
2,239

 
—

Net income (loss)
 
$
32,282

 
$
(1,852
)
 
$
13,281

 
$
10,601

Net income (loss) per Common Share – Basic
 
$
0.77

 
$
(0.05
)
 
$
0.31

 
$
0.24

Net income (loss) per Common Share – Diluted
 
$
0.77

 
$
(0.05
)
 
$
0.31

 
$
0.24

Dividends Declared per Share of Common Stock
 
$
0.31

 
$
0.60

 
$
1.07

 
$
1.91



10


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(Unaudited)
(in thousands—except share and per share data)
 
The table below reconciles Net Income (Loss) to Core Earnings for the three and nine months ended September 30, 2016 and September 30, 2015:
(dollars in thousands)
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Net Income (loss) – GAAP
 
$
32,282

 
$
(1,852
)
 
$
13,281

 
10,601

Provision for income tax
 
2,239

 
—

 
2,239

 
—

Net income (loss) before provision for income tax
 
34,521

 
(1,852
)
 
15,520

 
10,601

 
 
 
 
 
 
 
 
 
Adjustments:
 
 

 
 

 
 

 
 

Investments:
 
 

 
 

 
 

 
 

Unrealized (gain) loss on investments and securitized debt
 
(15,292
)
 
(24,723
)
 
(47,571
)
 
(10,284
)
Other than temporary impairment
 
4,978

 
5,917

 
22,131

 
14,884

Realized (gain) loss on sale of investments
 
(1,439
)
 
2,482

 
4,968

 
(9,267
)
Realized (gain) loss on foreign currency transactions
 
149

 
275

 
266

 
(2,523
)
Unrealized (gain) loss on foreign currency transactions
 
195

 
(201
)
 
639

 
859

 
 
 
 
 
 
 
 
 
Derivative Instruments:
 
 

 
 

 
 

 
 

Net realized (gain) loss on derivatives
 
14,242

 
(20,944
)
 
(11,479
)
 
(12,829
)
Unrealized (gain) loss on derivatives
 
(26,054
)
 
58,546

 
46,073

 
82,952

 
 
 
 
 
 
 
 
 
Non-cash stock-based compensation expense
 
433

 
509

 
1,351

 
1,969

Total adjustments
 
(22,788
)
 
21,861

 
16,378

 
65,761

Core Earnings – Non-GAAP Financial Measure
 
$
11,733

 
$
20,009

 
$
31,898

 
$
76,362

Basic Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure
 
$
0.28

 
$
0.48

 
$
0.76

 
$
1.82

Diluted Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure
 
$
0.28

 
$
0.48

 
$
0.76

 
$
1.82

Basic weighted average common shares and participating securities
 
41,970,108

 
41,946,885

 
41,959,152

 
41,896,839

Diluted weighted average common shares and participating securities
 
41,970,108

 
41,946,885

 
41,959,152

 
41,896,839



11


Reconciliation of Interest Income and Effective Cost of Funds
(Unaudited, in thousands)
 
The following table reconciles total interest income to interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2016 and September 30, 2015:
 
(dollars in thousands)
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Coupon interest income
 
$
34,944

 
$
49,287

 
$
109,514

 
$
161,835

Premium accretion, discount amortization and amortization of basis, net
 
(5,790
)
 
(13,466
)
 
(21,522
)
 
(44,179
)
Interest income
 
$
29,154

 
$
35,821

 
$
87,992

 
$
117,656

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

 
 

 
 

 
 

Coupon interest income
 
$
3,503

 
5,436

 
11,113

 
16,700

Amortization of basis (Non-GAAP Financial Measure)
 
(2,827
)
 
(4,163
)
 
(8,930
)
 
(12,877
)
Contractual interest income, net on Foreign currency swaps(1)
 
61

 
190

 
268

 
585

Contractual interest income, net on Total return swaps(1)
 
308

 
—

 
836

 
—

Subtotal
 
1,045

 
1,463

 
3,287

 
4,408

Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and other derivative instruments - Non-GAAP Financial Measure
 
$
30,199

 
$
37,284

 
$
91,279

 
$
122,064

 
(1)                Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
 
The following tables reconcile the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2016 and September 30, 2015:
 
 
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
 (dollars in thousands)
 
Reconciliation
 
Cost of
Funds/Effective
Borrowing
Costs
 
Reconciliation
 
Cost of
Funds/Effective
Borrowing
Costs
Interest expense
 
$
7,685

 
1.29
%
 
$
23,391

 
1.31
%
Net interest paid - interest rate swaps
 
6,736

 
1.14
%
 
21,907

 
1.22
%
Effective Borrowing Costs
 
$
14,421

 
2.43
%
 
$
45,298

 
2.53
%
Weighted average repurchase borrowings
 
$
2,365,695

 
 

 
$
2,389,321

 
 

 
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2015
 (dollars in thousands)
 
Reconciliation
 
Cost of
Funds/Effective
Borrowing
Costs
 
Reconciliation
 
Cost of
Funds/Effective
Borrowing
Costs
Interest expense
 
$
6,981

 
0.90
%
 
$
19,960

 
0.75
%
Net interest paid - interest rate swaps
 
5,224

 
0.68
%
 
10,796

 
0.41
%
Effective Borrowing Costs
 
$
12,205

 
1.58
%
 
$
30,756

 
1.16
%
Weighted average repurchase borrowings
 
$
3,064,689

 
 

 
$
3,536,381

 
 



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