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Anworth Mortgage Asset (NYSE:ANH)

Q4 2012 Earnings Call

February 08, 2013 1:00 pm ET

Executives

Joseph Lloyd McAdams - Chairman of The Board, Chief Executive Officer and President

Joseph E. McAdams - Executive Vice President, Chief Investment Officer and Director

Analysts

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Howard Henick

Stephen Laws - Deutsche Bank AG, Research Division

Operator

Good afternoon, and welcome to the Anworth Mortgage Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions]

Before we begin the call, I will make a brief introductory statement. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, and we hereby claim the protection of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to any such forward-looking statements.

Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words may, will, believe, expect, anticipate, intend, estimate, assume, continue or other similar terms or variations of those terms or the negative of those terms.

You should not rely on our forward-looking statements because the matters they describe are subject to assumptions known as unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.

Statements regarding the following subjects are forward-looking by their nature: our business and the investment strategy, market trends and risks, assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities.

These forward-looking statements are subject to various risks and uncertainties including those relating to: changes in interest rates; changes in the market value of our mortgage-backed securities; changes in the yield curve; the availability of mortgage-backed securities for purchase; increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities; our ability to use borrowing to finance our assets, and if available, the terms of any financing risks associated with investing in mortgage-related assets; changes in business conditions and the general economy, including the consequences of actions by the U.S. government and other foreign governments to address the global financial crisis; implementation of or changes in government regulations or programs affecting our business; our ability to maintain our qualification as a real estate investment trust under the Internal Revenue Code; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and management's ability to manage our growth. These and other risks, uncertainties and factors include those discussed under the heading Risk Factors in our Annual Report on Form 10-K and other reports that we file from time to time with the Securities and Exchange Commission could cause our actual results to differ materially and adversely from those projected in any forward-looking statements we make.

All forward-looking statements speak only as of the date they were made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements that may be made today or that reflect any change in our expectations or any change in events, conditions or circumstances based on which -- any such statements are made. Thank you.

Please note that this today's event is being recorded.

I would now like to introduce Mr. Lloyd McAdams, Chairman and Chief Executive Officer of Anworth. Please go ahead, sir.

Joseph Lloyd McAdams

Good morning, and good afternoon, ladies and gentlemen. I'm Lloyd McAdams, and I welcome you to this conference call in which we will summarize the company's recent activities and answer your questions about the past and the future during our question-and-answer session.

First, I will briefly describe recent events and then I will comment on current plans. During the fourth quarter of 2012, Anworth earned net income to common stockholders of $21.9 million, which was $0.15 per diluted share. This amount includes a realized gain of $4.4 million or $0.03 per diluted share. Also, during this period, our net interest income spread declined from 1.09% at September 30 to 0.94% at December 31, 2012. Stockholder equity available to our common shareholders at quarter end was approximately $1,014,000,000, which equates to a book value of $7.14 per share based on approximately 142 million shares of common stock outstanding as of December 31. This represents a decrease from our book value of $7.45 per share, which we reported on September 30.

The unrealized gain component of our book value is therefore 79.8 million, which means that the book value or historical book value would be described and calculated as $6.58.

The fair value of Anworth's portfolio of Agency mortgage-backed securities at quarter end was approximately $9.24 billion, which we assigned to 3 major categories of Agency mortgage-backed securities. The first category is ARMs whose interest rates reset within 1 year contractually; second category is hybrid ARMs whose interest rates reset after 1 year; and lastly, a fixed-rate mortgage-backed securities of 15- and 30-year maturities who, of course, interest rates never reset.

Repurchase agreement financing of our Agency mortgage-backed security portfolio was approximately $8.02 billion at December 31 and was 7.13x our total equity, which consists of common stockholder equity plus all preferred stock and junior subordinated notes. If calculated on our common equity alone, it would be 7.91x our common equity.

Turning to fixed rate. Interest rate swaps were $3.16 billion, which represents approximately 39% of our outstanding repurchase agreement balance at December 31. Anworth, as you know, is different in one regard from other or most mortgage REITs in that a significant portion of our portfolio, approximately 21%, consists of seasonal adjustable-rate mortgages whose coupons will contractually reset within the next 12 months. If for purposes of this calculation, we were to eliminate the repurchase agreements, which finance these 1-year reset ARMs because of their significantly reduced interest rate sensitivity, the ratio of our swaps to our outstanding purchase agreement balance would increase from approximately 39% as reported to approximately 54 -- 52% as adjusted.

While the size of our swap position and its proportion relative to our assets is a significant component of our balance sheet, I believe that the position's average remaining term of 34 months, or nearly 3 years, is more significant. Our management's current decision about the size and the term of this swap position is probably the major decision that we make that determines our current return on equity, and therefore, our dividend yield.

We should note that when determining the nature of a prudent hedging strategy for all of our assets, we do take into account the specific characteristics of each of those assets in which we have invested in the 3 major categories of MBS, which I referred to just a moment ago.

The weighted average coupon of our portfolio of Agency MBS was 2.98% at quarter end. The weighted average term to reset of Anworth's adjustable-rate agency MBS was 37 months at quarter end. After adjusting for interest rates paid through our swap transactions, the average interest rate on our repurchase agreement liabilities was 1.12% and the average term to interest rate reset of our liabilities taking these swaps into account was 420 days.

The CPR of Anworth's portfolio of Agency mortgage-backed securities during the quarter was approximately 26%. The average amortized cost of Anworth's portfolio of Agency MBS was 103.07%, which is a slight increase from the previous quarter.

As to our current plans, I believe there are several important subjects. First, as I have described in my letter to stockholders published in our annual report for now more than a decade, our earnings level is determined by 3 primary variables: the amount of interest earned, the amount of interest paid and the amortization of the mortgage-backed security premium that we purchased.

As we reported yesterday for the fourth quarter, our net income relative to the third quarter was, in varying degrees, influenced by each of these 3 variables, we could say, in a negative way. First, the interest rate received -- the interest received declined as ARMs reset to lower levels and new investment yields were lower than our historical portfolio average. Two, our borrowing costs increased as U.S. agency repo borrowing rates continued to rise. And three, the dollar amount of premium amortization increased as our assumptions for future rates of refinancing increased largely due to the current Federal Reserve stimulus and the slight increase in the amount of premium, which we carry on our books, which I mentioned just a moment ago.

Based on our current outlook, each of these variables is likely to continue this trend in the first quarter of 2013, the current quarter.

Secondly, as we have discussed before, if the Federal Reserve System of aggressive acquisition of mortgage-backed securities and its multiple quantitative easing programs were to be reduced for whatever reason or even if there was a hint that they might the reduced, I believe that there are parts of the mortgage-backed security market, which will be more vulnerable to larger corrections in prices than others. And therefore, as part of our risk management program, there is also an increased likelihood that we may find reason to sell some of our assets. This would likely produce a realized capital gain that we would then distribute to our stockholders and thereby reduce the unrealized gain portion of our book value, which I referred to earlier.

While we expect the operating earnings coming from net interest spread to continue to decline over the next few quarters if the current environment remains unchanged, we expect that the potential realized gains may either partially offset or exceed this decline.

The third item is that hybrid ARMs are continuing to become less available in today's mortgage origination market. Also, even within this sector, hybrids, which reset within 3 years and also 5 years, are becoming less appealing to homeowners, and therefore, becoming scarce to us. These homeowners seem to have a preference for longer reset hybrids or even fixed-rate mortgage-backed securities. The effect on us will be a greater reliance on longer reset hybrid ARMs and various fixed-rate MBS during the coming quarter and until we see this preference for mortgage origination change.

Today, on the call, we also have Joe McAdams, our Chief Investment Officer and a Director of the company; Thad Brown, our Chief Financial Officer; and Chuck Siegel, our Senior Vice President of Finance.

I would like to now turn the call back over to Jamie, the conference operator, to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bose George from KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Actually my first question is just on incremental spreads, where you're seeing things in the market right now.

Joseph E. McAdams

Sure, hi, Bose, this is Joe. What we saw during the fourth quarter relative to our purchases and our hedging activity were spreads that were approximately in a 115 basis point area. As we look into where we've been so far this quarter, we do see slightly higher yields on both the asset and liability sides, so still see spreads in that area in approximately 100 -- 110 to 120 basis point area. The average during the fourth quarter was 115.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then just given -- it looks like prepayments are pretty stable in your portfolio quarter-over-quarter. And the spreads look, I guess, slightly better than what you have on your balance sheet. Is it fair to think that the downward pressure on spreads might have ended?

Joseph E. McAdams

Well, the spreads, in terms of the realized spread on our portfolio?

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Yes.

Joseph E. McAdams

As Lloyd pointed out in the comments, we will continue to see a decrease in the interest income that we earned because where the current yields are, are still below the average portfolio level. And so I think we would expect potentially to see some reversal as we move forward on the cost of funds side. The fourth quarter is typically a higher repo cost quarter for us. The average repo rate was 47 basis points at the end of the year and our average repo so far year-to-date has been approximately 40 basis points. So one of the negative factors that impacted our spread during the fourth quarter was that repo rates were drifting up, moving into year end, while LIBOR was coming down. So what we saw is the -- some of the effect of the hedging of our swaps was mitigated -- was not helped by the fact that the floating rate we were receiving on the swaps was decreasing during the quarter even though our cost of funds was going up. So I don't think either one of those trends will have the same sort of magnitude in the first quarter going forward. And as you pointed out, relative to CPRs and premium amortization, as we have seen mortgage rates move higher both during the fourth quarter and continuing into 2013, I think we will see a lower realized level of prepayments. Our most recent prepayment report this year on our portfolio came out at approximately 24 CPRs. So I do think we'll see some improvement in those components. Will that, net-net, still offset the decrease in coupons? I still think there will be some downward pressure on our spread in the near term. The other factor that -- it's on the press release, but probably the effect of this won't be felt more till the second quarter is we have $375 million notional in interest rate swaps that mature in less than 12 months. The vast majority of those will mature during the first quarter and all of them will have matured by the mid -- by June 30. So that 3.32% fixed rate that we're paying on those -- some of those legacy swaps will drop off and given -- even though it's not a terribly large balance given the difference in rates, I think that works out to about an 18 basis point decline in the cost on those swaps. So those are positive factors on the premium amortization and interest rate paid side.

Operator

Our next question comes from Howard Henick from ScurlyDog Capital.

Howard Henick

I just have one quick question. I'm sure you watch what other people are doing in this space and you've been very fond, frequently saying there's no secrets here in functional leverage spreads, what have you, which is correct. But I would note among many people, Annaly, Capstead, Agency, all of them are highly respected, all bought back substantial amount of stocks when the book value was appreciably lower than book. I would also note that your book value sank lower than anybody else's, I believe in the low 70, 75 at one point, and you refrained from buying back stock. How can you defend that when all your other competitors see it as obviously the right thing to do and I believe many of the analysts would think it's the right thing to do and yet you continue not to do it. How can you defend that other than as a way to keep assets and keep fees higher?

Joseph Lloyd McAdams

This is Lloyd, I'll be happy to address that question. I have spoken about Anworth's philosophy of repurchasing shares since 1998 when long-term capital management problems caused the mortgage REITs that were in existence then, of which we were one, to drop rather sharply. And I hope I'll expand a little bit on my philosophy of why I think this is the right thing to do to either when to purchase shares back, when not to purchase shares back. And if I can get my thoughts together, I will explain why I think it may make sense for some companies to do it and not for others based on the structure of their portfolio. The first important issue for me is the general idea of book value. I should point out these are my beliefs. This is what I've spent several decades being a bond portfolio manager and it's my understanding of how it all works. I'm not going to say that when I talk to some people about this they don't always agree with me, but I'll do my best to give you a good explanation of how I think about it because I think about it a lot. There's this idea of book value. As everyone knows, portfolios of liquid investments have 2 measures of book value. There is the mark-to-market, mark to the current market book value, which is generally thought of as a good estimate of liquidating value. And then also there is the measure of book value called historical cost. For most investment portfolios, I think it's fair to say that historical cost has little, if any, meaning because the way the mark-to-market book value would become the historical cost, they would -- because the market would go down. The book value of the securities would go down in price. However, in a bond portfolio, totally unlike an equity portfolio, and so when I think of the repurchase of shares, I'm not thinking about an operating company that manufactures widgets and doesn't know how to deploy its capital. I'm thinking of a portfolio that is a bond portfolio, and try to understand and reflect on the ramifications of that. So -- and I should say it is particularly relevant for any adjustable-rate bond portfolio to take this into account if you paid a premium for adjustable-rate securities. When they're floating-rate corporate notes or whether they're mortgage-backed securities, the same thing applies. So I believe that historical cost is probably -- is very relevant and it could actually be more relevant than mark-to-market book value when you think of a portfolio of adjustable-rate mortgages. The reason the mark-to-market portfolio is greater than the historical cost is almost always with both fixed-rate and adjustable-rate assets that interest rates have declined, are resulting in price appreciation of these mortgage-backed securities. However, it's the historical cost that determines that portfolio's, let's call it, it's true yield level. The ROE in a bond portfolio relates more to the historical cost than the current mark-to-market. So selling a bond to gain -- add a gain will almost always result in lower income on the cost of the portfolio in the future if the assets -- if you reinvest the assets at the same type of security and at the same current market interest rates. Now the primary reason why I'm focusing on this historical cost issue and say that it's important with the mortgage-backed security is the speed at which appreciation and a mortgage-backed security portfolio without an increase in interest rates can evaporate because the charging of the unrealized gain against mark-to-market book value, not against historical book value. So the mark-to-market book value can come down dramatically even if interest rates are unchanged. And there's not a lot of assets whether they're stocks or whatever where you can say, if the market's unchanged, the gap between historical book value and mark-to-market book value could change dramatically. And in our case, it certainly does. I'll think of an example. If interest rates were unchanged for 2 years and the prepayment rate was 25% in each of those 2 years, about 1/2 of the difference between mark-to-market and historical cost would disappear with no effect on earnings, resulting -- it would only result in a decline in the mark-to-market book value. That makes it why for earnings calls for now 15 years I have gone out of my way every quarter to state what that difference is in cents per share and also in dollars. This type of phenomenon is rare in almost all other assets like stocks or real estate. So I believe that repurchasing shares at a price, and this is what we've -- which we've done historically. Starting over a decade ago, we have routinely repurchased our shares at more times than not I base my share repurchase on the difference between historical cost and the current stock price. This is I how I think about it, repurchasing shares at a price that is even halfway between the historical book value and the mark-to-market book value. If you own an ARM portfolio and a 25% CPR, it's very likely that the price you will pay 3 years from now will have diluted the core earnings power of your company. It might have added a couple of cents to buying back shares at 5% and 10% below the mark-to-market or even 20% below, but if you're buying it back at prices between those 2 numbers, I

think it is, in the long run, dilutive. And since this historical cost book value is what determines the long-term earning capability of the company, that's why I think it is important. This would be much like paying, say, anything that's worth -- that can buy today for $0.50, but you profoundly believe it could be sold tomorrow or sometime sold for $0.60 but you also know that past that time, relatively near, it could be worth $0.40. It only pays to buy something below where you think you might sell it today if you're going to do something with the money. And here, we're talking about buying it above and below the book value of stocks. So I differentiate my thinking in this regard between ARMs and fixed rates since ARMs provide a much more interest rate protection. You would buy back your stock if you had a fixed-rate portfolio and you didn't -- and you actually thought what if the portfolio manager of the fixed-rate portfolio decided that interest rates would probably go up on his mortgage portfolio? And as you know, they haven't created enough hedging instruments to hedge interest rate risk in a fixed-rate portfolio if it goes up dramatically, say, even 200 basis points. Five-year swaps will not get the job done. So in that regard, I can understand why during the period when you profoundly believe that your book value is going to go down dramatically and you wish to -- and you can buy your stock at the historical book value while your mark-to-market book value is going to go down, I can understand why people do that. Having an ARM portfolio is -- I think it is completely different because we have interest rate protection and I'm not focused as much as a fixed-rate portfolio manager is when you say, what would happen if rates went up 200 basis points, would we still be in business? The ARM portfolio provides substantially more protection. Doesn't provide complete protection at all. So during the past quarter, our share repurchase was at $5.77. We weren't able to buy a lot of stock. We bought a lot of stock -- we bought stock in a lot of different days. But frequently, we were held to 50,000 shares and whatnot because my purpose is not to drive the stock price up on the day we're buying. I try to put orders in to buy stock at the current market level. And what I can say, between $5.50 and $5.90, which I thought was significantly below the historical cost and worthy of the effort, there wasn't a lot of stock to buy at the market. I guess the stock's current price may have something to do with reflecting that there was more demand than I could really see and that we could execute it. So that's the answer to your question. I don't...

Howard Henick

How much did you buy?

Joseph Lloyd McAdams

I said we bought -- I think it was just less than 600,000 shares.

Joseph E. McAdams

Sorry, during the quarter, we purchased 735,000 shares, and as Lloyd mentioned, at average price of $5.77.

Howard Henick

Well, how's that possible? Because the stock -- the total stock, I thought, went up. So did you issue a stock greater than that? Why wouldn't -- let me finish. Why wouldn't you cease all sales of stock when the stock's trading below 80% of book? Doesn't that make eminent sense? And one other thing. You said ARM portfolio managers should treat it differently than fixed, which, frankly, I think is gobbledygook, but Capstead is more heavily ARM-weighted than you and they bought back a bunch of stock.

Joseph Lloyd McAdams

Well, I respect everybody in what they do, and I respect everybody who doesn't -- who disagrees with my philosophy. And you can assign whatever motive you want to it. But the answer is, I think, that ARMs are quite different. And I apologize, and the first question you had?

Howard Henick

You issued stock. You must have issued stock. Why you issued stock [indiscernible]

Joseph Lloyd McAdams

We have a long-standing 15-year policy. Any investor who wants to purchase $10,000 worth of stock any month we will sell it to them at a 1% discount. That has been a policy that has been in effect for a long time.

Howard Henick

That doesn't make it smart.

Joseph Lloyd McAdams

No, I think it's a good thing. We have a lot of stockholders who think this is a wonderful way to invest in our company. It may not be smart from the perspective that someone who doesn't want smaller investors to purchase more shares and would rather not let them buy shares at this current price. They paid about $6 a share during the quarter, so clearly the shares they paid, which they bought more shares than we bought back, but they pay at a higher price because I'm certainly trying to get a price that I thought was very attractive relative to historical book. But equally important, we offer all investors the opportunity to reinvest their dividends at varying rates, and I believe now it's at a 2% discount, and approximately 1/3 of our stockholders, most of whom are institutional investors, participate in this program. And it has been a long policy. It was originally established for the benefit of individual investors who didn't need the income now and who wanted the income later, they wanted to build their position, and I consider it an important shareholder benefit to be able to reinvest your dividends at a slight discount. But I certainly did not exclude some of our largest stockholders from participating in the program also. So every shareholder has the same opportunity to participate in the dividend reinvestment program.

Howard Henick

Right, 10,000 max a month you're saying, so nobody could buy, like, millions of dollars is what you're saying.

Joseph Lloyd McAdams

No, it's many different investors who purchase. There's 3,000 or 4,000 accounts.

Howard Henick

They can't buy more than 10,000 a month you're saying, per account?

Joseph Lloyd McAdams

Yes, I have a provision where sometime last year when the stock went up a lot, I have the provision to sell shares more than 10,000, but that definitely did not occur during the fourth quarter. The stock price was way too low to justify having an investor purchase shares directly that way.

Howard Henick

The last question is you said you bought it between $5.55 and $5.90, was that the range?

Joseph Lloyd McAdams

I think the average...

Howard Henick

So the average is 5...

Joseph Lloyd McAdams

No, I apologize. Yes, I remember the $5.55, the stock got really, really sticky at $5.55. And even though it may have traded at $5.50, it was extremely difficult to put our order in below the market of even 10,000 shares. And we had a hard time getting executions because clearly any buying orders that look like institutional orders, which we would look like an institutional order, caused various algorithm trading programs to immediately start bidding the stock up $0.01, so we were always like chasing it.

Howard Henick

I understand. I'm just thinking for the range. What was the lowest you bought stock and the highest you bought stock?

Joseph Lloyd McAdams

Well, I'm having to rely on my memory, but I'm thinking...

Howard Henick

Ballpark.

Joseph Lloyd McAdams

I only recall $5.55 in there somewhere and the highest was in the $5.90s at the beginning.

Howard Henick

Okay. And then my last point is I still would strongly encourage you to basically -- because I don't really believe in any of the historical cost stuff. I think what matters is what you're doing when you get prepaids, you have 2 options: you have the option of buying more bonds, or buying back stock. Those are the only 2 options and that's all that matters at that point. If you can buy back your stock, which is basically you're buying a pool of assets at a 25% discount, that's a much better deal than the one you're giving to your clients who can buy it at a 1% discount. And I'll stop there.

Joseph Lloyd McAdams

To make it right, I'll just add one piece to it. You have a third option and the third option is, I believe is to pay off repo.

Howard Henick

Yes, you could shrink that way, too. You have to do both if you want to maintain the same leverage. You pay back repo then...

Joseph Lloyd McAdams

Understood. No, but you would not want the same leverage. You would be doing this to actually delever the portfolio because you're expecting the mark-to-market book value to decline dramatically.

Howard Henick

If you pay back repo, you're delevering, right? If you buy back stock, you're levering. If you do it -- waited till the current leverage, you're doing nothing.

Joseph Lloyd McAdams

That's right. Yes, indeed. I agree with you on that completely.

Operator

[Operator Instructions] Our next question comes from Stephen [ph] [indiscernible] from -- who is private investor.

Unknown Attendee

You said you've harvested these gains on the mortgage-backed securities. How much more is there to do in that? You've got $4.4 million in gains so far. Can you give us a sense of a percentage that has been completed that you're intending to purchase?

Joseph E. McAdams

This is Joe. We don't have a set plan or a target of potential gains to realize. As Lloyd had discussed during the quarter, given that we've had, especially within our fixed-rate holdings, some significant appreciation during 2012 due in a significant part, to the activities of the Fed. We have identified securities during that quarter that we felt had appreciated to a point that they were unlikely to be attractive, positive contributors to the portfolio's return going forward, securities that had been acquired at a 3-point premium that were in the market trading with premiums in excess of 7 points at the time. So those were opportunities that we took and took advantage of. We continue to look for opportunities like that, especially within the fixed-rate portion of our portfolio that exhibits more price volatility were rates to rise and also has historically demonstrated more sensitivity to prepayments and refinancing incentives. So the amount of gains that were realized were obviously a very small percentage of our overall portfolio-wide unrealized gains. And we had -- we don't have a set target of gains to harvest or some sort of limit on our capacity of the gains we could realize. It's something that we will look to do opportunistically. And we have felt that during the fourth quarter and continuing into this quarter, there are some portions of our portfolio that have performed quite well. And we think that capital could be better used by realizing those gains and moving into other sorts of securities that we feel would have more potential for further appreciation.

Unknown Attendee

Okay. And what is your estimated taxable income for the year 2012? Do you have that?

Joseph E. McAdams

We're looking. I don't know if I have that information for you relative to our GAAP income at this point.

Joseph Lloyd McAdams

It is being published momentarily. It's going to be published very, very soon. In fact, I somehow think we issued a press release, which had it on it, but maybe I'm mistaken.

Unknown Attendee

Well, I know you had a dividend press release and this goes to part of that. Let me ask this other question that's somewhat related to that, and I presume that all of the gains on the sale of those mortgage-backed securities were not taxable because they were offset with a $90 million capital loss carryforward that you had that was disclosed in the 2011 10-K. And because you must declare your fourth quarter dividend before the year end has been completed, a portion of the prior year's taxable income is normally distributed in April of the subsequent year. This year, a portion of the $0.04 dividend paid in January that is considered 2013 income for shareholders will actually be some other remaining 2012 REIT income that would normally be just paid with the April '13 dividend, is that a correct assessment?

Joseph Lloyd McAdams

I'll first say this. I'm the Chief Executive Officer, and I spend most of my focuses on the portfolio and the risk management of the portfolio. And we can -- I would suggest that you can call the office and they will be happy to give you the tax situation. Listening to what you said, and our Chief Financial Officer's here also, what you said was that what was earned in -- was declared in late December was 2013 income for shareholders. It's my understanding that, that dividend in 2012 paid in January of 2013 is 2012 income.

Unknown Attendee

Okay. Well, I'll call the office then and...

Joseph Lloyd McAdams

Yes, that would be good, Mr. Hillman or the Chief Financial Officer or the other people on the staff, they can answer your question specifically.

Operator

Our next question comes from Stephen Laws from Deutsche Bank.

Stephen Laws - Deutsche Bank AG, Research Division

Lloyd, I guess, a couple of things have been covered but wanted to touch base, and I think you may have touched on it a second ago, with the gains taken in the fourth quarter. Not something you typically do. You guys have long time been more cash flow investors and have viewed it that way, can you talk about any maybe portfolio changes that happened since year end? Anything you've looked at where there are certain segments of the market or your legacy portfolio where you guys have continued to reduce exposure? Or did you really complete most of the repositioning you felt was needed during the fourth quarter?

Joseph E. McAdams

Steve, this is Joe. One of the things that has changed, and you are correct, that it's been -- it had been a number of years since we had realized gains as a significant component of our income. Has been the fact that we have had an increase in the fixed-rate portion of our portfolio as Lloyd made reference to in his comments. We are obviously still a predominantly an ARM investor. We do look to buy hybrid ARMs when they are attractive relative to alternatives. But within our fixed-rate portion of the portfolio, there had been some fairly significant appreciation of securities that had only been held for 12 months, or in some cases, less, where we felt that at some very high mark-to-market prices, as I mentioned in excess of 7 points, 6 or 7 points of premium, for those sorts of securities that -- which still might have some potential refinance-ability given how new they were above and beyond our portfolio average made sense to consider realizing those gains and shifting the proceeds of those sales back either into more ARMs or into other fixed-rates that had a lower mark-to-market and more -- less exposure to prepayments and more potential for price appreciation. So that's something we continue to look at and the market has -- did trade off some during the fourth quarter and that has continued so far during January. But we have realized gains on some similar sorts of securities so far during the quarter. Well, the magnitude of the gains is less than what took place during the fourth quarter. We'll continue to look at those opportunities. So there hasn't been a major shift relative to that. It was not -- I wouldn't view it as a onetime event. But it is definitely something that we'll continue to monitor and clearly prices on all mortgage-backed securities have come down some since that quarter, so we'll continue to look at those sorts of sales. All of the sales were relative to our 15-year fixed portion of our portfolio.

Stephen Laws - Deutsche Bank AG, Research Division

And maybe switching sides to the swap book, clearly expect you guys to pick up some benefit through the years as you have about $375 million of swaps at 3.32%, broken out in the press release, maturing here early this year. Can you maybe give us a little color in how you guys look at that swap book? Are these swaps that were initially put in place to match the fixed-rate term of the hybrids that were bought in conjunction with the swaps, or do you really look at it more on a total portfolio basis as far as the percentage of repo that you want to have swaps in place for or is it something completely different that you look at? So I guess the shorter way to ask is should we assume that this will be replaced with just straight repo financing or will you put the new swaps in place obviously at a rate much lower than the 3.32% that's maturing?

Joseph E. McAdams

That's a good question. You're correct, these swaps were put on relative to assets that -- the fixed-rate portion of some assets, which were back in the time they would have been -- these swaps were put on would have been hybrid ARMs. Given that rates have come down and prepayments have been higher than we would have estimated on those securities when we bought them several years ago, in many cases, these legacy swaps we have, especially the ones rolling off this year, really aren't required to hedge the assets that they were purchased against either because they're moving in -- the assets are moving into a resetting period with their interest rates or more of those assets have paid down at this point than we would have expected. So they won't be replaced in that sense. The swaps we put on, on a quarterly basis are generally related to new asset acquisitions. That said, you did bring up a good point that we do consider the overall portfolio interest rate risk. The fact that we have been operating with a very narrow asset liability mismatch is a factor we take into account when we put on new hedges versus new assets that we acquire during the third and fourth quarter of last year. We did enter into swaps relative to new purchases that, on the margin, were below that 40% ratio that we have had in the past. But that is something that was driven by the fact that we have, at December 31, by our calculations, no real asset liability mismatch. 1.1 effective duration on our assets and a 1.1 year effective maturity on our hedge swaps. So as we move forward incrementally we are going to continue to maintain a hedging strategy similar to how we've had in the past. But on the margin, sometimes we may overhedge or underhedge new assets based on where we see the overall portfolio. So I hope that answers your question.

Stephen Laws - Deutsche Bank AG, Research Division

Yes, that's great color as far as thinking about it. I mean, clearly, I think, pretty clear we'll see a benefit here once these $375 million rolls off at that rate. And then one final question, if I may, just more of a general concept question regarding prepayments. Can you maybe provide any color as how we should think about any differences in prepayment speeds on hybrid ARMs or those that are now true ARMs as they've passed their roll date versus kind of most prepayment commentary on a macro levels towards the fixed-rate market given the size? Now the curve shifted up a little bit, do we have -- do you guys experience any borrowers looking maybe to extend their duration and refi out of an ARM into a fixed to lock in a rate at current levels as they think the curve's going higher? Have we not seen any of that, or is it just that borrowers that haven't refinanced yet are still -- have other issues that are prevent refinancing altogether?

Joseph E. McAdams

You're right, that is a phenomenon that we've seen in the past when the yield curve flattens. There can be some refinancing out the curve from borrowers to look to lock in a lower rate for a longer period of time even when there may not even be as significant as interest rate savings as you might expect. And I think there is a factor of that within the hybrid market as well. What we have seen, I mean, is the net effect has been a decline in the prepayment rate over the last 2, 3 and 4 months in the hybrid ARMs sector. And I would say that, from my opinion, the reason we've seen that has been on balance, that the other factors you mentioned, the factors -- the fact that still there are legacy ARM borrowers who don't have the same ability to refinance as easily as more recent fixed-rate borrowers might, and the fact that at some level, there still has been some component of the refinancing activity that's been driven by poor loans being bought out of the pool. And I think that has been decreasing as well. So those are the 3 major factors, and I think it's fair to say that for now the incentive for ARM borrowers to go and lock in a 30-year mortgage rate has not been strong enough to offset the other factors.

Operator

Ladies and gentlemen, I'm showing no additional questions at this time. I'd like to turn the conference call back over to Mr. McAdams for any closing remarks.

Joseph Lloyd McAdams

Jamie, thank you very much. We certainly do appreciate everyone's attendance, and we appreciate the fact that you ask questions, not only hopefully answer questions that you have but that also would be valuable to other people. We will have a call again about this time next quarter. We look forward to you participating with us, and we certainly appreciate your interest in Anworth. If you'd like to obtain more information about the company: one, you can visit our website, we do our best to make it as comprehensive as possible; or you can call our Investor Relations office at (310) 255-4438 and hopefully they can take care of what you need. Thanks, again. Everyone, have a good weekend.

Operator

And ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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