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Invesco Mortgage Capital Inc. Reports Third Quarter 2017 Financial Results

ATLANTA, Nov. 6, 2017 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September 30, 2017.

Highlights:

  • Q3 2017 net income attributable to common stockholders of $49.1 million or $0.44 basic earnings per common share ("EPS") compared to $46.8 million or $0.42 basic EPS in Q2 2017
  • Q3 2017 core earnings* of $49.1 million or core EPS of $0.44 compared to $46.1 million or core EPS of $0.41 in Q2 2017
  • Q3 2017 book value per diluted common share*** of $18.34 compared to $18.27 at Q2 2017 and $17.48 at Q4 2016
  • Q3 2017 common stock dividend increased to $0.41 per share
  • Issued $287.5 million of preferred equity

Core earnings per share* improved to $0.44 for the quarter, an increase of $.03 or 7.3% over the previous quarter, primarily due to higher effective net interest income and the deployment of proceeds from the $287.5 million preferred equity offering in August. Substantially all the preferred equity offering proceeds were deployed in Agency RMBS and CMBS by the end of the quarter which should result in the Company realizing the full impact of its accretive benefits to core earnings in the fourth quarter. Given the improvement in earnings, the common stock dividend paid on October 26, 2017 was raised to $0.41 per share, an increase of 2.5%. As of September 30, 2017, 59% of the Company's equity was allocated to residential and commercial credit assets and 41% was allocated to Agency RMBS. "Our portfolio performed well during the third quarter, and we continue to be very encouraged by the Company's dividend paying potential as demonstrated by our Board's declaration to increase the common stock dividend to $0.41 per share," said John Anzalone, Chief Executive Officer. "In addition to our favorable economic return and continued book value stability, we are also pleased with our preferred equity raise in August and expect to see the full quarter of its accretive benefits to core earnings in the fourth quarter. Importantly, we continue to believe the economic outlook is supportive of our strategy and attractive investment opportunities remain that may result in further earnings and dividend improvements."

* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.
** Economic return for the quarter ended September 30, 2017 is defined as the change in book value per diluted common share from June 30, 2017 to September 30, 2017 of $0.07; plus dividends declared of $0.41 per common share; divided by the June 30, 2017 book value per diluted common share of $18.27. Economic return for the nine months ended September 30, 2017 is defined as the change in book value per diluted common share from December 31, 2016 to September 30, 2017 of $0.86; plus dividends declared of $1.21 per common share; divided by the December 31, 2016 book value per diluted common share of $17.48.
*** Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million), Series B Preferred Stock ($155.0 million) and Series C Preferred Stock ($287.5 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

Key performance indicators for the quarters ended September 30, 2017 and June 30, 2017 are summarized in the table below.

($ in millions, except share amounts)

Q3 '17

Q2 '17

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized costs)

$17,434.6

$16,029.5

$1,405.1

Average borrowings

$15,196.4

$13,955.3

$1,241.1

Average equity

$2,206.3

$2,185.4

$20.9





U.S. GAAP Financial Measures




Total interest income

$140.4

$127.0

$13.4

Total interest expense

$54.2

$44.1

$10.1

Net interest income

$86.2

$82.9

$3.3

Total expenses

$11.3

$10.6

$0.7

Net income (loss) attributable to common stockholders

$49.1

$46.8

$2.3





Average earning asset yields

3.22%

3.17%

0.05%

Cost of funds

1.43%

1.26%

0.17%

Net interest rate margin

1.79%

1.91%

(0.12%)





Book value per common share (diluted)*

$18.34

$18.27

$0.07

Earnings (loss) per common share (basic)

$0.44

$0.42

$0.02

Earnings (loss) per common share (diluted)

$0.43

$0.41

$0.02

Debt-to-equity ratio

6.0x

5.9x

0.1x





Non-GAAP Financial Measures**




Core earnings

$49.1

$46.1

$3.0

Effective interest income

$146.3

$132.9

$13.4

Effective interest expense

$78.1

$70.4

$7.7

Effective net interest income

$68.2

$62.4

$5.8





Effective yield

3.36%

3.32%

0.04%

Effective cost of funds

2.06%

2.01%

0.05%

Effective interest rate margin

1.30%

1.31%

(0.01%)





Core earnings per common share

$0.44

$0.41

$0.03

Repurchase agreement debt-to-equity ratio

6.3x

6.1x

0.2x


* Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million), Series B Preferred Stock ($155.0 million) and Series C Preferred Stock ($287.5 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).


** Core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin), and repurchase agreement debt-to-equity ratio are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, average earning asset yields), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

Financial Summary

Net income attributable to common stockholders for the third quarter of 2017 was $49.1 million compared to $46.8 million for the second quarter. Higher net income attributable to common stockholders was driven by an increase in net interest income and a decrease in total other losses during the quarter that were partially offset by dividends on preferred stock issued during the quarter. During the third quarter of 2017, the Company completed a public offering of 11,500,000 shares of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") at the price of $25.00 per share. Total proceeds were $287.5 million before issuance costs of $9.4 million.

Book value per diluted common share for the third quarter of 2017 increased by 0.4% to $18.34 reflecting the continued low volatility environment.

During the third quarter of 2017, the Company generated $49.1 million in core earnings, an increase of $3.0 million or 6.5% over the second quarter. Core earnings increased in the third quarter primarily due to higher effective net interest income that was partially offset by the Series C Preferred Stock dividends.

Total interest income increased to $140.4 million for the third quarter of 2017 compared to $127.0 million for the second quarter primarily due to higher average earning assets. Average earning assets rose to $17.4 billion during the third quarter, up $1.4 billion (8.8%) from $16.0 billion during the second quarter. The increase in average earning assets was primarily due to investing Series C Preferred Stock proceeds. The Company leveraged Series C Preferred Stock proceeds and paydowns on securities to purchase $2.5 billion of 30 year fixed- rate Agency RMBS and $375.8 million of CMBS during the third quarter.

The Company increased its average borrowings by $1.2 billion (8.9%) in the third quarter, resulting in average borrowings of $15.2 billion and total interest expense of $54.2 million compared to average borrowings of $14.0 billion and total interest expense of $44.1 million during the second quarter. The Company's total interest expense rose during the third quarter primarily due to higher interest rates and higher average borrowings leveraging MBS purchases during the quarter. The Company's cost of funds rose to 1.43% for the third quarter, up from 1.26% for the second quarter, reflecting the June 2017 increase in the federal funds rate and rising LIBOR rates throughout the third quarter.

The Company modestly increased leverage to 6.0x in the third quarter of 2017 from 5.9x in the second quarter. The Company retired $60.9 million of its Senior Exchangeable Notes (the "Notes") during the third quarter and has retired $242.2 million year-to-date. As of September 30, 2017, $157.8 million of Notes is outstanding. The Notes will mature in March 2018.

Total expenses for the third quarter of 2017 were approximately $11.3 million compared to $10.6 million for the second quarter. Management fees totaled $9.6 million in the third quarter, up from $9.0 million in the second quarter of 2017. Third quarter management fees rose primarily due to issuing the Series C Preferred Stock. General and administrative expenses were $1.7 million in the third quarter of 2017, compared to $1.6 million in the second quarter. General and administrative expenses were higher during the third quarter primarily due to transaction fees related to new interest rate swaps added during the quarter and higher professional fees.

The ratio of annualized total expenses to average equity(1) increased to 2.04% for the third quarter of 2017 compared to 1.95% for the second quarter primarily due to higher management fees.

As previously announced, the Company declared the following dividends on September 14, 2017: a common stock dividend of $0.41 per share paid on October 26, 2017; a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2017; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 27, 2017. The Company also declared its first Series C Preferred Stock dividend of $0.6823 per share that will be paid on December 27, 2017 for the period from date of issuance to but not including December 27, 2017. The Company will declare its next dividend on Series B and Series C Preferred Stock following its regularly scheduled Board of Directors meeting in February 2018 for the period from December 27, 2017 through but not including March 27, 2018. The Company will continue to declare its quarterly dividends on common stock and Series A Preferred Stock in the third month of each quarter.

(1)

The ratio of annualized total expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on the weighted month-end balance of total equity excluding equity attributable to preferred stockholders.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that primarily focuses on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Tuesday, November 7, 2017, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:

800-857-7465

International:

1-312-470-0052

Passcode:

Invesco

An audio replay will be available until 5:00 pm ET on November 21, 2017 by calling:

800-510-9771 (North America) or 1-402-344-6800 (International)

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the market for our target assets, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



Three Months Ended


Nine Months Ended

$ in thousands, except share amounts

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Interest Income










Mortgage-backed and credit risk transfer securities (1)

134,138



121,027



112,467



374,038



347,573


Commercial loans

6,251



6,021



5,680



18,036



16,520


Total interest income

140,389



127,048



118,147



392,074



364,093


Interest Expense










Repurchase agreements

45,907



36,072



24,892



111,926



97,952


Secured loans

5,544



4,535



2,746



13,492



8,149


Exchangeable senior notes

2,724



3,504



5,620



11,236



16,847


Total interest expense

54,175



44,111



33,258



136,654



122,948


Net interest income

86,214



82,937



84,889



255,420



241,145


Other Income (loss)










Gain (loss) on investments, net

(11,873)



11,175



(7,155)



(2,551)



5,860


Equity in earnings (losses) of unconsolidated ventures

408



(154)



729



(1,280)



1,992


Gain (loss) on derivative instruments, net

1,955



(53,513)



35,378



(46,096)



(293,528)


Realized and unrealized credit derivative income (loss), net

(2,930)



21,403



31,926



38,428



57,564


Net loss on extinguishment of debt

(1,344)



(526)





(6,581)




Other investment income (loss), net

2,313



2,533



(554)



6,175



(3,617)


Total other income (loss)

(11,471)



(19,082)



60,324



(11,905)



(231,729)


Expenses










Management fee – related party

9,557



9,027



6,719



27,385



25,292


General and administrative

1,697



1,608



1,836



5,389



5,769


Total expenses

11,254



10,635



8,555



32,774



31,061


Net income (loss)

63,489



53,220



136,658



210,741



(21,645)


Net income (loss) attributable to non-controlling interest

800



670



1,723



2,656



(235)


Net income (loss) attributable to Invesco Mortgage Capital Inc.

62,689



52,550



134,935



208,085



(21,410)


Dividends to preferred stockholders

13,562



5,716



5,716



24,994



17,148


Net income (loss) attributable to common stockholders

49,127



46,834



129,219



183,091



(38,558)


Earnings (loss) per share:










Net income (loss) attributable to common stockholders










Basic

0.44



0.42



1.16



1.64



(0.34)


Diluted

0.43



0.41



1.05



1.59



(0.34)


Dividends declared per common share

0.41



0.40



0.40



1.21



1.20




(1) The table below shows the components of mortgage-backed and credit risk transfer securities income for the periods presented.




Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Coupon interest

156,635



147,267



144,325



449,971



433,095


Net (premium amortization)/discount accretion

(22,497)



(26,240)



(31,858)



(75,933)



(85,522)


Mortgage-backed and credit risk transfer securities interest income

134,138



121,027



112,467



374,038



347,573


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



Three Months Ended


Nine Months Ended

In thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Net income (loss)

63,489



53,220



136,658



210,741



(21,645)


Other comprehensive income (loss):










Unrealized gain (loss) on mortgage-backed
and credit risk transfer securities, net

19,089



39,633



32,015



75,011



270,591


Reclassification of unrealized (gain) loss on
sale of mortgage-backed and credit risk
transfer securities to gain (loss) on
investments, net

7



651





1,508



(11,581)


Reclassification of amortization of net
deferred (gain) loss on de-designated
interest rate swaps to repurchase agreements
interest expense

(6,438)



(6,369)



(4,831)



(19,105)



11,331


Currency translation adjustments on
investment in unconsolidated venture

807



139



(235)



331



(10)


Total other comprehensive income (loss)

13,465



34,054



26,949



57,745



270,331


Comprehensive income (loss)

76,954



87,274



163,607



268,486



248,686


Less: Comprehensive (income) loss
attributable to non-controlling interest

(970)



(1,099)



(2,063)



(3,384)



(3,157)


Less: Dividends to preferred stockholders

(13,562)



(5,716)



(5,716)



(24,994)



(17,148)


Comprehensive income (loss) attributable to common
stockholders

62,422



80,459



155,828



240,108



228,381


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



As of

$ in thousands except share amounts

September 30, 2017


December 31, 2016

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of
$17,398,372 and $14,422,198, respectively)

18,259,552



14,981,331


Commercial loans, held-for-investment

280,989



273,355


Cash and cash equivalents

73,530



161,788


Due from counterparties

1,550



86,450


Investment related receivable

20,934



43,886


Accrued interest receivable

56,532



46,945


Derivative assets, at fair value

7,394



3,186


Other assets

102,343



109,297


Total assets

18,802,824



15,706,238


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

14,088,838



11,160,669


Secured loans

1,650,000



1,650,000


Exchangeable senior notes, net

157,380



397,041


Derivative liabilities, at fair value

40,631



134,228


Dividends and distributions payable

59,909



50,924


Investment related payable

122,896



9,232


Accrued interest payable

12,255



21,066


Collateral held payable

2,955



1,700


Accounts payable and accrued expenses

1,788



1,534


Due to affiliate

10,778



9,660


Total liabilities

16,147,430



13,436,054


Commitments and contingencies (See Note 16) (1)




Equity:




Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:




7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding
($140,000 aggregate liquidation preference)

135,356



135,356


7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares
issued and outstanding ($155,000 aggregate liquidation preference)

149,860



149,860


7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares
issued and outstanding ($287,500 aggregate liquidation preference)

278,108




Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 111,616,551 and
111,594,595 shares issued and outstanding, respectively

1,116



1,116


Additional paid in capital

2,384,157



2,379,863


Accumulated other comprehensive income

350,686



293,668


Retained earnings (distributions in excess of earnings)

(670,261)



(718,303)


Total stockholders' equity

2,629,022



2,241,560


Non-controlling interest

26,372



28,624


Total equity

2,655,394



2,270,184


Total liabilities and equity

18,802,824



15,706,238




(1)

See Note 16 of the Company's condensed consolidated financial statements filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017

Non-GAAP Financial Measures

The Company uses the following non-GAAP financial measures to analyze its operating results and believes these financial measures are useful to investors in assessing the Company's performance as further discussed below:

  • core earnings (and by calculation, core earnings per common share)
  • effective interest income (and by calculation, effective yield)
  • effective interest expense (and by calculation, effective cost of funds)
  • effective net interest income (and by calculation, effective interest rate margin), and
  • repurchase agreement debt-to-equity ratio.

The most directly comparable U.S. GAAP measures are:

  • net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share)
  • total interest income (and by calculation, earning asset yield)
  • total interest expense (and by calculation, cost of funds)
  • net interest income (and by calculation, net interest rate margin); and
  • debt-to-equity ratio.

The non-GAAP financial measures used by the Company's management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of its peer companies.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; net loss on extinguishment of debt; and cumulative adjustments attributable to non-controlling interest. The Company may add additional reconciling items to its core earnings calculation in the future if appropriate.

The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results. The Company excludes the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, the majority of the Company's mortgage-backed securities are classified as available-for-sale securities, and changes in the valuation of these securities are recorded in other comprehensive income on its condensed consolidated balance sheet. The Company elected the fair value option for its mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in the condensed consolidated statement of operations. In addition, certain gains and losses represent one-time events.

The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:


Three Months Ended


Nine Months Ended

$ in thousands, except per share data

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Net income (loss) attributable to common stockholders

49,127



46,834



129,219



183,091



(38,558)


Adjustments:










(Gain) loss on investments, net

11,873



(11,175)



7,155



2,551



(5,860)


Realized (gain) loss on derivative instruments, net (1)

(19,503)



40,229



(1,347)



5,808



62,222


Unrealized (gain) loss on derivative instruments, net (1)

95



(6,682)



(60,419)



(20,025)



150,842


Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)

8,803



(15,559)



(25,963)



(20,904)



(39,175)


(Gain) loss on foreign currency transactions, net (3)

(1,504)



(1,731)



1,340



(3,748)



6,007


Amortization of net deferred (gain) loss on de-designated interest rate swaps(4)

(6,438)



(6,369)



(4,831)



(19,105)



11,331


Net loss on extinguishment of debt

1,344



526





6,581




Subtotal

(5,330)



(761)



(84,065)



(48,842)



185,367


Cumulative adjustments attributable to non-controlling interest

67



10



1,060



616



(2,289)


Preferred stock dividend declared but not accumulated (5)

5,211







5,211




Core earnings

49,075



46,083



46,214



140,076



144,520


Basic income (loss) per common share

0.44



0.42



1.16



1.64



(0.34)


Core earnings per share attributable to common stockholders (6)

0.44



0.41



0.41



1.26



1.29




(1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the
following components:




Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Realized gain (loss) on derivative instruments, net

19,503



(40,229)



1,347



(5,808)



(62,222)


Unrealized gain (loss) on derivative instruments, net

(95)



6,682



60,419



20,025



(150,842)


Contractual net interest expense

(17,453)



(19,966)



(26,388)



(60,313)



(80,464)


Gain (loss) on derivative instruments, net

1,955



(53,513)



35,378



(46,096)



(293,528)




(2) U.S. GAAP realized and unrealized credit derivative income (loss), net on the condensed consolidated statements of operations includes the
following components:




Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net

(8,803)



15,559



25,963



20,904



39,175


GSE CRT embedded derivative coupon interest

5,873



5,844



5,963



17,524



18,389


Realized and unrealized credit derivative income (loss), net

(2,930)



21,403



31,926



38,428



57,564




(3) U.S. GAAP other investment income (loss), net on the condensed consolidated statements of operations includes the
following components:




Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Dividend income

809



802



786



2,427



2,390


Gain (loss) on foreign currency transactions, net

1,504



1,731



(1,340)



3,748



(6,007)


Other investment income (loss), net

2,313



2,533



(554)



6,175



(3,617)




(4) U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the
following components:




Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Interest expense on repurchase agreement borrowings

52,345



42,441



29,723



131,031



86,621


Amortization of net deferred (gain) loss on de-designated interest rate swaps

(6,438)



(6,369)



(4,831)



(19,105)



11,331


Repurchase agreements interest expense

45,907



36,072



24,892



111,926



97,952




(5) Preferred stock dividend declared but not accumulated is a timing adjustment related to the first dividend declaration on
Series C Preferred Stock. On September 14, 2017, the Company declared a dividend on Series C Preferred Stock that
covers the period from the date of issuance, August 16, 2017, to but not including the dividend payment date, December
27, 2017. The Company adjusted core earnings for the period ended September 30, 2017 to exclude the portion of the
dividend declared for the period from October 1, 2017 through December 26, 2017 because the Company does not
consider the future unaccumulated portion of the dividend a current component of its capital costs.



(6) Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted
average number of common shares outstanding.


Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net. The Company includes its GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense because the Company does not consider the amortization a current component of its borrowing costs.

The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:


Three Months Ended


September 30, 2017


June 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

140,389


3.22

%


127,048


3.17

%


118,147


2.94

%

Add: GSE CRT embedded derivative
coupon interest recorded as
realized and unrealized credit
derivative income (loss), net

5,873


0.14

%


5,844


0.15

%


5,963


0.15

%

Effective interest income

146,262


3.36

%


132,892


3.32

%


124,110


3.09

%


Nine Months Ended


September 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

392,074


3.15

%


364,093


3.10

%

Add: GSE CRT embedded derivative
coupon interest recorded as
realized and unrealized credit
derivative income (loss), net

17,524


0.14

%


18,389


0.16

%

Effective interest income

409,598


3.29

%


382,482


3.26

%

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:


Three Months Ended


September 30, 2017


June 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds

Total interest expense

54,175


1.43

%


44,111


1.26

%


33,258



0.94

%

Add (Less): Amortization of net
deferred gain (loss) on de-
designated interest rate swaps

6,438


0.17

%


6,369


0.18

%


4,831



0.14

%

Add: Contractual net interest expense
on interest rate swaps recorded
as gain (loss) on derivative
instruments, net

17,453


0.46

%


19,966


0.57

%


26,388



0.74

%

Effective interest expense

78,066


2.06

%


70,446


2.01

%


64,477



1.82

%


Nine Months Ended


September 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Cost of Funds /
Effective Cost
of Funds


Reconciliation


Cost of Funds /
Effective Cost
of Funds

Total interest expense

136,654


1.26

%


122,948


1.19

%

Add (Less): Amortization of net deferred gain (loss) on de-
designated interest rate swaps

19,105


0.18

%


(11,331)


(0.11)

%

Add: Contractual net interest expense on interest rate swaps
recorded as gain (loss) on derivative instruments, net

60,313


0.56

%


80,464


0.78

%

Effective interest expense

216,072


2.00

%


192,081


1.86

%

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:


Three Months Ended


September 30, 2017


June 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

86,214


1.79

%


82,937


1.91

%


84,889


2.00

%

Add (Less): Amortization of net
deferred (gain) loss on de-
designated interest rate swaps

(6,438)


(0.17)

%


(6,369)


(0.18)

%


(4,831)


(0.14)

%

Add: GSE CRT embedded derivative
coupon interest recorded as
realized and unrealized credit
derivative income (loss), net

5,873


0.14

%


5,844


0.15

%


5,963


0.15

%

Less: Contractual net interest expense
on interest rate swaps recorded
as gain (loss) on derivative
instruments, net

(17,453)


(0.46)

%


(19,966)


(0.57)

%


(26,388)


(0.74)

%

Effective net interest income

68,196


1.30

%


62,446


1.31

%


59,633


1.27

%


Nine Months Ended


September 30, 2017


September 30, 2016

$ in thousands

Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

255,420


1.89

%


241,145


1.91

%

Add (Less): Amortization of net deferred (gain) loss on
de-designated interest rate swaps

(19,105)


(0.18)

%


11,331


0.11

%

Add: GSE CRT embedded derivative coupon interest
recorded as realized and unrealized credit derivative
income (loss), net

17,524


0.14

%


18,389


0.16

%

Less: Contractual net interest expense on interest rate swaps
recorded as gain (loss) on derivative instruments, net

(60,313)


(0.56)

%


(80,464)


(0.78)

%

Effective net interest income

193,526


1.29

%


190,401


1.40

%

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of September 30, 2017 and June 30, 2017. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity. The Company presents a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes presenting the Company's repurchase agreement debt-to-equity ratio, when considered together with U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

September 30, 2017

$ in thousands

Agency

RMBS

Residential
Credit (1)

Commercial
Credit (2)

Exchangeable
Senior Notes
and Other

Total

Investments

12,869,842


2,280,913


3,412,470



18,563,225


Cash and cash equivalents (3)

30,453


15,569


27,508



73,530


Derivative assets, at fair value (4)

7,394





7,394


Other assets

82,161


6,135


66,397


3,982


158,675


Total assets

12,989,850


2,302,617


3,506,375


3,982


18,802,824








Repurchase agreements

11,115,979


1,688,915


1,283,944



14,088,838


Secured loans (5)

517,771



1,132,229



1,650,000


Exchangeable senior notes, net




157,380


157,380


Derivative liabilities, at fair value

39,292



1,339



40,631


Other liabilities

162,669


17,566


29,995


351


210,581


Total liabilities

11,835,711


1,706,481


2,447,507


157,731


16,147,430








Total equity (allocated)

1,154,139


596,136


1,058,868


(153,749)


2,655,394


Adjustments to calculate repurchase agreement debt-to-
equity ratio:






Net equity in unsecured assets and exchangeable
senior notes (6)



(303,673)


153,749


(149,924)


Collateral pledged against secured loans

(598,870)



(1,309,570)



(1,908,440)


Secured loans

517,771



1,132,229



1,650,000


Equity related to repurchase agreement debt

1,073,040


596,136


577,854



2,247,030


Debt-to-equity ratio (7)

10.1


2.8


2.3


NA


6.0


Repurchase agreement debt-to-equity ratio (8)

10.4


2.8


2.2


NA


6.3




(1)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(2)

Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

June 30, 2017

$ in thousands

Agency

RMBS

Residential
Credit (1)

Commercial
Credit (2)

Exchangeable
Senior Notes
and Other

Total

Investments

10,852,753


2,453,015


3,079,693



16,385,461


Cash and cash equivalents (3)

29,985


18,653


15,431



64,069


Derivative assets, at fair value (4)

11,005





11,005


Other assets

132,267


6,950


70,200


3,979


213,396


Total assets

11,026,010


2,478,618


3,165,324


3,979


16,673,931








Repurchase agreements

9,227,679


1,792,375


1,098,894



12,118,948


Secured loans (5)

506,909



1,143,091



1,650,000


Exchangeable senior notes, net




217,804


217,804


Derivative liabilities, at fair value

43,047



1,100



44,147


Other liabilities

195,806


20,960


62,951


3,221


282,938


Total liabilities

9,973,441


1,813,335


2,306,036


221,025


14,313,837








Total equity (allocated)

1,052,569


665,283


859,288


(217,046)


2,360,094


Adjustments to calculate repurchase agreement debt-to-
equity ratio:






Net equity in unsecured assets and exchangeable
senior notes (6)



(302,177)


217,046


(85,131)


Collateral pledged against secured loans

(596,514)



(1,345,151)



(1,941,665)


Secured loans

506,909



1,143,091



1,650,000


Equity related to repurchase agreement debt

962,964


665,283


355,051



1,983,298


Debt-to-equity ratio (7)

9.2


2.7


2.6


NA


5.9


Repurchase agreement debt-to-equity ratio (8)

9.6


2.7


3.1


NA


6.1




(1)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(2)

Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

Average Asset Balances

The table below presents information related to the Company's average earning assets for the following periods.


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Average Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

3,223,684


3,374,039


3,409,739


3,370,401


2,409,219

30 year fixed-rate, at amortized cost

6,486,613


4,852,769


3,613,116


5,274,103


3,784,762

ARM, at amortized cost

258,304


276,272


332,801


275,010


368,409

Hybrid ARM, at amortized cost

1,847,709


1,996,026


2,703,529


2,043,497


2,893,860

Agency - CMO, at amortized cost

287,364


309,113


362,825


308,159


383,995

Non-Agency RMBS, at amortized cost

1,339,639


1,483,354


2,079,681


1,537,013


2,243,941

GSE CRT, at amortized cost

790,886


796,050


612,531


784,301


641,445

CMBS, at amortized cost

2,920,587


2,663,808


2,532,667


2,721,306


2,610,204

U.S. Treasury securities, at amortized cost



169,041



60,610

Commercial loans, at amortized cost

279,840


278,052


272,614


277,642


263,532

Average earning assets

17,434,626


16,029,483


16,088,544


16,591,432


15,659,977















Average Earning Asset Yields (2):







Agency RMBS:







15 year fixed-rate

1.95%


1.97%

1.86%


1.99%


1.97%

30 year fixed-rate

2.73%


2.83%

2.55%


2.73%


2.76%

ARM

2.35%


2.27%

2.18%


2.31%


2.31%

Hybrid ARM

2.19%


2.29%

2.06%


2.26%


2.15%

Agency - CMO

2.71%


0.34%

2.42%


1.16%


2.60%

Non-Agency RMBS

6.56%


5.90%

5.06%


5.97%


4.90%

GSE CRT (3)

2.74%


2.62%

0.98%


2.51%


0.89%

CMBS

4.52%


4.45%

4.28%


4.40%


4.34%

U.S. Treasury securities

—%


—%

1.09%


—%


1.15%

Commercial loans

8.86%


8.69%

8.27%


8.69%


8.35%

Average earning asset yields

3.22%


3.17%

2.94%


3.15%


3.10%



(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized
cost basis.

(2)

Average earning asset yields for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of the amortized cost of the investments. All yields are annualized.

(3)

GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.

Average Borrowings and Equity Balances

The table below presents information related to the Company's average borrowings and average equity for the following periods.


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2017


June 30, 2017


September 30,
2016


September 30,
2017


September 30,
2016

Average Borrowings (1):










Agency RMBS (2)

10,919,243


9,665,651


9,334,305


10,105,277


8,823,633

Non-Agency RMBS

1,062,528


1,155,529


1,681,136


1,208,702


1,812,516

GSE CRT

661,095


655,715


428,798


639,234


451,024

CMBS (2)

2,367,648


2,239,854


2,213,541


2,260,356


2,187,871

U.S. Treasury securities



168,689



73,310

Exchangeable senior notes

185,930


238,530


396,213


256,261


395,599

Total average borrowings

15,196,444


13,955,279


14,222,682


14,469,830


13,743,953

Maximum borrowings during the period (3)

15,896,218


13,986,752


14,381,178


15,896,218


14,381,178





















Average Cost of Funds (4):










Agency RMBS (2)

1.28

%


1.10

%


0.67

%


1.09

%


0.66

%

Non-Agency RMBS

2.67

%


2.47

%


1.94

%


2.42

%


1.86

%

GSE CRT

2.69

%


2.51

%


2.16

%


2.50

%


2.14

%

CMBS (2)

1.91

%


1.63

%


1.14

%


1.63

%


1.13

%

U.S. Treasury securities

%


%


0.26

%


%


0.25

%

Exchangeable senior notes

5.86

%


5.88

%


5.67

%


5.85

%


5.68

%

Cost of funds

1.43

%


1.26

%


0.94

%


1.26

%


1.19

%

Interest rate swaps average fixed pay rate (5)

2.09

%


2.13

%


2.13

%


2.12

%


2.11

%

Interest rate swaps average floating receive rate (6)

(1.24)

%


(1.06)

%


(0.56)

%


(1.07)

%


(0.49)

%

Effective cost of funds (non-GAAP measure) (7)

2.06

%


2.01

%


1.82

%


2.00

%


1.86

%

Average Equity (8):

2,206,307


2,185,448


2,130,097


2,173,671


2,032,636

Average debt-to-equity ratio (average during period)

6.9

x


6.4

x


6.7x


6.7

x


6.8

x

Debt-to-equity ratio (as of period end)

6.0

x


5.9

x


6.0x


6.0

x


6.0

x



(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.

(2)

Agency RMBS and CMBS average borrowings and cost of funds include borrowings under repurchase agreements and secured loans.

(3)

Amount represents the maximum borrowings at month-end during each of the respective periods.

(4)

Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by the Company's average borrowings.

(5)

Interest rate swaps average fixed pay rate is calculated by dividing annualized contractual swap interest expense by the Company's average notional balance of interest rate swaps.

(6)

Interest rate swaps average floating receive rate is calculated by dividing annualized contractual swap interest income by the Company's average notional balance of interest rate swaps.

(7)

For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."

(8)

Average equity is calculated based on the weighted month-end balance of total equity excluding equity attributable to preferred stockholders.


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SOURCE Invesco Mortgage Capital Inc.