Western Asset Mortgage Capital Corporation Announces First Quarter 2017 Results

For the Three Months Ended

GAAP Results

March 31, 2017

December 31, 2016

Net Interest Income

$

19,693

$

26,725

Other Income (Loss):

Realized gain (loss) on sale of investments, net

21,258

(17,023)

Other than temporary impairment

(6,097)

(10,155)

Unrealized gain (loss), net

(5,140)

(64,678)

Gain (loss) on derivative instruments, net

(4,697)

32,479

Other, net

403

338

Other Income (loss)

5,727

(59,039)

Total Expenses

4,866

5,065

Income (loss) before income taxes

20,554

(37,379)

Income tax provision

312

917

Net income (loss)

$

20,242

$

(38,296)

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

$

0.48

$

(0.92)

Non-GAAP Results

Core earnings plus drop income⁽¹⁾

$

10,281

$

22,051

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

0.25

0.52

Weighted average yield⁽²⁾

4.39

%

4.80

%

Effective cost of funds(3)

2.81

%

2.06

%

Annualized net interest margin⁽²⁾⁽³⁾

2.01

%

2.91

%

Annualized CPR on Agency RMBS

10.5

%

11.9

%

(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.

Investment Portfolio

(dollars in thousands)

Coupon

Principal
Balance

Amortized

Cost

Fair Value

Agency

40-year fixed rate

3.5%

$

98,748

$

99,921

$

100,791

30-year fixed rate

3.0%

25,905

26,857

25,685

3.5%

38,215

40,950

39,396

4.0%

319,352

343,646

337,470

4.5%

208,703

224,002

226,590

5.0%

46,758

52,495

52,237

5.5%

1,941

2,296

2,157

6.0%

2,257

2,509

2,610

20-year fixed rate

3.5%

110,907

116,702

115,658

4.0%

131,490

139,124

139,478

Agency RMBS IOs and IIOs⁽¹⁾

3.0%

N/A   

29,885

32,229

Agency CMBS

2.9%

1,124,505

1,108,854

1,112,402

Agency CMBS IOs and IIOs⁽²⁾

0.9%

N/A  

8,128

7,299

Subtotal Agency

3.1%

2,108,781

2,195,369

2,194,002

Non-Agency

Non-Agency RMBS

2.9%

86,024

62,158

64,308

Non-Agency CMBS

4.9%

447,375

361,379

342,115

Subtotal Non-Agency

4.6%

533,399

423,537

406,423

Other Securities⁽⁵⁾

6.8%

90,665

113,471

114,487

Subtotal MBS and Other Securities

3.5%

2,732,845

2,732,377

2,714,912

Whole-Loans

Residential Whole-Loans

4.6%

211,005

211,822

215,800

Residential Bridge Loans⁽³⁾

9.5%

33,186

33,204

N/A  

Securitized Commercial Loan⁽⁴⁾

9.0%

25,000

25,000

24,500

Subtotal Whole-Loans

5.6%

269,191

270,026

240,300

$

3,002,036

$

3,002,403

$

2,955,212

(1)

Includes $13.7 million of amortized cost and $15.1 million of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(2)

Includes $8.1 million of amortized cost and $7.3 million of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.

(3)

Residential Bridge Loans are reflected at amortized costs.

(4)

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.

(5)

Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.7 million.

Repurchase Agreements

Balance

Weighted Average
Interest Rate (end of
period)

Weighted Average
Remaining Maturity
(days)

Agency RMBS

$

835,537

1.01

%

50

Agency CMBS

933,457

1.02

%

34

Non-Agency RMBS

50,438

2.60

%

43

Non-Agency CMBS

239,632

2.69

%

36

Whole-Loans⁽¹⁾

213,509

3.32

%

15

Other Securities

51,854

2.50

%

25

Total

$

2,324,427

1.47

%

38

⁽¹⁾

 Whole-Loans includes the repurchase agreements for Residential Whole-Loan, Residential Bridge Loans and Securitized Commercial Loans

Fixed Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity

Notional Value

Average

Fixed Pay

Rate

Average
Floating
Receive Rate

Average

Maturity

(Years)

1 year or less

$

105,900

0.8

%

1.0

%

0.6

Greater than 1 year and less than 3 years

118,000

1.8

%

1.1

%

2.4

Greater than 3 years and less than 5 years

1,047,800

2.1

%

1.1

%

3.7

Greater than 5 years

2,823,400

2.8

%

0.8

%

9.4

Total

$

4,095,100

2.5

%

0.9

%

7.5

Variable Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity

Notional Value

Average

Floating

Pay Rate

Average
Fixed
Receive Rate

Average

Maturity

(Years)

Greater than 1 year and less than 3 years

$

192,800

1.0

%

1.4

%

2.9

Greater than 3 years and less than 5 years

1,609,900

0.8

%

1.8

%

4.1

Greater than 5 years

970,000

1.1

%

2.2

%

11.9

Total

$

2,772,700

0.9

%

1.9

%

6.7

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 statements of operations, but is not included in core earnings. Drop income was approximately $1.0 million for the three months ended March 31, 2017.

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 March 31, 2017, the net long position in TBAs was $100.0 million in notional value.

5

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

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

March 31, 2017
(Unaudited)

December 31, 2016

Assets:

Cash and cash equivalents

$

48,101

$

46,172

Mortgage-backed securities and other securities, at fair value ($2,360,107 and $2,261,430 pledged as collateral, at fair value, respectively)

2,714,912

2,576,517

Residential Whole-Loans, at fair value ($215,800 and $192,136 pledged as collateral, at fair value, respectively)

215,800

192,136

Residential Bridge Loans ($33,204 and $0 pledged as collateral, respectively)

33,204

—

Securitized commercial loan, at fair value

24,500

24,225

Investment related receivable

30,452

33,600

Accrued interest receivable

10,935

18,812

Due from counterparties

56,412

243,585

Derivative assets, at fair value

9,561

20,571

Other assets

497

398

Total Assets ⁽¹⁾

$

3,144,374

$

3,156,016

Liabilities and Stockholders' Equity:

Liabilities:

Borrowings under repurchase agreements, net

$

2,324,427

$

2,155,644

Securitized debt, at fair value

10,780

10,659

Accrued interest payable

4,381

16,041

Investment related payables

333,505

341,458

Due to counterparties

3,850

740

Derivative liability, at fair value

10,268

182,158

Accounts payable and accrued expenses

3,531

3,255

Payable to affiliate

2,546

2,584

Dividend payable

12,995

12,995

Total Liabilities ⁽²⁾

2,706,283

2,725,534

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

765,421

765,042

Retained earnings (accumulated deficit)

(327,749)

(334,979)

Total Stockholders' Equity

438,091

430,482

Total Liabilities and Stockholders' Equity

$

3,144,374

$

3,156,016

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

March 31, 2017
(Unaudited)

December 31, 2016

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

Residential Whole-Loans, at fair value ($215,800 and $192,136 pledged as collateral, at fair value, respectively)

$

215,800

$

192,136

Residential Bridge Loans ($33,204 and $0 pledged as collateral, respectively)

33,204

—

Securitized commercial loan, at fair value

24,500

24,225

Investment related receivable

7,471

1,241

Accrued interest receivable

2,329

1,622

Other assets

93

—

Total assets of consolidated VIEs

$

283,397

$

219,224

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

Securitized debt, at fair value

$

10,780

$

10,659

Accrued interest payable

85

85

Accounts payable and accrued expenses

86

2

Total liabilities of consolidated VIEs

$

10,951

$

10,746

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands—except share and per share data)

Three Months Ended

March 31, 2017

December 31, 2016

Net Interest Income

Interest income

$

28,430

$

35,764

Interest expense

8,737

9,039

Net Interest Income

19,693

26,725

Other Income (Loss)

Realized gain (loss) on sale of investments, net

21,258

(17,023)

Other than temporary impairment

(6,097)

(10,155)

Unrealized gain (loss), net

(5,140)

(64,678)

Gain (loss) on derivative instruments, net

(4,697)

32,479

Other, net

403

338

Other Income (Loss)

5,727

(59,039)

Expenses

Management fee to affiliate

2,476

2,503

Other operating expenses

417

236

General and administrative expenses

Compensation expense

740

768

Professional fees

888

867

Other general and administrative expenses

345

691

Total general and administrative expenses

1,973

2,326

Total Expenses

4,866

5,065

Income (loss) before income taxes

20,554

(37,379)

Income tax provision

312

917

Net income (loss)

$

20,242

$

(38,296)

Net income (loss) per Common Share – Basic

$

0.48

$

(0.92)

Net income (loss) per Common Share – Diluted

$

0.48

$

(0.92)

Dividends Declared per Share of Common Stock

$

0.31

$

0.31

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 months ended March 31, 2017 and December 31, 2016:

Three months ended

(dollars in thousands)

March 31, 2017

December 31, 2016

Net Income (loss) – GAAP

$

20,242

$

(38,296)

Provision for income tax

312

917

Net income (loss) before provision for income tax

20,554

(37,379)

Adjustments:

Investments:

Unrealized (gain) loss on investments and securitized debt

5,140

64,678

Other than temporary impairment

6,097

10,155

Realized (gain) loss on sale of investments

(21,258)

17,023

Realized (gain) loss on foreign currency transactions

1

(167)

Unrealized (gain) loss on foreign currency transactions

—

20

Derivative Instruments:

Net realized (gain) loss on derivatives

(801)

3,962

Unrealized (gain) loss on derivatives

(851)

(40,938)

Non-cash stock-based compensation expense

362

348

Total adjustments

(11,310)

55,081

Core Earnings – Non-GAAP Financial Measure

$

9,244

$

17,702

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

$

0.22

$

0.42

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

$

0.22

$

0.42

Basic weighted average common shares and participating securities

41,973,170

41,971,600

Diluted weighted average common shares and participating securities

41,973,170

41,971,600

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 months ended March 31, 2017 and December 31, 2016:

Three months ended

(dollars in thousands)

March 31, 2017

December 31, 2016

Coupon interest income

$

29,915

$

37,658

Premium amortization, discount accretion and amortization of basis, net

(1,485)

(1,894)

Interest income

28,430

35,764

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

Coupon interest income

2,041

3,035

Amortization of basis (Non-GAAP Financial Measure)

(1,565)

(2,508)

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

—

15

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

231

285

707

827

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

$

29,137

$

36,591

(1)

Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three months ended March 31, 2017 and December 31, 2016:

Three months ended March 31, 2017

December 31, 2016

(dollars in thousands)

Reconciliation

Cost of Funds/Effective
Borrowing Costs

Reconciliation

Cost of Funds/Effective
Borrowing Costs

Interest expense

$

8,737

1.55

%

$

9,039

1.30

%

Net interest paid - interest rate swaps

7,056

1.26

%

5,324

0.76

%

Effective Borrowing Costs

$

15,793

2.81

%

$

14,363

2.06

%

Weighted average repurchase borrowings

$

2,280,026

$

2,775,889