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MFA Financial, Inc. (NYSE:MFA)

Q4 2013 Earnings Conference Call

February 13, 2014 10:00 AM ET

Executives

Danielle Rosatelli – Investor Relations

William S. Gorin – Chief Executive Officer

Craig L. Knutson – President and Chief Operating Officer

Stephen D. Yarad – Chief Financial Officer

Gudmundur Kristjansson – Senior Vice President

Analysts

Daniel K. Altscher – FBR Capital Markets & Co.

Douglas M. Harter – Credit Suisse Securities LLC

Steve C. DeLaney – JMP Securities LLC

John A. Hall – Wells Fargo Securities LLC

Daniel Furtado – Jefferies & Company, Inc.

Richard B. Shane – JPMorgan Securities LLC

Christopher R. Donat – Sandler O’Neill & Partners LP

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Inc. Fourth Quarter 2013 Earnings Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

I’ll now turn the conference over to Danielle Rosatelli. Please go ahead?

Danielle Rosatelli

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflects management’s beliefs, expectations and assumptions as to MFA’s future performance and operation. When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, may or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including those described in MFA’s Annual Report on Form 10-K for the year ended December 31, 2012, its quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2013 and other reports that it may file from time-to-time with the Securities and Exchange Commission. These risks and uncertainties and other factors could cause MFA’s actual results to differ materially from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA’s fourth quarter 2013 financial results. Thank you for your time.

I would now like to turn this call over to Bill Gorin, MFA’s Chief Executive Officer.

William S. Gorin

Thank you, Danielle, and I want to welcome everyone on the snowy day to MFA’s fourth quarter 2013 financial results webcast. With me today are Craig Knutson, MFA's President; Gudmundur Kristjansson, Senior Vice President; Steve Yarad, CFO; and a number of other executives.

Now despite variability, monetary policy, interest rates and pre-payments, MFA generated consistently good results throughout the year, and in the fourth quarter. This is due in large part to our focus on strong fundamental analysis, when investing in credit sensitive residential mortgage assets.

To summarize the quarter, in the quarter we generated net income of $74.8 million or $0.20 per share. Book value per common share increased approximately 3% to $8.06 as of December 31 from $7.85 at the end of the third quarter. This growth was due primarily to non-Agency MBS price appreciation.

In the fourth quarter, we again transferred a sizable amount. In this case, $47 million from credit reserve to accretable discounts, bringing the total transferred in the year to approximately $208 million.

Due to the increases in accretable discount, and to changes in the forward curve, the loss-adjusted yield in our non-Agency MBS portfolio increased to 7.77% in the fourth quarter. now, hopefully you all have access to the webcast.

Turning to Slide 3, you will see, as I mentioned, net income per common share was $0.20, the dividend was $0.20, and the estimated taxable income per common share was also $0.20. With that dividend, we end the year approximately $0.17 per share undistributed in terms of taxable income distributions.

Turning to Page 4, which I think is a pretty unique metric for our company relative to all financial companies throughout the year. despite change in interest rates, and pre-payment fees, our key metrics remained generally consistent throughout 2013. Spreads started the year at 2.32%, ended the year at 2.34% with not much variation in between.

Debt-to-equity ratio, started the year at 3.1 times, ended the year at 3.0 times, again without much variation during the year. In general, throughout the year, through all four quarters, over 55% of MFA’s assets remains in agency hopeful assets with the remainder in non-Agency MBS.

Turning to Page 5; you can see as I mentioned, book value started the quarter at $7.85 grew to $8.06 primarily due to change in the value of non-Agency MBS. Page 6, and hopefully this will be the last time we need to have a separate slide on taxable income in our earnings call.

We’ve now distributed stockholders an amount equal to all taxable income for years prior to 2013. We currently estimate that for 2013, REIT taxable income was approximately $374 million, while distributions not attributed to prior years was approximately $313 million. Now we have until the filing of our 2013 tax return, which should be around September of 2014 to declare a distribution of any REIT taxable income not previously distributed.

Again, talking about consistency, we ended the quarter with our interest rate sensitivity as measured by net duration below one. Gudmundur Kristjansson will give more detail about the interest sensitivity of MFA’s assets and our distribution.

Gudmundur Kristjansson

Thanks you, Bill. On Slide 7, we show the duration of our assets and hedging instruments. In the top part of the table, we display the duration of our Agency and non-Agency asset, broken down into buckets by coupon resets.

We estimate that the total duration of our assets is 2.1. And in the bottom half of the table, we summarize the duration of our hedging instruments, which currently are interest rate swaps with maturities of up to 10 years.

The duration of our hedging instrument is negative 3.7. When we combine durations of assets and hedging instruments, we estimate that our net duration is 0.9. Although, net duration is the good indicator of interest rate risk, it is also important to understand that expense risk in our portfolio is limited. This is because 70% of our non-Agency securities are Hybrid ARMs and 60% of our Agency securities are Hybrid ARMs, while the rest of our Agency MBS securities have 15 years or less to maturity.

These structural features limit the extensive risk of our mortgage-backed securities. Because of the limited extensive risk in our portfolio, we did not need to add interest rate hedges in the fourth quarter, and are comfortable with our interest rate risk as it is.

And with that, I’ll turn the slide over to Bill, again.

William S. Gorin

Great. thanks, Gudmundur. And now, Craig Knutson will provide some detail as to the improved housing market metrics, and more importantly the impact on MFA’s portfolio.

Craig L. Knutson

So thanks, Bill. Turning to Slide 8, we continue to see improvement in the credit fundamentals of the underlying mortgages in the non-Agency portfolio, and the key metric that we focus on here is the loan-to-value ratio or the LTV.

now, as I’m sure you know the loan-to-value ratio is a fraction where the numerator is the loan amount, and the denominator is the property value. and so we have two moving parts here. The first is many of the loans in fact, more than half of the loans in the portfolio are now amortizing.

So as loans amortize as homeowners make monthly payments of principal and interests, they are lowering their loan amount. That amortization lowers the loan amount. So, what does that do? Well, that lowers the numerator of that fraction, thereby lowering the fraction, lowering the LTV.

But in addition, we also have home price appreciation. So the property values are increasing in value. So, that increases, at the same time the denominator of that fraction, which again further lowers that loan-to-value ratio.

So why do we care about loan-to-value ratio? Well, the lower the loan-to-value ratio, the fewer defaults that we would expect to occur in the future. And in addition, we would expect lower loss severities on loans that due default.

So, as a result, again, primarily of lower LTVs, we have lowered our estimates of future losses in the non-Agency portfolio. As Bill said previously, in the fourth quarter, we transferred $47 million from our credit reserve to accretable discount, which is for the year, over $200 million that we moved from the credit reserve to the accretable discount.

We move to Slide 9. So credit reserve reductions, what happens when we move money from our credit reserve to accretable discount? What I’ll point out is the accounting here is different than it would be for, for instance loan loss reserves for a bank. When a bank changes their loan loss reserves, that change was directly through their income statement and therefore through retained earnings.

For us, the treatment is different, when we reduce our credit reserve and increase our accretable discounts, we increase the yield on those assets – on those non-Agency mortgages, we increase those yield prospectively. So it increases our future earnings as it increases the yields on those securities. So we moved $207 million during the year 2013 that $207 million will be recognized as additional income over the remaining life of those assets.

Now, just to give you some perspective, the total credit reserve transfer over 2012 and 2013, if – again if we freeze all the other elements, and there are the moving parts, pre-payment fees, forward curve and so forth. But if we just isolate the effect of the credit reserve reductions that has probably increased the non-Agency security yields by approximately 70 basis points. But again, this is perspective, it’s future earnings as we recognize that over time, over the remaining life of those assets.

Finally, although that the credit reserve reductions do not impact our book value, again this is different than it would be for a bank. Our book value is determined solely by the fair market value of those securities. So, again these changes do not directly impact book value.

If we turn to Slide 10. So, Slide 10, two graphs here, the one on the left is the average non-Agency LTV. So I’d call your attention to the grey line. You can see in the grey line that the average LTV of delinquent loans in the portfolio has declined from the beginning of 2012 to-date from about 120% to less than 90%. So again, this is average LTV, but that’s very significant, because those lower LTVs should lead to fewer defaults and lower loss severities on loans that due default.

Now, while this average LTV and the lower average LTV is certainly a good thing, it’s only one element, and the graph on the right illustrates another very important point. So if we look at average LTV, again, lower average LTV is good, but a 65 LTV loan, when averaged with a 125% LTV loan may show an average of 95%. But the fact is that, 125% LTV loan is still very much at risk of default.

So the graph on the right shows the percentage of loans with LTVs that are over 100%, that are still over 100%. And you can see in the beginning of 2012, probably two-thirds of the delinquent loans in the portfolio had LTVs over 100%, and now that number is less than a third, it’s down to almost 25%.

And then finally, I’d call your attention to the orange line on the right graph. So these are the loans that are current in the portfolio. These loans are not delinquent. And again, some of those loans, we expect will default in the future. But as those LTVs, and as the percentage of loans with LTVs greater than 100% declines, and that’s gone from 50% down to about 15%. those loans are certainly at less risk of default. And again, if they due default, we would expect lower loss severities as they have lower LTVs.

Moving to Slide 11. We show the – Slide 11 and 12 show the two largest geographic concentrations. The Slide 11 is California, which comprises approximately 46% of the portfolio. And you can see the key counties, where we have concentrations of loans. And in general those home price depreciation numbers for the year are up 20% or more, which again speak to the LTV.

Slide 12, which is Florida, again not up as much as California, but that’s about 8% of the portfolio, and their double-digit increases more than 10% in all those key counties, where we have concentrations. So, good news for the two largest states, and also note in the middle of a blizzard in New York both those states are much warmer than we are here today.

Slide 13. This is another key metrics, so we look at the transition rate. So, these are loans that are current today, at what rate are those – are loans that are current today transitioning to delinquent. And you can see that after peaking in early 2009, the transition rate has declined, we’re back to almost early 2008 levels of loans transitioning from current to delinquent. So again, another very good sign for the credit fundamentals.

And finally, Slide 14. So, this just shows how we account for these securities. So, if you look on the left hand side, you can see the blue part, the purchase price is 73%. So, think of that as a price of 73%, average purchase price is 73% at par.

Now therefore, there was a discount of 27%. In this case, if you takeout OTTI 26% was our net purchase discount. So, what do we do with that purchase discounts? Well, if you look over on the right, you can see that the majority – the vast majority of that purchase discount is still held in a credit reserve, the purple portion at the bottom, the accretable discount, that’s the portion that we accrete into income along with coupon income.

the credit reserve, which is still a little bit over $1 billion, is not accreted into income. The other way to look at this is our purchase price over – on the left is 73% at par, and because our credit reserve represents 19% of the face amount of these securities. then in essence, we’re assuming in those yields that we get back $0.81 on the dollar. So we paid $0.73 on the dollar to these securities, and we’re expecting to get back $0.81.

and with that, I will turn the call back over to Bill.

William S. Gorin

Thanks. Operator, we are available to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Dan Altscher with FBR. Go ahead, please.

Daniel K. Altscher – FBR Capital Markets & Co.

Hey, thanks. Good morning, everyone. Greetings from a snowy Washington D.C. winter wonderland.

William S. Gorin

Thanks.

Craig L. Knutson

Glad to have you on the call.

Daniel K. Altscher – FBR Capital Markets & Co.

Yes, we made it. I was wondering if you talk a little bit about the Agency portfolio, clearly the pre-payment fees were down quite a bit, which probably helps the overall asset yield this quarter. Where are we looking around for first quarter so far, my sense that may have been – maybe better than normalized or normal – better than expected number per se?

Gudmundur Kristjansson

Hi Dan, this is Gudmundur. You’re right, pre-payment dropped a lot in the fourth quarter, it came down by about 30%. And in the first quarter fees are down a little bit, and I expect the first quarter to come in a little bit lower than the fourth quarter. Looking-forward to one of that, I was cautioned to say that, right now we have the – lower parts of turnover and CPRs. So for the foreseeable future, and the next quarter could be probably a little bit lower, but then they should pick up as we move into the year.

Daniel K. Altscher – FBR Capital Markets & Co.

Okay. Yeah that makes sense. And switching – turning to a little bit of a different topic. You did increase the buyback authorization, just recently, but didn’t quite really bought back any shares in this quarter or at least in the fourth quarter. How do you think about that moving forward; was the authorization just to increase the flexibility or is there actually like an intent to buyback the stock?

William S. Gorin

Good question, Dan. Let me give you the longer answer. So as you know, in 2013, we distributed special dividends of about $300 million to investors. So we were very shareholder friendly, and basically – and that was capital you couldn’t use for share buyback.

Strategically, based on the consistency of our earnings, I would say our strategy is working; in no way are we competing with a non-profit maximizing government entity that can’t [indiscernible]. So we’re very happy with our strategy, I must call our strategy ground and pound versus other people that might be somewhat defensive at this time in their strategy.

That being said, in the fourth quarter, some days and discounts were very intriguing, and we actually did purchase 2.1 million shares at the average price of $7.20 in the fourth quarter.

So it wasn’t just to give us the flexibility, we implemented that.

Daniel K. Altscher – FBR Capital Markets & Co.

Okay, that’s really interesting, sounds good. And then just one quick one on the hedge portfolio, it looks like you got rid of the TBA shorts that were in the last quarter, maybe like an experiment, we’re just trying to see how those would work, was there anything fundamentally wrong within that weren’t working or simply why we give it as a TBA shorts?

William S. Gorin

Yeah. Well the TBA shorts was not an experiment, it was – could there be unknown uncertainty as the market accepted the concept of tapering. And we think we’re sort of through that. So it was just extra protection towards seeing like in extra volatile, less predictable period of time.

Daniel K. Altscher – FBR Capital Markets & Co.

Okay, got you. Thanks so much and enjoy the snow.

William S. Gorin

Thanks. You too.

Operator

Thank you. Our next question is from Douglas Harter with Credit Suisse. Go ahead please.

Douglas M. Harter – Credit Suisse Securities LLC

Thanks. You gave some Craig; you gave some good color around the impact of the switching of the – releasing of the reserves from – into basically earnings over time. Can you talk about how much of the impact you also saw from yield curve shifts in the Non-Agency yield this quarter and sort of what we’ve seen in the first quarter, if we should expect some of – for all of that?

Craig L. Knutson

Sure. To be honest I think the effect of the forward curve, I don’t have the exact number, Doug, but the effect of the forward curve was not that significant in the fourth quarter yield that that was primarily due to the credit reserve adjustment. So yes, there is some sensitivity to forward curve, but I can say primarily it’s been the credit reserve that’s driven that.

Douglas M. Harter – Credit Suisse Securities LLC

And did we see more of it in the – more of a pickup in the yield in the fourth quarter just from the cumulative impact of everything that you've talked about and the fact that you’ve been doing it sort of over the course of the year and it just kind of builds to the point where it gets to be more meaningful?

Craig L. Knutson

Exactly, that we’ve tried to isolate that and that 70 basis point yield number is an attempt to strip out all the other affects and that’s the cumulative effect of 2012 and 2013 of those credit reserve adjustments.

Douglas M. Harter – Credit Suisse Securities LLC

Got it. Okay. so there is nothing, there is no reason to think that just because what’s happened in the yield curve kind of quarter-to-date, but that yield shouldn’t be sustainable.

Craig L. Knutson

Again, tomorrow…

Douglas M. Harter – Credit Suisse Securities LLC

They’re all being equal.

Craig L. Knutson

Tomorrow is the new day, but I would agree.

Douglas M. Harter – Credit Suisse Securities LLC

Okay, I appreciate that, Craig. Thank you.

Operator

Thank you. We’ll go next to Steve DeLaney with JMP Securities. Go ahead, please.

Steve C. DeLaney – JMP Securities LLC

Good morning, everybody and congratulations on yet another very solid quarter. I want to thanks for the clarity on, when you had some unique things last year with taxable EPS with that change, and accounting method for tax. So it’s helpful to have this disclosure, the $61 million and the $0.17. Bill, I was wondering last year, you actually paid two specials.

I get the impression from the way you presented this that since you have until September to deal with this in terms of distribution that you’ll just use this amount to sort of maintain and contribute to the 2014 dividends and possibly, have a carryover at the end of next year into 2015. and am I reading you right on that?

William S. Gorin

Well, one I – the Board sets dividend policy, we do not,

Steve C. DeLaney – JMP Securities LLC

Yeah.

William S. Gorin

But I think what you are saying mathematically makes sense that’s just keeping the regular dividend clearly will be fully distributed for 2013 by September and we’re not – it doesn’t appear as if that shortfall would be growing.

Steve C. DeLaney – JMP Securities LLC

Got it, got it. And I guess shifting to the book value, nice increase there, seeing some of the earlier reports, there seems to be comments and some of the book value moves that actually exceeded expectations; it seemed to be focused on the seasoned hybrids. We kind of can see what the 15 years are doing, sort of down a point and a half maybe in the fourth quarter up a point a half now, sort of a round trip.

But it seems like the seasoned hybrid ARMs have materially outperformed say new hybrids or 15 years. And I was wondering Gudmundur if you could give us any color from what you’re seeing kind of within your portfolio, how the hybrids – your more seasoned hybrids have performed in 4Q and 1Q?

William S. Gorin

Yeah, I mean in general, short cash flows where that seasoned hybrids or 10-year or seasoned 15-year units did or high coupons hitting it for that matter, did pretty well in the fourth quarter, and continued to do well in the first quarter. So I would definitely agree with that.

Steve C. DeLaney – JMP Securities LLC

Okay. so you are seeing continued whatever happened in the fourth quarter, you are seeing some pull-through and continued strength there…

William S. Gorin

Yeah.

Steve C. DeLaney – JMP Securities LLC

Kind of with the broader markets.

William S. Gorin

Absolutely, continue to perform well, not necessarily that they’re increasing in price, but whatever they gained, the momentum that they gained has kind of stayed in the fourth quarter.

Gudmundur Kristjansson

See when you’re saying we agree with, it seems to be great demand at any short asset.

Steve C. DeLaney – JMP Securities LLC

Yeah. At this point, in the rate cycle, I think people assess the banks, just want to be at the short-end. And Bill, just one last thing and I’ll hop off. This is big picture, just looking at 2014, it seems like there are a lot of emerging kind of opportunities for a broad residential mortgage REIT is suppose to sort of the more narrow Agency REIT. It gives you guys a lot of flexibility. Just curious if you have any thoughts about what might be some of the best opportunities for you, in the broader residential credit area as you look out 2014. Thanks.

William S. Gorin

Right. Thanks and look we appreciate the opportunity to share our strategy in this forum. So, thank you for that. So, approximately 5, 6 years ago we adjusted the strategies from Agency assets, which basically are dependent upon interest rate sensitivity and prepay sensitivity to Non-Agency assets especially when they cheapened.

We believe that the assets don’t move – the movements are not highly correlated. That is shown in the consistency of our returns, where I would say over the year maybe the yield on the Agency portfolio was trended down while the yields Non-Agency has trended up. I would say our competitive advantage is credit analysis. So – but we are completely supportive of people widening beyond few agencies, because again, you’re dealing with a non-economic competitor in the government.

If we looked at mortgage servicing rights for example, but there we think that asset, well its great, it’s not correlated with agencies it is negative correlation, is dependent upon prepays, which are therefore dependent upon interest rates and we’re not saying that we’re the best predictor of interest rates or prepays or the weather, but I think we’ve done very well by focusing on the credit performance of mortgage assets of the certain vintage and we continue to find a lot of opportunities there Steve. So I think you are going to see more of the same in 2014.

Steve C. DeLaney – JMP Securities LLC

All right. I appreciate that color and good job guys. Thank you

William S. Gorin

Thanks.

Operator

Thank you. We have a question from John Hall with Wells Fargo. Go ahead please

John A. Hall – Wells Fargo Securities LLC

Yes thanks and good morning and again thanks for the color on the strategy. It seems like the strategies amongst superiors are evolving and you guys are back kind of step to knitting.

Just back on the – that the yield interest earning assets that was up 21 basis points in the fourth quarter. I know you disclosed the 70 basis point cumulative benefit I guess from the credit reserve releases. But in the fourth quarter with that job how much of that was attributed to the credit reserve release specifically and how much was just due to lower prepayments fees on the Agency MBS?

William S. Gorin

All right. so we could tell you the change in the yield on the Agencies and by the way we’ll be filling the 10-K soon today. But I believe the Agency yield went from 213 in the third quarter to 237 in the fourth quarter. And I think that’s where you seen the impact of the slow down in prepayments fees. In the non-agency yield as we have already said went up 733 to 777 the majority of that is due to improve credit and some portion of it is due to change in the forward curves.

By the way, I want to point out, the change in the forward curve is really only significant for the adjustable rate of non-agency. The fixed rate non-agency are not impacted, which is why we are comfortable saying most of the change is due to change in credit assumptions.

John A. Hall – Wells Fargo Securities LLC

Okay, good. Thanks. And then just the last question I guess more on a strategy question around your agency obviously the seasoned ARM strategy has been a good one. If we – as the Fed – if we assume the Fed continues to taper and eventually gets out of the markets, some believe that that could cause OAS to widen out significantly for fixed REIT 15 to 30-year product. If we were to see that the hypothetically, what would MFA approach be if they were good risk adjusted returns kind of after the market had moved or would you just say strategy is working for us, we are not really interested in moving out on the curve with respect to the agency opportunity?

William S. Gorin

So your question is, would we ever consider going beyond a 15-year Agency?

John A. Hall – Wells Fargo Securities LLC

Yeah, basically.

William S. Gorin

So the answer would be, we would be reluctant too, but if with the appropriate hedging, if the spreads were appropriate, we would consider it definitely.

John A. Hall – Wells Fargo Securities LLC

Okay, thank you guys very much.

William S. Gorin

Thank you.

Operator

Thank you. Our next question is Daniel Furtado with Jefferies. Please go ahead.

Daniel Furtado – Jefferies & Company, Inc.

Good morning, everybody. Thank you for the opportunity.

Craig L. Knutson

Sure.

Daniel Furtado – Jefferies & Company, Inc.

First question, I guess you know the Non-Agency continues to perform very well, congratulations there everyone. But here is the bud, at the same time it is – it continues to run off pretty steadily we all know that the universe of the non-agency shrink. And I think you talked about this a little bit with the DeLaney’s question. But most specifically to this strategy or how active are you on the new purchase front today. And how do you see that market going forward?

William S. Gorin

Let me start my usual speech which is on everyone of these calls the question either asked me too early or too late you might have heard this before, but that being said, we are very active in the markets.

Craig L. Knutson

Yes and then the market wall it is shrinking I think it’s still probably $700 billion or so. And probably been new supply or bonds we trading in the last month its several billion dollars. And we probably put – so far this year we probably put $200 million to work in Non-Agency. So, it’s not hard to reinvest one-off at all. Although our run off on Non-Agency typically runs about $60 million, very rough numbers, $60 million a month and about half of that pays down re-securitization, so it leave us about $30 million should reinvest, which again, it’s not very difficult. So yes, at some point, at some year, there will certainly be less supply and less opportunity. But at least for now, we don’t feel like we’re constrained at all.

Daniel Furtado – Jefferies & Company, Inc.

Got you. And so I guess not looking for guidance, but despite the contraction on say, the principal on this portfolio, it wouldn’t be out of the question if we were to see the principal balance on this piece grow over the course of time even from here.

Craig L. Knutson

Well as Bill said about 55% of our assets are hopeful agencies.

Daniel Furtado – Jefferies & Company, Inc.

Right.

Craig L. Knutson

As you know, that’s a limiting factor. So I think that’s been fairly consistent for the last year or so.

Daniel Furtado – Jefferies & Company, Inc.

Understood there. and then speaking of the re-REMIC bonds, what are your thoughts about potentially leveraging the next step down as the AAAs burn off and the next sequential bond then becomes defacto AAA. Is that something you’d look to do and if so how far how to you think we are before that becomes viable option for you guys?

Craig L. Knutson

Well, it’s a good question Dan. We’ve actually already done that on the first securitization that we did DMSI deal that we did back in 2010. That a one paid off and we’ve sold the A2 and actually the A3 on that as well. So, that was a REMIC transaction, which makes it easier to sell those securities.

Several of the other deals were debt for tax structures and not to get too complicated here. But those we would have to wait until the senior bond pays off to then sell the second bond because we can only have one sold at a time.

But another option on those Non-Agencies would be if the senior bonds payoff and we are now the holder of all remaining pieces. We could also potentially collapse those deals and get the underlying bonds back. So we certainly have a lot of flexibility, like I say it’s a good question and something that that we talk about a lot. our guess is that the second two deals that we did are probably going to pay off; those senior bonds will probably pay off in the middle and then latter part of this year. So again, we have a lot of flexibility and a lot of different options open to us there.

Daniel Furtado – Jefferies & Company, Inc.

Great, thanks for the color there, Craig. Have a great day.

Craig L. Knutson

Thanks, Dan. You too.

Operator

Thank you. Our next question is from Rick Shane with JPMorgan. Please go ahead.

Richard B. Shane – JPMorgan Securities LLC

Hey, guys. thanks for taking my questions this morning. A couple of things, one I guess I’d like to take a slightly different take on the question that’s Steve DeLaney had asked related to the rollover dividend. Going back to some comments Bill made last year, which played out pretty consistently with these expectations, we’ve seen the convergence between GAAP and tax. Tax actually fell $0.03 this quarter, and it’s now right in line with the dividend. I’m curious if you think that trend is going to continue. And then obviously, we see that $0.17 rollover is basically cushion to continue to make REIT taxable distributions.

William S. Gorin

Right. Good question. So, one in order to forecast taxable income, we’d have to forecast a number of things, which we’re not prepared to do. But the trend you point out is correct and the way we look at it, taxable income sets your minimum distribution in no way does it set your maximum distribution.

and we had some strange tax results, because we purchased senior most pieces at very large discounts, which require us to make these large distributions over the last year. So, we don’t see taxable income as a ceiling. And I think going forward we certainly will focus on taxable income and economic income.

Richard B. Shane – JPMorgan Securities LLC

Got it. Okay, that’s helpful. And then the second question is I’m surprised that you didn’t comment this question and maybe we’re missing something. But historically, one of the metrics that you guys have focused on is core income. And there has always been a reconciliation associated with GAAP to core, that didn’t appear this quarter. I’m curious what the rationale for that was and actually, there is a new one that we always put the weighted average share count from the core reconciliation. So we don’t have a weighted – at least we’ve been unable to find the correct weighted average share count for the quarter.

Stephen D. Yarad

Rick, it’s Steve Yarad. Thanks for your question on that. The reason that we started to practice of disclosing core income a number of years ago, it had a lot to do with the fact that we – of the accounting we had to do for linked transactions. and you might recall, if you go back a year or two that the impact that linked transactions on our financial segment was certainly significant.

Overtime those Linked Transactions have run off and we have much less of that in our portfolio now and so the impact on our income statement of the mark-to-market on the Linked Transactions is now virtually de minimis and it has really no impact on yield and on Non-Agency portfolio for our disclosed leverage numbers. So we’ve taken the decision in this quarter to take out the GAAP to call or reconciliation which in the past has driven heavily by the Linked Transactions.

If you note in the press release we still listed out the gains on sales of these securities, so it can pretty easily back into what the core number would have been for the quarter. In terms of your question on the weighted average shares, when the K gets filed shortly after this call a little later today, you will see in the EPS footnote the weighted average shares and that will help you to do the calculations you need on that front.

Richard B. Shane – JPMorgan Securities LLC

Sure, I think I’m assuming that just not including it the way that this quarter was sort of disconnect between removing the slide. I would ask if you could going forward just throw it in the press release of that, we can dial-in our numbers right way?

Craig L. Knutson

Sure.

Richard B. Shane – JPMorgan Securities LLC

Awesome. Thank you guys very much.

Operator

Thank you. (Operator Instructions) And our next question is from Chris Donat with Sandler O’Neill. Go ahead, please.

Christopher R. Donat – Sandler O’Neill & Partners LP

Hi, good morning. It’s Chris Donat. Thanks for taking my question. I had one question I want to clarify on the timing of how you addressed the credit reserve and accretable discount.

Am I correct that you look at a third of the portfolio every quarter is that how you do it? And then for your LTV calculations when you’re looking at the home values, is that something you’re looking at real-time or is it on a similar sort of cadence that one-third every quarter for the home values?

Craig L. Knutson

So Chris, we do look at the credit reserve every quarter. it’s not exactly a third of the securities every single quarter. But there is no event where we don’t look at a security at least every nine month. So we might our credit reserve work might encompass 45% or even 50% of the portfolio in a particular quarter. but again, there are no bonds that go unlooked at for more than three quarters. And I’m sorry the second part of your question?

Christopher R. Donat – Sandler O’Neill & Partners LP

Just on the LTV calculation, the value part of that, you’re looking at that basically real time or monthly, right. You’re not assessing home values on a – some sort of lag basis, are you or what is the …

Craig L. Knutson

We look at that monthly, but again, we don’t have BPOs on these properties. So we’re doing zip code level work.

Christopher R. Donat – Sandler O’Neill & Partners LP

Right.

Craig L. Knutson

But zip code level work is typically median home price in that zip code. so to the extent that the specific mortgage is a lot less than the median home price or lot greater then obviously we are making some assumption that their prices move in line with the medium prices. But those are pretty much real time and we get those monthly.

Christopher R. Donat – Sandler O’Neill & Partners LP

Okay. Okay. And then just asking on the share repurchases. Looking at the average price for the quarter looks like a 10% discount to book is where you pull the triggers out of fairway to think about, where you might be active in the future or does it depend on about factors.

William S. Gorin

Yes, it’s depends on number of factors.

Christopher R. Donat – Sandler O’Neill & Partners LP

Okay. Not currently quantified, but thanks. I appreciate it.

William S. Gorin

Sure.

Operator

Thank you. (Operator Instructions) And Mr. Gorin we have no else in queue.

William S. Gorin

Thanks very much operator. And thanks everyone for participating. We hope everyone gets home safely today. Thanks a lot.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive Teleconference. You may now disconnect.

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