Thornburg (NYSE:TMA)
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Thornburg Mortgage, Inc. (NYSE:TMA), today reported net income for the
quarter ended September 30, 2008, of $140.0 million, or $1.23 diluted
earnings per common share based on a weighted average of 110.1 million
common shares and penny warrants outstanding. Earnings for the quarter
were significantly impacted by the following items:
$654.7 million loss on further impairment of the company’s
MBS portfolio due to further declines in MBS fair value prices and an
$8.2 million net loss on the sale of ARM loans and REO
$594.6 million fair value gain related to the Senior Subordinated
Secured Notes due 2015 (the “Senior
Subordinated Notes”)
$160.2 million fair value gain related to the Principal
Participation Agreement (the “PPA”)
and Additional Warrant Liability
Net interest income was $80.1 million compared to $53.3 million for the
prior quarter of 2008, or 50% more than the prior quarter. Third quarter
operating expenses as a percentage of average assets was 0.32% at
September 30, 2008.
Override Agreement Lender Status
The company and the counterparties to the Override Agreement continue to
be in active negotiations to resolve the outstanding interpretative
issues under the Override Agreement. As of September 30, 2008, $267.3
million of previously restricted cash was applied to the outstanding
reverse repurchase agreement balances. Securities collateralizing the
reverse repurchase agreements had a face amount of $7.3 billion and a
carrying value of $4.8 billion at September 30, 2008.
Credit Performance of ARM Portfolio
The credit performance of the company’s
portfolio of ARM Assets continues to be favorable compared to industry
benchmarks, however actual loss and delinquency experience has increased
as mortgage credit performance generally has deteriorated. The company’s
originated and purchased mortgage loan portfolio has very low
delinquencies and realized losses. The company believes that, despite
downgrades, its MBS portfolio still has substantial credit protection to
absorb losses on the underlying mortgage collateral. At September 30,
2008, 98.1% of the company’s ARM asset
portfolio was high quality, of which 15.0% represented purchased ARM
assets rated AAA or AA based on the highest rating received and the
remaining 83.1% comprised high quality ARM loans. All of the mortgage
assets in the company’s Purchased ARM assets
portfolio are credit enhanced through credit subordination as opposed to
being credit guaranteed by a private sector mono-line credit insurer.
During the third quarter, the company continued to experience credit
downgrades from the various credit rating agencies on its mortgage
assets portfolio. As of September 30, 2008, the company experienced
downgrades on $2.0 billion of unpaid principal balance and $1.2 billion
of carrying value of its mortgage assets portfolio. Since September 30,
2008, there have been additional credit downgrades announced by the
credit rating agencies. As of November 3, 2008, an additional $570.0
million of unpaid principal balance and $372.0 million of carrying value
of mortgage assets have been downgraded. After taking into consideration
all of these downgrades, 70.3% of the carrying value of the securities
collateralizing the reverse repurchase agreements remains AA or AAA
rated and the majority of this portfolio continues to have substantial
credit protection in the form of credit subordination. Despite the
downgrades, the company believes that any ultimate realization of losses
will be less than the deeply discounted carrying value of its mortgage
asset portfolio.
Purchased securitized loans comprised 1.5% of the company’s
ARM assets at September 30, 2008—assets in
which the company has retained the credit risk associated with its
ownership and which have a total principal balance of underlying loans
of $5.3 billion. Accordingly, the company has currently estimated credit
losses in the form of a nonaccretable discount of $22.4 million, or
0.42% of the balance of these securities.
At September 30, 2008, 60-day plus delinquent loans and REO properties
in the company’s originated and bulk
purchased loans totaled 1.58% of its $21.4 billion portfolio of
securitized and unsecuritized ARM loans, up from 0.81% at June 30, 2008,
but still significantly below the industry’s
conventional prime ARM loan delinquency ratio of 8.25% at June 30, 2008
as reported by the Mortgage Bankers Association. One category of bulk
purchased loans, specifically $528.0 million of pay option ARMs
purchased from one seller, continues to exhibit substantially higher
delinquencies than the rest of the company’s
loan portfolio and is effectively doubling the company’s
total portfolio delinquency rate. The company is actively managing these
delinquencies so as to minimize losses as best as possible. In the third
quarter, the company realized loan losses and charge-offs relating to
REO of $6.1 million. The company believes that the impairments totaling
$631.3 million reflected in its securitized ARM loans greatly exceeded
all probable credit losses inherent in the ARM loan portfolio at
September 30, 2008, and that the substantial majority of such impairment
relates to current market conditions and liquidity risk.
Consistent with broader market conditions and a lack of ability to
securitize loans at reasonable prices, Thornburg Mortgage did not
complete a securitization in the third quarter of 2008. Instead, the
company completed a sale of $111.2 million in ARM loans at a loss of
$13.2 million during the third quarter of 2008 in order to reduce its
warehouse financing. Subsequent to September 30, 2008, the company has
an agreement to sell an additional $92.2 million of loans and upon
settlement later this month expects to completely pay of its warehouse
financing with these proceeds.
During the quarter ended September 30, 2008, Thornburg Mortgage also did
not originate or purchase any ARM assets.
Third Quarter Results
The company's third quarter earnings of $140.0 million were primarily
due to decreases in the fair value of the PPA and additional warrant
liability and the Senior Subordinated Notes of $160.2 million and $594.6
million, respectively, partially offset by a net loss on ARM assets of
$662.9 million primarily due to continued declines in the fair value of
its MBS portfolio. However, aside from these fair market value related
income items, net interest income, a significant component of core
ongoing earnings, was $80.1 million compared to $53.3 million for the
prior quarter, or 50% more than the prior quarter.
The portfolio yield during the third quarter of 2008 increased 22 basis
points to 7.17% from 6.95% in the prior quarter, primarily due to a 30
basis point increase in accretion of asset discounts.
Thornburg Mortgage’s average cost of funds
decreased to 6.01% in the third quarter from 6.19% in the prior quarter.
This resulted in an average net interest margin of 1.15% for the
quarter. The primary cause of the decrease in the company’s
cost of funds from the second quarter of 2008 was a decrease in the
one-month LIBOR rate during the period.
Premium amortization for the quarter ended September 30, 2008 resulted
in accretion of $81.7 million for the third quarter of 2008, which
reflects an actual CPR for the quarter of 12%, down from 16% and 14%,
respectively, for the quarters ended June 30, 2008 and September 30,
2007, respectively. Largely as a result of the other-than-temporary
impairment charges taken in the fourth quarter of 2007 and the first
half of 2008, the company owns its mortgage assets at a net discount of
9.65%, which suggests that any increase in prepayments will have a
positive impact on portfolio spreads and margins.
Book value at September 30, 2008 was a deficit of $(34.20) per common
share, as compared to $(36.76) per common share at June 30, 2008. The
decrease in the per share deficit is principally due to the PPA and
additional warrant liability fair value improvement and other factors
discussed above, partially offset by a net decrease in the unrealized
fair value of the company’s purchased ARM
assets and hedging instruments recorded in accumulated other
comprehensive income.
Reverse Stock Split
On September 26, 2008, the company effected a one-for-ten reverse split
of its common stock. As a result of the reverse split, every 10 shares
of (old) common stock, par value $0.01 per share, which were outstanding
as of September 26, 2008, the effective date, were combined into one
share of (new) common stock, par value of $0.01 per share. All
historical numbers relating to shares of common stock have been adjusted
to reflect the one-for-ten reverse split.
The reverse stock split was implemented to cure a deficiency under
Section 802.01C of the New York Stock Exchange Listed Company Manual
that resulted from the average closing price of the company’s
common stock falling below $1.00 for more than 30 consecutive trading
days.
Interest “Payment in Kind”
Consents
On October 1, 2008, Thornburg Mortgage announced it had received
consents, effective September 30, 2008, from the holders of
approximately 98.6% of the aggregate principal amount outstanding of the
Senior Subordinated Notes to accept the September 30th interest payment
on their notes in the form of additional Senior Subordinated Notes in
principal amount equal to the cash interest payable. All Senior
Subordinated Notes will continue to bear interest at a rate of 18% per
annum until the successful completion of the Exchange Offer and Consent
Solicitation and until the additional warrants are issued to the Senior
Subordinated Note holders. As consideration for their consents,
consenting holders received a consent fee, at their election, of either
(i) 6.5217 shares of the company’s common
stock in respect of each $1,000 principal amount of the Senior
Subordinated Notes (the "Consent Stock") or (ii) additional Senior
Subordinated Notes with an aggregate principal amount equal to the
market value of the total number of shares of Consent Stock on the date
of issuance to which such holder would have been entitled.
Exchange Offer and Consent Solicitation
On October 31, 2008, the company announced that it is extending the
expiration of its Exchange Offer and Consent Solicitation (the “Exchange
Offer”) for all outstanding shares of its
8.00% Series C Cumulative Redeemable Preferred Stock, Series D Adjusting
Rate Cumulative Redeemable Preferred Stock, 7.50% Series E Cumulative
Convertible Redeemable Preferred Stock and 10% Series F Cumulative
Convertible Redeemable Preferred Stock (collectively, the “Preferred
Stock”) from 5:00 p.m., New York City time,
on October 31, 2008 to 5:00 p.m., New York City time, on November 19,
2008, unless further extended or terminated by the company. Each share
of Preferred Stock tendered in the Exchange Offer will receive three
shares of common stock. As of November 3, 2008, the Company had received
tenders for 71.0% of the outstanding shares of its Series C Preferred
Stock, 73.3% of the outstanding shares of its Series D Preferred Stock,
75.1% of the outstanding shares of its Series E Preferred Stock and
66.2% of the outstanding shares of its Series F Preferred Stock. Holders
of the Preferred Stock that have tendered their shares may withdraw
their shares at any time.
The company believes that successfully completing the amended Exchange
Offer remains a critical step in order for the company to be able to
resume normalized business operations as doing so will reduce the
interest rate on its Senior Subordinated Notes from 18% to 12%, which
will greatly reduce the cash demands on the company. In addition, the
successful completion of the amended Exchange Offer will result in the
termination of the PPA, an agreement which provides to each investor who
also purchased Senior Subordinated Notes an interest in the then unpaid
principal amount of a specific portfolio of mortgage-backed securities
and rights under any repurchase agreements, reverse repurchase
agreements, swap agreements, loan agreements and other agreements to
which Thornburg Mortgage is a party as well as other consideration
outlined in the PPA. The termination of the PPA is also integral to the
company being able to maintain its REIT status which provides for
significant tax savings and higher returns to shareholders during
profitable periods.
The Exchange Offer is being made to holders of Preferred Stock in
reliance upon the exemption from the registration requirements of the
Securities Act of 1933, as amended, afforded by Section 3(a)(9) thereof.
Investor inquiries about the Exchange Offer should be directed to the
company at 866-222-2093 (toll free). Holders of the Preferred Stock are
urged to read the Offering Circular dated July 23, 2008 and all
amendments and supplements thereto, which have been filed with the SEC,
and the amended and restated Offering Circular filed on November 3,
2008. Requests for copies of the Offering Circular, all amendments and
supplements thereto and related documents may be directed to Georgeson
Inc., the information agent for the Exchange Offer, at 866-399-8748
(toll free). The Offering Circular, all amendments and supplements
thereto and other information regarding the Exchange Offer may also be
obtained through the SEC's Web site at www.sec.gov
and the company’s Web site at: www.thornburgmortgagetender.com.
Conference Call Information
The company will host a dial-in conference call from 10:30 a.m. to noon
EST on Wednesday, November 12, 2008, to discuss the third-quarter
results. The U.S. teleconference dial-in number is (800) 762-6085 and
the international dial-in number is (480) 629-9025. A replay of the call
will be available beginning at 1:30 p.m. EST on November 12, 2008 and
ending at 1:59 p.m. EST on December 12, 2008. The replay dial-in number
is (800) 475-6701 in the U.S. and (320) 365-3844 internationally. The
access code for both replay numbers is 968830.
The conference call will also be archived on the company's web site
throughout the fourth quarter of 2008. The conference call will also be
web cast live through a link at: http://www.talkpoint.com/viewer/starthere.asp?Pres=124117
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2008
December 31, 2007
ASSETS
(Unaudited)
ARM Assets:
Purchased ARM Assets:
ARM securities, net
$
3,596,872
$
10,046,818
Purchased Securitized Loans, net
393,434
647,225
Purchased ARM Assets
3,990,306
10,694,043
ARM Loans:
Securitized ARM Loans, net
824,852
2,557,961
ARM Loans Collateralizing Debt, net
20,433,846
21,383,177
ARM loans held for sale or securitization, net
157,120
549,359
ARM Loans
21,415,818
24,490,497
ARM Assets
25,406,124
35,184,540
Cash and cash equivalents
16,699
149,109
Restricted cash and cash equivalents
354,600
538,505
Liquidity Reserve Fund
113,457
-
Hedging Instruments
6,139
17,523
Accrued interest receivable
120,812
190,484
Other assets
267,491
192,200
Total assets
$
26,285,322
$
36,272,361
LIABILITIES
Reverse Repurchase Agreements
$
4,638,927
$
11,547,354
Asset-backed CP
-
400,000
Collateralized Mortgage Debt
20,362,739
21,246,086
Whole loan financing facilities
72,777
453,500
Senior Notes
305,000
305,000
Senior Subordinated Notes
406,964
-
Subordinated Notes
240,000
240,000
PPA and Additional Warrant Liability
423,355
-
Hedging Instruments
11,557
123,936
Accrued interest payable
62,379
90,260
Dividends payable
-
47,330
Accrued expenses and other liabilities
84,959
59,161
26,608,657
34,512,627
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred Stock: par value $0.01 per share
1,001,589
832,485
Common Stock: par value $0.01 per share; 3,955,985,785 and
458,585,500 shares authorized, respectively; 38,736,393 and
13,993,600 shares issued and outstanding, respectively
387
140
Warrants
7,805
-
Additional paid-in-capital
3,329,734
2,897,462
Accumulated other comprehensive loss
(97,160
)
(172,432
)
Accumulated deficit
(4,565,690
)
(1,797,921
)
(323,335
)
1,759,734
Total liabilities and shareholders’
equity (deficit)
$
26,285,322
$
36,272,361
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30,
2008
2007
Interest income from ARM Assets and cash equivalents
$
498,639
$
621,980
Interest expense on borrowed funds
(418,570
)
(585,829
)
Net interest income
80,069
36,151
Servicing income, net
1,792
4,125
Mortgage services income, net
1,091
575
Gain (Loss) on ARM Assets, net
(662,904
)
(1,099,246
)
Gain (Loss) on Derivatives, net
(12,669
)
(25,271
)
Gain (Loss) on extinguishment of debt
-
-
PPA and Additional Warrant Liability fair value changes
160,192
-
Senior Subordinated Notes fair value changes
594,553
-
Net noninterest income (loss)
82,055
(1,119,817
)
Reversal of (provision for) loan losses
-
(2,628
)
Management fee
(6,000
)
(6,183
)
Performance fee
-
-
Long-term incentive awards
(320
)
15,490
Other operating expenses
(16,047
)
(9,192
)
Income (loss) before provision for (benefit from) income taxes
139,757
(1,086,179
)
Provision for (benefit from) income taxes
290
(12,000
)
NET INCOME (LOSS)
$
140,047
$
(1,098,179
)
Net income (loss)
$
140,047
$
(1,098,179
)
Dividends declared on Preferred Stock
-
(10,238
)
Net income (loss) available to common shareholders
$
140,047
$
(1,108,417
)
Basic earnings (loss) per common share
$
2.74
$
(89.41
)
Diluted earnings (loss) per common share
$
1.23
$
(89.41
)
Dividends declared per common share
$
-
$
-
Thornburg Mortgage is a leading single-family residential mortgage
lender focused principally on prime and super-prime borrowers seeking
jumbo and super-jumbo adjustable-rate mortgages.
This press release contains forward-looking statements within the
meaning of the federal securities laws. These forward-looking statements
are based on current expectations, estimates and projections, and are
not guarantees of future performance, events or results. Actual results
and developments could differ materially from those expressed in or
contemplated by the forward-looking statements due to a number of
factors, including but not limited to: the ongoing impact of the March
31, 2008 financing transaction; the company’s
ability to meet the ongoing conditions of the Override Agreement and
successfully conclude negotiations with the parties thereto with respect
to an amended and restated agreement; general economic conditions; the
company’s ability to meet its interest
payment obligations under its outstanding debt securities and other
payment obligations; ongoing volatility in the mortgage and
mortgage-backed securities industry; the company’s
ability to complete the Exchange Offer and terminate the PPA; the company’s
ability to raise additional capital; the company’s
ability to retain or sell additional assets; further downgrades on our
mortgage securities portfolio, delinquency rates for loans, changes in
interest rates and other risk factors discussed in the company's SEC
reports, including its most recent quarterly report on Form 10-Q, annual
report on Form 10-K/A, its current reports on Form 8-K, its Proxy
Statement for its Annual Meeting held on June 12, 2008, its Offering
Circular, as amended to date, and its Registration Statement on Form
S-3. These forward-looking statements speak only as of the date on which
they are made and, except as required by law, the company does not
intend to update such statements to reflect events or circumstances
arising after such date.