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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10‑Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File Number 001‑13709


ANWORTH MORTGAGE ASSET CORPORATION

(Exact name of registrant as specified in its charter)


 

 

MARYLAND

52‑2059785

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1299 Ocean Avenue, 2nd Floor

Santa Monica, California

90401

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (310) 255‑4493


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

Large Accelerated Filer 

Accelerated Filer 

Non-Accelerated Filer ☐    

Smaller Reporting Company 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).   Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 Par Value

 

ANH

 

New York Stock Exchange

Series A Cumulative Preferred Stock, $0.01 Par Value

 

ANHPRA

 

New York Stock Exchange

Series B Cumulative Convertible Preferred Stock, $0.01 Par Value

 

ANHPRB

 

New York Stock Exchange

Series C Cumulative Redeemable Preferred Stock, $0.01 Par Value

 

ANHPRC

 

New York Stock Exchange

 

As of May 6, 2019, the registrant had 98,645,229 shares of common stock issued and outstanding.

 

 

 

 


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

FORM 10‑Q

INDEX

 

 

 

 

 

 

 

 

Page

 

Part I. 

 

FINANCIAL INFORMATION

3

 

 

Item 1.

Consolidated Financial Statements

3

 

 

 

Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

3

 

 

 

Consolidated Statements of Operations for the three  months ended March 31, 2019 and 2018 (unaudited)

4

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019  and 2018 (unaudited)

5

 

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 (unaudited)

6

 

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2018 (unaudited)

7

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)

8

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

Item 4.

Controls and Procedures

63

 

Part II. 

 

OTHER INFORMATION

64

 

 

Item 1.

Legal Proceedings

64

 

 

Item 1A.

Risk Factors

64

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

Item 3.

Defaults Upon Senior Securities

69

 

 

Item 4.

Mine Safety Disclosures

69

 

 

Item 5.

Other Information

69

 

 

Item 6.

Exhibits

70

 

 

 

Signatures

73

 

 

 

 

2


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION

Item 1.     Consolidated Financial Statements

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

 

 

(audited)

ASSETS

 

 

  

 

 

 

Agency MBS at fair value (including $3,421,455 and $3,433,252 pledged to counterparties at March 31, 2019 and December 31, 2018, respectively)

 

$

3,745,091

 

$

3,548,719

Non-Agency MBS at fair value (including $700,391 and $726,428 pledged to counterparties at  March 31, 2019 and December 31, 2018, respectively)

 

 

768,597

 

 

795,203

Residential mortgage loans held-for-securitization

 

 

129,583

 

 

11,660

Residential mortgage loans held-for-investment through consolidated securitization trusts(1)

 

 

535,077

 

 

549,016

Residential real estate

 

 

13,752

 

 

13,782

Cash and cash equivalents

 

 

21,997

 

 

3,165

Reverse repurchase agreements

 

 

 —

 

 

20,000

Restricted cash

 

 

75,513

 

 

30,296

Interest and dividends receivable

 

 

17,539

 

 

16,872

Derivative instruments at fair value

 

 

27,396

 

 

46,207

Right to use asset-operating lease

 

 

1,660

 

 

1,794

Prepaid expenses and other

 

 

5,524

 

 

2,986

Total Assets

 

$

5,341,729

 

$

5,039,700

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Accrued interest payable

 

$

16,084

 

$

24,828

Repurchase agreements

 

 

3,760,634

 

 

3,811,627

Warehouse line of credit

 

 

15,442

 

 

 —

Asset-backed securities issued by securitization trusts(1)

 

 

525,712

 

 

539,651

Junior subordinated notes

 

 

37,380

 

 

37,380

Derivative instruments at fair value

 

 

36,261

 

 

15,901

Dividends payable on preferred stock

 

 

2,297

 

 

2,297

Dividends payable on common stock

 

 

12,813

 

 

12,803

Payable for purchased MBS

 

 

227,997

 

 

 —

Payable for purchased loans

 

 

112,316

 

 

11,660

Derivative counterparty margin

 

 

5,238

 

 

 —

Accrued expenses and other

 

 

1,045

 

 

654

Long-term lease obligation

 

 

1,660

 

 

1,794

Total Liabilities

 

$

4,754,879

 

$

4,458,595

Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($19,494 and $19,494, respectively); 780 and 780 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

$

19,455

 

$

19,455

Stockholders’ Equity:

 

 

  

 

 

  

Series A Cumulative Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($47,984 and $47,984, respectively); 1,919 and 1,919 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

$

46,537

 

$

46,537

Series C Cumulative Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($50,257 and $50,257, respectively); 2,010 and 2,010 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

 

48,944

 

 

48,944

Common Stock: par value $0.01 per share; authorized 200,000 shares, 98,565 and 98,483 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

 

986

 

 

985

Additional paid-in capital

 

 

982,344

 

 

981,964

Accumulated other comprehensive income (loss) consisting of unrealized gains and losses

 

 

9,654

 

 

(30,792)

Accumulated deficit

 

 

(521,070)

 

 

(485,988)

Total Stockholders’ Equity

 

$

567,395

 

$

561,650

Total Liabilities and Stockholders’ Equity

 

$

5,341,729

 

$

5,039,700


(1)

The consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. At March 31, 2019 and December 31, 2018, total assets of the consolidated VIEs were $537 million and $551 million (including accrued interest receivable of $1.8 million and $1.8 million), respectively (which is recorded above in the line item entitled “Interest and dividends receivable”), and total liabilities were $527 million and $541 million (including accrued interest payable of $1.7 million and $1.7 million), respectively (which is recorded in the line item above entitled “Accrued interest payable”). Please refer to Note 5, “Variable Interest Entities,” for further discussion.

See accompanying notes to unaudited consolidated financial statements.

3


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2019

    

2018

    

Interest and other income:

 

 

  

 

 

  

 

Interest-Agency MBS

 

$

25,711

 

$

24,044

 

Interest-Non-Agency MBS

 

 

10,466

 

 

10,021

 

Interest-residential securitized mortgage loans

 

 

5,368

 

 

6,238

 

Interest-residential mortgage loans held-for-securitization

 

 

86

 

 

 —

 

Other interest income

 

 

19

 

 

28

 

 

 

 

41,650

 

 

40,331

 

Interest expense:

 

 

  

 

 

  

 

Interest expense on repurchase agreements

 

 

27,136

 

 

19,093

 

Interest expense on asset-backed securities

 

 

5,200

 

 

6,070

 

Interest expense on warehouse line of credit

 

 

234

 

 

 —

 

Interest expense on junior subordinated notes

 

 

547

 

 

447

 

 

 

 

33,117

 

 

25,610

 

Net interest income

 

 

8,533

 

 

14,721

 

Operating expenses:

 

 

 

 

 

  

 

Management fee to related party

 

 

(1,724)

 

 

(1,737)

 

Rental properties depreciation and expenses

 

 

(355)

 

 

(386)

 

General and administrative expenses

 

 

(967)

 

 

(1,110)

 

Total operating expenses

 

 

(3,046)

 

 

(3,233)

 

Other (loss):

 

 

  

 

 

  

 

Income-rental properties

 

 

436

 

 

451

 

Realized net (loss) on sales of available-for-sale MBS

 

 

(6,147)

 

 

(11,987)

 

Realized (loss) on sales of Agency MBS held as trading investments

 

 

(7,363)

 

 

(7,327)

 

Unrealized gain (loss) on Agency MBS held as trading investments

 

 

14,906

 

 

(8,890)

 

(Loss) gain on derivatives, net

 

 

(27,289)

 

 

13,412

 

Total other (loss)

 

 

(25,457)

 

 

(14,341)

 

Net (loss)

 

$

(19,970)

 

$

(2,853)

 

Dividends on preferred stock

 

 

(2,297)

 

 

(2,297)

 

Net (loss) to common stockholders

 

$

(22,267)

 

$

(5,150)

 

Basic (loss) per common share

 

$

(0.23)

 

$

(0.05)

 

Diluted (loss) per common share

 

$

(0.23)

 

$

(0.05)

 

Basic weighted average number of shares outstanding

 

 

98,537

 

 

98,185

 

Diluted weighted average number of shares outstanding

 

 

98,537

 

 

98,185

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

    

2019

    

2018

    

 

Net (loss)

 

$

(19,970)

 

$

(2,853)

 

 

Available-for-sale Agency MBS, fair value adjustment

 

 

25,109

 

 

(35,481)

 

 

Reclassification adjustment for loss on sales of Agency MBS included in net (loss)

 

 

6,169

 

 

11,945

 

 

Available-for-sale Non-Agency MBS, fair value adjustment

 

 

8,187

 

 

667

 

 

Reclassification adjustment for (gain) loss on sales of Non-Agency MBS included in net (loss)

 

 

(22)

 

 

42

 

 

Amortization of unrealized gains on interest rate swaps remaining in other comprehensive income

 

 

1,003

 

 

940

 

 

Reclassification adjustment for interest (income) on interest rate swaps included in net (loss)

 

 

 —

 

 

(194)

 

 

Other comprehensive income (loss)

 

 

40,446

 

 

(22,081)

 

 

Comprehensive income (loss)

 

$

20,476

 

$

(24,934)

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accum.

    

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comp.

 

 

 

 

 

 

 

 

 

 

Series A

 

Series C

 

 

 

Series A

 

Series C

 

Common

 

 

 

 

Accum. Other

 

Income

 

Accum. Other

 

 

 

 

 

 

 

 

Preferred

 

Preferred

 

Common

 

Preferred

 

Preferred

 

Stock

 

Additional

 

Comp. Income

 

Gain (Loss)

 

Comp. Income

 

 

 

 

 

 

For the Three Months Ended

 

Stock Shares

 

Stock Shares

 

Stock Shares

 

Stock

 

Stock

 

Par

 

Paid-In

 

Gain (Loss)

 

Non-Agency

 

Gain (Loss)

 

Accum.

 

 

 

March 31, 2019

 

Outstanding

 

Outstanding

 

Outstanding

 

Par Value

 

Par Value

 

Value

 

Capital

 

Agency MBS

 

MBS

 

Derivatives

 

(Deficit)

 

Total

Balance, December 31, 2018

 

1,919

 

2,010

 

98,483

 

$

46,537

 

$

48,944

 

$

985

 

$

981,964

 

$

(28,824)

 

$

9,563

 

$

(11,531)

 

$

(485,988)

 

$

561,650

Issuance of common stock

 

 

 

 

 

82

 

 

  

 

 

 

 

 

 1

 

 

355

 

 

 

 

 

  

 

 

  

 

 

  

 

 

356

Other comprehensive income, fair value adjustments and reclassifications

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

31,278

 

 

8,165

 

 

1,003

 

 

  

 

 

40,446

Net (loss)

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

(19,970)

 

 

(19,970)

Amortization of restricted stock

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

25

 

 

  

 

 

  

 

 

  

 

 

  

 

 

25

Dividend declared - $0.539063 per Series A preferred share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(1,035)

 

 

(1,035)

Dividend declared - $0.390625 per Series B preferred share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(304)

 

 

(304)

Dividend declared - $0.476525 per Series C preferred share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(958)

 

 

(958)

Dividend declared - $0.13 per common share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(12,815)

 

 

(12,815)

Balance, March 31, 2019

 

1,919

 

2,010

 

98,565

 

$

46,537

 

$

48,944

 

$

986

 

$

982,344

 

$

2,454

 

$

17,728

 

$

(10,528)

 

$

(521,070)

 

$

567,395

 

See accompanying notes to unaudited consolidated financial statements.

6


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accum.

    

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comp.

 

 

 

 

 

 

 

 

 

 

Series A

 

Series C

 

 

 

Series A

 

Series C

 

Common

 

 

 

 

Accum. Other

 

Income

 

Accum. Other

 

 

 

 

 

 

 

 

Preferred

 

Preferred

 

Common

 

Preferred

 

Preferred

 

Stock

 

Additional

 

Comp. Income

 

Gain (Loss)

 

Comp. Income

 

 

 

 

 

 

For the Three Months Ended

 

Stock Shares

 

Stock Shares

 

Stock Shares

 

Stock

 

Stock

 

Par

 

Paid-In

 

Gain (Loss)

 

Non-Agency

 

Gain (Loss)

 

Accum.

 

 

 

March 31, 2018

 

Outstanding

 

Outstanding

 

Outstanding

 

Par Value

 

Par Value

 

Value

 

Capital

 

Agency MBS

 

MBS

 

Derivatives

 

(Deficit)

 

Total

Balance, December 31, 2017

 

1,919

 

1,989

 

98,137

 

$

46,537

 

$

48,420

 

$

981

 

$

980,243

 

$

2,163

 

$

30,201

 

$

(15,344)

 

$

(415,235)

 

$

677,967

Issuance of Series C Preferred Stock

 

  

 

21

 

 

 

  

 

 

  

524

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

524

Issuance of common stock

 

  

 

  

 

75

 

 

  

 

 

  

 

 

 1

 

 

365

 

 

  

 

 

  

 

 

  

 

 

 

 

 

366

Other comprehensive income, fair value adjustments and  reclassifications

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(23,536)

 

 

709

 

 

746

 

 

  

 

 

(22,081)

Net (loss)

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(2,853)

 

 

(2,853)

Amortization of restricted stock

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

24

 

 

  

 

 

  

 

 

  

 

 

  

 

 

24

Dividend declared - $0.539063 per Series A preferred share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(1,035)

 

 

(1,035)

Dividend declared - $0.390625 per Series B preferred share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(305)

 

 

(305)

Dividend declared - $0.476525 per Series C preferred share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(958)

 

 

(958)

Dividend declared - $0.15 per common share

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(14,732)

 

 

(14,732)

Balance, March 31, 2018

 

1,919

 

2,010

 

98,212

 

$

46,537

 

$

48,944

 

$

982

 

$

980,632

 

$

(21,373)

 

$

30,910

 

$

(14,598)

 

$

(435,118)

 

$

636,917

 

See accompanying notes to unaudited consolidated financial statements.

 

 

7


 

Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

    

2019

    

2018

Operating Activities:

 

 

  

 

 

  

Net (loss)

 

$

(19,970)

 

$

(2,853)

Adjustments to reconcile net (loss) to net cash provided by operating activities:

 

 

  

 

 

  

Amortization of premium on MBS

 

 

5,886

 

 

7,601

Amortization/accretion of market yield adjustments (Non-Agency MBS)

 

 

1,222

 

 

1,829

Accretion of discount (residential mortgage loans)

 

 

(29)

 

 

(28)

Depreciation on rental properties

 

 

119

 

 

118

Realized loss on sales of available-for-sale MBS

 

 

6,147

 

 

11,987

Realized loss on sales of Agency MBS held as trading investments

 

 

7,363

 

 

7,327

Unrealized (gain) loss on Agency MBS held as trading investments

 

 

(14,906)

 

 

8,890

Impairment charge on residential mortgage loans held-for-investment

 

 

 —

 

 

18

Amortization of restricted stock

 

 

25

 

 

25

Net settlements received (paid) on interest rate swaps, net of amortization

 

 

4,861

 

 

(596)

Unrealized loss (gain) on interest rate swaps, net

 

 

33,718

 

 

(25,394)

(Gain) loss on derivatives, net of derivative income - TBA Agency MBS

 

 

(6,429)

 

 

11,981

Changes in assets and liabilities:

 

 

 

 

 

  

Decrease in reverse repurchase agreements

 

 

20,000

 

 

 —

(Increase) decrease in interest receivable

 

 

(765)

 

 

27

(Increase) in prepaid expenses and other

 

 

(4,546)

 

 

(5,753)

(Decrease) in accrued interest payable

 

 

(8,705)

 

 

(1,526)

Increase in accrued expenses

 

 

2,063

 

 

5,150

Net cash provided by operating activities

 

$

26,054

 

$

18,803

Investing Activities:

 

 

  

 

 

  

MBS Portfolios:

 

 

  

 

 

  

Proceeds from sales

 

$

903,822

 

$

589,073

Purchases

 

 

(997,367)

 

 

(672,090)

Principal payments

 

 

185,692

 

 

209,607

Residential mortgage loans held-for-securitization:

 

 

 

 

 

 

Purchases

 

 

(18,028)

 

 

 —

Principal payments

 

 

802

 

 

 —

Residential mortgage loans held-for-investment through consolidated securitization trusts:

 

 

  

 

 

  

Principal payments

 

 

30

 

 

28

Residential properties purchases

 

 

(195)

 

 

(54)

Net cash provided by investing activities

 

$

74,756

 

$

126,564

Financing Activities:

 

 

 

 

 

  

Borrowings from repurchase agreements

 

$

7,207,740

 

$

6,959,970

Repayments on repurchase agreements

 

 

(7,258,733)

 

 

(7,079,868)

Borrowings from warehouse line of credit

 

 

15,716

 

 

 —

Net settlements of TBA Agency MBS Contracts

 

 

8,022

 

 

(14,848)

Derivative counterparty margin

 

 

5,238

 

 

 —

Proceeds from common stock issued

 

 

356

 

 

366

Proceeds on Series C Preferred Stock issued

 

 

 —

 

 

525

Preferred Stock dividends paid

 

 

(2,297)

 

 

(2,278)

Common stock dividends paid

 

 

(12,803)

 

 

(14,721)

Net cash (used in) financing activities

 

$

(36,761)

 

$

(150,854)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

64,049

 

 

(5,487)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

33,461

 

 

23,430

Cash, cash equivalents, and restricted cash at end of period

 

$

97,510

 

$

17,943

Supplemental Disclosure of Cash Flow Information:

 

 

  

 

 

  

Cash paid for interest

 

$

31,612

 

$

21,662

Change in payables for MBS purchased

 

$

227,997

 

$

 —

Change in payables for residential mortgage loans purchased

 

$

100,656

 

$

 —

See accompanying notes to unaudited consolidated financial statements.

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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As used in this Quarterly Report on Form 10‑Q, “Company,” “we,” “us,” “our,” and “Anworth” refer to Anworth Mortgage Asset Corporation.

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Our Company

We were incorporated in Maryland on October 20, 1997 and commenced operations on March 17, 1998. Our principal business is to invest in, finance, and manage a leveraged portfolio of residential mortgage-backed securities, or MBS, and residential mortgage loans, which presently include the following types of investments:

·

Agency mortgage-backed securities, or Agency MBS, which include residential mortgage pass-through certificates and collateralized mortgage obligations, or CMOs, which are securities representing interests in pools of mortgage loans secured by residential property in which the principal and interest payments are guaranteed by a government-sponsored enterprise, or GSE, such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac;

·

Non-agency mortgage-backed securities, or Non-Agency MBS, which are securities issued by companies that are not guaranteed by federally sponsored enterprises and that are secured primarily by first-lien residential mortgage loans; and

·

Residential mortgage loans. We acquire Non-QM residential mortgage loans (which are described further on page 47) from independent loan originators with the intent of holding these loans for securitization. These loans are financed by warehouse lines of credit until securitization. We also hold residential mortgage loans through consolidated securitization trusts. We finance these loans through asset-backed securities, or ABS, issued by the consolidated securitization trusts. The ABS, which are held by unaffiliated third parties, are non-recourse financing. The difference in the amount of the loans in the trusts and the amount of the ABS represents our retained net interest in the securitization trusts.

Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code. As long as we retain our REIT status, we generally will not be subject to federal or state income taxes to the extent that we distribute our taxable net income to our stockholders, and we routinely distribute to our stockholders substantially all of the taxable net income generated from our operations. In order to qualify as a REIT, we must meet various ongoing requirements under the tax law, including requirements relating to the composition of our assets, the nature of our gross income, minimum distribution requirements, and requirements relating to the ownership of our stock.

Our Manager

We are externally managed and advised by Anworth Management LLC, or our Manager. Effective as of December 31, 2011, we entered into a management agreement, or the Management Agreement, with our Manager, which effected the externalization of our management function, or the Externalization. Since the effective date of the Externalization, our day-to-day operations are being conducted by our Manager through the authority delegated to it under the Management Agreement and pursuant to the policies established by our board of directors, or our Board.

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Our Manager is supervised by our Board and is responsible for administering our day-to-day operations. In addition, our Manager is responsible for (i) the selection, purchase, and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with portfolio management, administrative, and other services and activities relating to our assets and operations as may be appropriate.

Our Manager will also perform such other services and activities as described in the Management Agreement relating to our assets and operations as may be appropriate. In exchange for these services, our Manager receives a management fee, paid monthly in arrears, in an amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement).

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles utilized in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are susceptible to change relate to the determination of the fair value of investments and derivatives, cash flow projections for and credit performance of Non-Agency MBS and residential mortgage loans, amortization of security and loan premiums, accretion of security and loan discounts, and accounting for derivative activities. Actual results could materially differ from these estimates. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

Our consolidated financial statements include the accounts of all subsidiaries. Significant intercompany accounts and transactions have been eliminated. The interim financial information in the accompanying unaudited consolidated financial statements and the notes thereto should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018. Our consolidated financial statements also include the consolidation of certain securitization trusts that meet the definition of a variable interest entity, or VIEs, because the Company has been deemed to be the primary beneficiary of the securitization trusts. These securitization trusts hold pools of residential mortgage loans and issue series of ABS payable from the cash flows generated by the underlying pools of residential mortgage loans. These securitizations are non-recourse financing for the residential mortgage loans held-for-investment. Generally, a portion of the ABS issued by the securitization trusts are sold to unaffiliated third parties and the balance is purchased by the Company. We classify the underlying residential mortgage loans owned by the securitization trusts as residential mortgage loans held-for-investment through consolidated securitization trusts in our consolidated balance sheets. The ABS issued to third parties are recorded as liabilities on the Company’s consolidated balance sheets. The Company records interest income on the residential mortgage loans held-for-investment and interest expense on the ABS issued to third parties in the Company’s consolidated statements of operations. The Company records the initial underlying assets and liabilities of the consolidated securitization trusts at their fair value upon consolidation into the Company and, as such, no gain or loss is recorded upon consolidation. See Note 5, “Variable Interest Entities,” for additional information regarding the impact of consolidation of securitization trusts.

The consolidated securitization trusts are VIEs because the securitization trusts do not have equity that meets the definition of GAAP equity at risk. In determining if a securitization trust should be consolidated, the Company evaluates (in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810‑10) whether it has both (i) the power to direct the activities of the securitization trust that most significantly impact its economic performance and (ii) the right to receive benefits from the securitization trust or the obligation to absorb losses of the securitization trust that could be significant. The Company determined that it is the primary beneficiary of certain securitization trusts because it has certain delinquency and default oversight rights on residential mortgage loans. In addition, the Company owns the most subordinated class of ABS issued by the securitization trusts and has the obligation to absorb losses and right to receive benefits from the securitization trusts that could potentially be significant to the securitization trusts. The Company assesses modifications, if any, to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

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Change in Basis of Presentation

In accordance with ASU 2016-2, “Leases,” we have recorded on our unaudited consolidated balance sheets a “Right to Use Asset-Operating Lease,” and the related “Long-Term Lease Obligation.” All prior period information is presented in the same manner for conformity.

The following is a summary of our significant accounting policies:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value. Restricted cash includes cash pledged as collateral to counterparties on various derivative transactions.

Reverse Repurchase Agreements

We use securities purchased under agreements to resell, or reverse repurchase agreements, as a means of investing excess cash. Although legally structured as a purchase and subsequent resale, reverse repurchase agreements are treated as financing transactions under which the counterparty pledges securities (principally U.S. treasury securities) and accrued interest as collateral to secure a loan. The difference between the purchase price that we pay and the resale price that we receive represents interest paid to us and is included in “Other interest income” on our consolidated statements of operations. It is our policy to generally take possession of securities purchased under reverse repurchase agreements at the time such agreements are made.

Mortgage-Backed Securities

Agency MBS are securities that are obligations (including principal and interest) guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our investment-grade Agency MBS portfolio is invested primarily in fixed-rate and adjustable-rate mortgage-backed pass-through certificates and hybrid adjustable-rate MBS. Hybrid adjustable-rate MBS have an initial interest rate that is fixed for a certain period, typically one to ten years, and then adjusts annually for the remainder of the term of the asset. We structure our investment portfolio to be diversified with a variety of prepayment characteristics, investing in mortgage assets with prepayment penalties, investing in certain mortgage security structures that have prepayment protections and purchasing mortgage assets at a premium and at a discount. A portion of our portfolio consists of Non-Agency MBS. Our principal business objective is to generate net income for distribution to our stockholders primarily based upon the spread between the interest income on our mortgage assets and our borrowing costs to finance our acquisition of those assets.

We classify our MBS as either trading investments, available-for-sale investments, or held-to-ma