Western Asset Mortgage Capital Corp (WMC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Western Asset Mortgage Capital Corporation's third quarter 2012 earnings conference call. Today's call is being recorded and will be available for replay beginning at 5 PM Eastern standard time. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following this presentation. Now, first, I would like to turn the call over to Mr. Larry Clark, investor relations for the Company. Please go ahead, Mr. Clark.

Thank you, operator. I want to thank everyone for joining us today to discuss Western Asset Mortgage Capital Corporation's financial results for the three months ended September 30, 2012. By now, you should have received a copy of today's press release. If not, it is available on the Company's website at www.WesternAssetMCC.com.

With us today from management are Gavin James, Chief Executive Officer; Steve Sherwyn, Chief Financial Officer; Stephen Fulton, Chief Investment Officer; and Travis Carr, Chief Operating Officer.

Before we begin, I would like to review the Safe Harbor statement. This conference call will contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of the Company. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the Company's reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.SEC.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

With that, I will now turn the call over to Gavin James, Chief Executive Officer.

Thanks, Larry. Good, day, everyone, thanks for joining us today for our third quarter earnings conference call. I will begin the call by providing some opening comments. Steve Sherwyn, our CFO, will then discuss our financial results. Travis Carr, our COO, will then discuss the current trends we are seeing in the Agency RMBS market, and then Stephen Fulton, our Chief Investment Officer, will provide an overview of our investment portfolio, our liability profile and our future outlook. After our prepared remarks, we will conduct a brief question and answer session.

We are very pleased with the results that we achieved in the third quarter. We generated strong core earnings of $0.89 per share. Our net book value increased by 10% during the quarter and we paid a dividend of $0.85 per share, which represents an annualized yield of 15.3% based on September 28, 2012 closing price of our stock.

Our total economic return to shareholders for the quarter was 14.3%, which we define as the change in net book value during the quarter plus the third-quarter dividend expressed as a percentage of the beginning net book value.

As we had expected, the Fed launched QE3 in mid-September. When combined with Operation Twist, the Fed will be purchasing over $80 billion in Agency RMBS each month with the intent to put downward pressure on long-term interest rates and support the mortgage market, the housing recovery and ultimately the economy. Our portfolio is well positioned for the Fed's announcement and it was borne out in strong results for the quarter. While QE3 has put pressure on net interest margins going forward and is expected to moderately increase mortgage refinancing in the industry, we believe that our portfolio, which consists of mortgage pools that have favorable prepayment characteristics, will continue to deliver superior risk-adjusted returns.

In addition, we believe the reelection of President Obama will likely have a continued impact on the mortgage market going forward. While it's too early to get the types of changes that are in store regarding housing and mortgage policy, we expect that the administration will try to support an emerging housing recovery by proposing additional programs to spur refinancings and provide relief to homeowners as well as reevaluate the role for GSEs in implementing housing policy.

Turning to other events in the quarter, we were very pleased to have been able to execute a follow-on stock offering at the end of September. The offering more than doubled our capital base and will allow us to reduce our general and administrative expenses as a percentage of equity. The capital raise was done on an accretive basis to net book value and will enable us to continue to generate attractive risk-adjusted returns for our shareholders. We deployed the new capital in less than a week, which is a testament to the strong and resourceful agency investment team at Western Asset.

At this time, I'm going to turn the call over to Steve Sherman, our Chief Financial Officer, to discuss our financial results. Steve?

Thanks, Gavin. Good morning. I will discuss our financial results for the third quarter ended December 30, 2012. Bear in mind that we priced our follow-on offering on Friday, September 28 but did not receive the proceeds from the offering until October 3. However, we entered into purchase transactions for approximately $2.7 billion of RMBS on September 28. And because we utilize trade debt accounting, those securities are listed as assets on our balance sheet at the end of the quarter, with the corresponding liability being recorded as investment-related payables.

So, while our balance sheet at September 30 reflects the larger portfolio, the results of the quarter primarily reflected net interest income that was generated from the estimated $2 billion portfolio that we managed prior to deploying the proceeds from recent follow-on offering.

Our net income for the quarter was approximately $28.2 million, or $2.72 per weighted average diluted share. Our core earnings, which is defined as net income excluding net realized and unrealized gains and losses on investment, net unrealized gains and losses on derivative contracts and non-cash stock-based compensation expense, was approximately $9.3 million, or $0.89 per diluted share. Our net interest income for the period was approximately $12.8 million. This number is a GAAP number and does not include the interest we receive from our IO securities, nor does it take into account the cost of our interest rate swaps, both of which are included in the loss on derivative instruments line in our income statement.

On a non-GAAP basis, our net interest income, including interest we receive from IO securities and taking into account the cost of hedging, was approximately $11.2 million. Included in this calculation was $21.5 million of coupon interest offset by $6.9 million of premium amortization.

Our weighted average net interest spread for the quarter, which takes into account the interest that we receive from IO securities as well as the fully hedged cost of our financing, was 2%, reflecting a 2.79% gross yield on our portfolio and a 0.79% effective cost of funds. Our operating expenses for the period were approximately $2.1 million, which includes approximately $1.3 million for general and administrative expenses and approximately $800,000 in management fees.

In addition to core earnings, we had approximately $6.5 million of short-term capital gains as a result of modest repositioning of our portfolio, which Steve Fulton will discuss. Our net took value increased in the period from a dividend-adjusted $19.79 on June 30 to $21.76 on September 30, an increase of $1.97 per share or approximately 10%. During the third quarter, our constant prepayment rate, or CPR, was 4.1% on an annualized basis. This compares to 5.7% for the month of June. The CPR for our portfolio for the month of September was 2.8$. Our estimated CPR for the next 12 months is 7.4%.

As of September 30 we had borrowed a total of approximately $1.9 billion under our existing master repurchase agreements with 11 counterparties. Subsequent to the end of the quarter, we settled on the approximately $2.7 billion of securities that were purchased in conjunction with our follow-on offering and we financed these purchases with approximately $2.5 billion in additional repurchase borrowings. Our leverage ratio at the end of the period, taking into account the subsequent incremental financing, was approximately 8.5 to 1.

Finally, I would like to provide some additional color regarding our relationships with our counterparties that provide our repurchase agreement financing. We are in an attractive position of having repo capacity well in excess of our needs. We currently have master repurchase agreements with 14 counterparties and we continually receive offers to expand our repo lines from these and other institutions. We have also declined to enter into relationships with eight other counterparties as a result of our rigorous internal credit review process. At present, we feel comfortable with our existing counterparties and believe that we have more than ample liquidity to meet our present and expected funding requirements.

With that, I'll turn the call over to Travis Carr. Travis?

Thanks, Steve. I would like to provide a few general remarks in the state of the agency RMBS market.

The outlook for Agency RMBS remains favorable from a technical standpoint as net supply should remain firmly negative and demand remains strong. The Fed is providing a solid bid for these securities, particularly for the lower coupon fixed-rate mortgages which are expected to have the most impact on rates being offered borrowers in the primary mortgage market. Despite the higher prices and lower yields of agency bonds, we continue to view the hedge-adjusted carry from RMBS that's attractive, particularly with the type of collateral that we target, which are prepayment protected mortgage pools.

Moving to the interest rate environment, given the slow US economic recovery and ongoing concerns about Europe, our view on interest rates over the next 6 to 12 months is that we see a relatively stable yield curve with near zero interest rates at the short end of the curve. We do, however, except some steepening at the long end of the curve as the economic recovery proceeds along a subdued yet positive path. Our view on the yield curve is supported by the lower volatility in the 1-by-10 swap market, probably the most highly traded and closely monitored market for intermediate rates. The volatility is that multi-year lows, and we think that it could go even lower in the coming months.

When we recognize the possibility of moderately higher long-term rates, we continue to view prepayment risk as the primary risk that we face and have positioned the portfolio to mitigate this risk. Steve Fulton will go into more detail on the specifics of our strategy.

This historically low interest rates in the RMBS market are expected to generate an increased level of mortgage refinancing which will continue to cause certain sectors of the market to experience higher prepayments, specifically hybrid ARMs and more generic 15- and 30-year pools. That being said, the lower interest rates in the secondary market are not being fully passed through to the consumer in the primary mortgage market. The spread between primary and secondary mortgage rates is at the high end of its historic range, this indicative of the fact that most of the country's major mortgage originators are still reluctant to increase origination capacity. While mortgage industry employment has increased in recent months, we do not expect that lending capacity will meaningfully increase when mortgage rates are at all-time historic lows and are eventually expected to increase. This should mute the effect of lower rates on refinancing activity, which now accounts for approximately 80% of the mortgage market.

Now I will turn the call over to Steve Fulton for a further discussion of our portfolio and investment outlook. Steve?

Thanks, Travis. Good morning. Thanks for joining us today. I hope everybody in New York is holding up under the difficult weather back there. I appreciate your taking the time to join us on the call this morning.

Let me start the discussion of our portfolio. We are pleased to report that we have assembled a portfolio that has to date performed right in line with our expectations. Our strategy of focusing on mortgage pools that we expect will exhibit lower prepayment characteristics is working, as evidenced by our lower than industry-wide prepayment speeds. This is enabling us to generate higher than average gross yields and correspondingly higher net spreads. By and large, the announcement of QE3 did not have a material impact on our portfolio management strategy, as we have been anticipating QE3 for several months and had positioned the portfolio accordingly.

As of September 30, 2012, the total estimated market value of our portfolio was approximately $4.61 billion and consisted exclusively of agency mortgages. Our portfolio is heavily weighted towards 30-year fixed-rate mortgage pools which represent approximately 85% of the value of the total portfolio. 20-year fixed-rate mortgages make up 11% and the remaining 4% is split between interest-only strips, inverse interest-only strips and fixed-rate CMOs.

Our continued heavy emphasis on 30-year mortgages is based on our continued view that they produce the highest hedge-adjusted carry in the current yield curve and interest-rate environment. If you break down our specified pools by sector, at September 30, 48% of the total was invested in mortgage pools with lower loan balances, which is consistent with our stated investment strategy of minimizing our prepayment risk. The next-largest sector was pools with a low percentage of third-party or TPO-originated loans at 24%. MHA loans with high LTVs represent 21% of the total, and then new production lines and low FICO loans make up the remaining 7% of our pools.

We focused our new purchases primarily on the loan balance, MHA and low third-party origination loans, as we find that these pools currently offer the most attractive relative value. Last quarter we talked about loans with a high spread at origination, or high SATO loans, and while we still like high SATO loans, we've reduced our overall exposure to them. If there is going to be an expansion of HARP, it may potentially impact higher SATO loans more than lower ones, and we are mindful of that possibility.

During the quarter, we repositioned a portion of the portfolio and sold approximately $660 million of securities, recognizing net gains of approximately $6.5 million. This is part of our strategy to constantly evaluate the expected prepayment characteristics of the pools that we own. In one case, we became aware that a specific originator began targeting specific loan size borrowers for refinancing, so we moved out of those securities and into similar securities with a different originator. We've placed a great deal of focus on looking at securities at a granular level and understanding what specific originators are doing so that we can anticipate where there may be potential changes in prepayment behavior.

At approximately $5 billion in assets, we believe that the size of our portfolio and our world-class agency RMBS platform are comparative advantages. We have the ability and the agility to make trades that could shave off a point or two in CPRs. Security selection has more of an impact on our portfolio as a result of our size. We can execute $500 million trades relatively quickly and it can have a meaningful difference in our performance. As Steve Sherwyn noted, our CPR was 4.1 for the quarter, which is among the lowest in our peer group and is reflective of the effectiveness of our security selection and portfolio management strategy.

And now I would like to spend a few minutes discussing the liability side of our balance sheet. As Steve mentioned, we funded our portfolio through the use of short-term repurchase agreements, or repos. After we settled on the securities our balance sheet at quarter end, we had borrowed over $4.4 billion under these agreements. Currently, we enjoy excellent relationships in the repo market, in part due to our ability to leverage Western Assets' strong position as a leading global money market fund manager. Because we are essentially funding longer duration fixed-rate assets with short duration variable-rate liabilities, we utilize hedging to narrow the duration gap. This is primarily done in the form of entering into pay fixed and received LIBOR interest rate swaps, and recently with the use of interest rate swaption contracts. These instruments allow us to fix a portion of our funding rates as well as to extend the duration of our liabilities to more closely match the duration of our assets.

As of September 30, we have entered into approximately $2.26 billion in notional value of interest rate swaps and swaptions inclusive of swaps entered into in anticipation of the overall increase in the size of the portfolio and its funding needs. The most notable change in the composition of our swap positions was layering in some long end protection against rising interest rates and also entering into one-year by 10-year payer swaptions. These swap and swaption positions represent approximately 56% of our outstanding funding. The swap contracts range in maturities to between nine months and 20 years with a weighted average maturity of 7.1 years and bear a weighted average fixed-rate of 1.3%. Approximately 26% of the notional value of the swap positions are held in forward-starting swaps that start approximately 10 months forward. As a result, our portfolio had a net duration of approximately 0.9 year at September 30.

But as we've said before, we really focus on the partial durations of our portfolio. So while we currently maintain a slightly positive duration for the entire portfolio, we have negative duration at the long end of the portfolio and positive duration at the short end, as we expect that if rates increase, the long end of the curve will be disproportionately affected. Going forward, we expect incremental spreads to be in the 1.7% to 1.8%. This is lower than our third quarter net interest spread, but higher than what it appears most other mortgage REITs are positioned to generate.

And on a final that, as Steve Sherwyn mentioned, our adjusted leverage at September 30 was approximately 8.5 times, which is a moderate increase from June 30. Given our view that for the near-term that that has de-risked the portion of the Agency RMBS market that we are active in and has reduced volatility, we view our increased leverage as an appropriate response as we seek to maintain the same value at risk. This really brings up an important point about how we view the world and how we manage the portfolio. We do not target a specific dividend level and then adjust leverage accordingly in order to achieve that dividend. We are targeting and appropriate risk-adjusted return given the current market environment and our view on the future, and the dividend is a function of these decisions we make in that context. It's an important distinction and one that is key to understanding our decision making relative to the appropriate amount of leverage.

With that, if anybody has any questions, we will certainly entertain them. Operator, could you open up the call?

(Operator instructions) Rick Shane, JPMorgan.

I am intrigued by the use of the forwards on the swaps portfolio and the rationale for that. I guess what I'm trying to figure out is, is that a function of how you think the portfolio is going to grow over time, and so you are taking advantage of an attractive environment right now and locking in funding for future growth? Or, is it a function of some other sort of interest rate bet? And again, as an equity guy, I would love to get the rationale for that.

No, it's really pretty straightforward. Doing a 10-year swap today and doing a nine-year swap one years forward, in theory, are identical economic positions, the only difference being how you handle the 12 months between now and the one-year forward swap and what you think repo rates will do versus the forward curve.

So, essentially, our view is that repo rates are going to be falling for the first half of next year for a variety of reasons, which I will be happy to get into. So in other words, the forward repo rates are going to be lower than what is implied by the forward curve. So our view is that it's cheaper to essentially fund at three-month repo rates rolling it every three months, and then enter into a nine-year swap one year forward than it is to enter into a 10-year swap today.

Great, that's very helpful, and that was exactly the type of answer I was looking for. And since you said you will entertain some questions and you opened yourself up for it, would you mind going through why you think forward repo rates are going to decline?

I can't tell you. No, I'm just kidding.

That wasn't an entertaining enough question, Steve?

No, no, I had to. Essentially, it's a supply/demand thing. If you look at -- if you remember -- if you just look at where LIBOR is compared to repo financing right now, repo financing is somewhat elevated. And a reasonable question would be why. It has a lot to do with what's on the balance sheet of repo providers or banks right now. And when you think of what's going on with Operation Twist, which ends in December, the Fed is essentially selling short duration treasuries and buying longer one. That's the Fed's schtick. And what happens is that those short treasuries basically end up on the balance sheets of banks while they attempt to sell them, but basically their balance sheet is plugged up by these short-duration Treasury securities that are being sold by the Fed. Well, that all ends in December and those things are all at much lower rates than either LIBOR or repos. So we would expect to see a lot of those assets replaced with repo assets, which are basically much cheaper or higher-yielding assets for banks than short-duration treasuries. And that's essentially it. It's just a supply-and-demand thing based on the ending of Operation Twist; that's largely the concept. And of course, we think short rates are continuing to be basically pegged at zero for the foreseeable future.

Daniel Furtado, Jefferies & Co.

First question is, would you expect any potential principal forgiveness plan from the government to exclude previously refinanced HARP loans, or do you have an opinion there?

Boy, there is a loaded one -- wow! You know, I think -- honestly, I think principal forgiveness is a little bit of a tough -- is going to be a little bit of a tough sell. I think I would expect them to take a bigger shot -- and it's not going to happen while DeMarco is there. The recess appointment of DeMarco would potentially mean that the administration would have to appoint one of the directors that currently works under DeMarco. So I don't know, I think that's a pretty tough one. I think the easier the lower-hanging fruit is to spur refinancings. Principal forgiveness is a little bit of a hot button. Refinancings really isn't. And I'm not -- given the housing market seems to already be curing itself, forgiving principal to somebody that's got a 1.15 LTV, if he is going to be up 5% a year for the next three years is not -- I don't know, the taxpayer isn't going to like that so much.

So I would really expect the focus -- I think we would really expect the focus to be on spring refinancings as opposed to principal forgiveness from the get-go, at least for the relatively intermediate term. And like I said, we view the housing market as sort of curing itself.

So I guess we think that principal forgiveness is a pretty low probability, although not zero in the intermediate-term. So we haven't really given too much thought to, if it happens, what would it likely -- what borrowers would we be angling for. But I guess, if I had to hazard a guess, it would probably be pre-HARP borrowers at higher LTVs. But like I said, I haven't really thought about it because we do think it is a fairly low probability.

Understood, great, thank you for that. And then hopefully maybe one that's not so loaded. So when we think out into the exit from the Fed, and I get the forward starting swaps and, to maybe a greater degree even, the swaptions, intend to help protect book value. But how do you think about the agency price risk from a technical perspective where, when the market starts to sense rates will move up, we will expect treasuries to move up pretty dramatically over a short period of time, certainly surpassing whatever the Fed would do? And then you have the technical aspect of not only the Fed at first not reinvesting in MBS, but then outright selling, and then you also would have the selling, the technical selling pressure of people who had used agencies as a safe harbor or a shelter in the storm. And so what's the risk -- how do you think about the risk that when we look at historical models or historical ways to hedge the book, that those won't really be relevant because, in essence, this volatility that the Fed has taken out, it hasn't destroyed the volatility, it has just squeezed it, compressed into different pockets. And once the Fed is kind of -- the invisible hand moves away, that should spring back dramatically and in ways that are probably, looking at historical patterns, are not necessarily relevant.

Yes, and that's really an important reason to why we hedge partial durations and we don't just have one, two and three and four-year swaps. To us, the risk is the duration that will be moving out the curve as its deepens in the higher rates. I have a very difficult time believing that a 2% 10-year is going to make sense to people under a higher rate regime or, for that matter -- where is the (inaudible) now, 2.60 or whatever, a 3%, 30-year security. So I think that's one of the reasons -- and it's also one of the reasons we have bought some longer-dated swaption vol post-quarter end. Basically, we bought some swaptions vol all the way out in 20 years. So we view that as basically the best methodology for hedging what we think will -- we kind of agree with you, once the Fed --

But I will say, we also think the Fed taking away the punch bowl is not -- that's not next week's trade or next month or next quarter's trade, for that matter. But, it is a trade that is on the horizon, and I think it will be relatively -- it could be relatively ugly and quick when it happens. And we are very mindful of that. Fortunately, it doesn't fit into local models. But some of us have been around trading since 1994, when [Asken] blew up and George [Voll] and some others blew up. We know what can and under large extension situations. I think we have a reasonably decent idea how to hedge that, and I think we are nimble enough and agile enough to do it.

But essentially the way we are attacking it now is to focus on partial durations and make sure that we have volatility hedges out the yield curve. Even though, quite honestly, we think 1-by-10 swaption vol which hit 80 normal the other day, which is a multi-year low -- don't forget, several years ago, it was down to 64 normal vol and that convexity cost is inversely proportional to the square of volatility, not to just volatility. So a 20% reduction in volatility from 80 to 64 normal is not a 20% reduction in convexity cost; it's the square of that. And we do think vol is going to continue to fall for the next, I would say, three to nine months. But we are pretty mindful of what the exit strategy will be.

Steve DeLaney, JMP Securities.

Guys, congratulations on a great quarter. I wanted to ask you a little bit about the earnings in the quarter that exceeded the dividend. So let's just say for a minute that the 89 core and the 85 dividend were kind of a wash. That leaves you with about $6.5 million of gain revenue, which of course would be taxable. And you've got 14 million pro forma shares, I think, so about it looks like maybe 25% in a cookie jar for undistributed taxable. Just curious not so much about that 25%, because in the big picture, that's not that much money. But as you go forward -- and I think, Steve, you guys are certainly -- you're going to see relative value. I suspect you will be generating some gains as we move forward. How are you going to view those gains as they build up and you have a cushion? How are you going to play that off against your dividend policy? Any color you could give on that would be helpful.

Well, certainly for 2012, our -- well, policy is basically to distribute 100% of taxable income. Certainly, for 2012, there will be a make-whole, for lack of a better term, in the fourth quarter.

Okay.

Going forward, whether it makes sense to incorporate trading gains into the dividend or not is something we are still discussing and looking at. For this year, it made more sense to put everything into the fourth quarter in that regard.

Okay. So I don't know whether you will just declare a quarterly and a special. Will you distinguish between the two as to what is the set early dividend and what the make-whole amount is?

We will distinguish between what portion -- again, it's all short-term because we've only been in business since May, so there will be no long-term capital gain benefit. But we will distinguish between the core portion and the capital gain portion.

You covered repo. That was my other question. Thanks a lot.

Mike Widner, Stifel Nicolaus.

I wanted to go back to one of the things you said in the opening remarks. You were talking about spreads, and I wasn't quite sure I followed one of the things you said. I think you mentioned 1.7 to 1.8 range. And wasn't your view -- you were saying that's where you see spreads on incremental investments today, or if that's where you said that you saw the portfolio heading? I just wasn't quite sure what your comments were there.

Basically, that's what we think incremental spreads are.

Okay, and so you were reporting for this quarter basically a 2% spread. Assuming continued CPRs very subdued levels is the right way to think about it, that core business kind of doing 2% and eventually, if all things stay the way they are today, we eventually gravitate toward that 1.7%, 1.8% kind of spread range. Is that the implication?

Yes. I'm not sure I can rifle-shot at quite that close, but I will say as of September 30, if you want to do a point in time, I think we were at about 1.90%. So taking the end of the quarter, sort of point in time, looking at year forward prepayment rates. So could we drift into the 1.70% to 1.80 range? Yes, sure. That's -- I'm always trying to be fairly conservative on -- I'm a big fan of under-promising and over-delivering as opposed to over-promising and under-delivering. So I guess I would suggest that you think about the 1.70% to 1.80% range. But we are running above that as of the end of the quarter.

Boris Pialloux, National Securities.

Thanks for taking my question, and great quarter. I wanted to go back to what you said about the 600 million you sold. You mentioned that you had a specific originator targeting loan size borrower, so I assume that you were talking about low loan balances. So I'm just trying to figure this. How do you actually identify these kind of trends where originators actually or refinancing certain type of borrowers?

We have got some internal proprietary programs that we use based on posted rates and websites and talking with some third-party originators. So it's a whole variety of means that we triangulate into what we think people are up to. It's not necessarily perfect, but it gives us a pretty good idea on a go-forward basis. So I don't want to say it's a black box, but it is a variety of proprietary methodologies that we used to try to triangulate through a variety of sources what specific originators are up to.

We are always on the look, if you will, for originators that are just slightly less aggressive refinancers across the load balanced spectrum. And that's -- I don't think we are alone in that. I think the one thing that helps us out a little bit is we can move in and out of $250 million or $500 million pretty quietly, pretty quickly, pretty efficiently without disturbing the market, and nobody really knows what's up. And so our size does give us a little bit of an advantage, I think. But it's just a method of -- the reality is you've just got to turn over the rocks and turn over enough of them, and at some point it leads you to some information.

Anyway, congratulations.

(Operator instructions) Mike Widner, Stifel Nicolaus.

Just wanted to follow up also on something you've mentioned about adding swaptions post Q. As I look at the swaps, the swaps balances and then what we see on the balance sheet right now is you indicated you guys bought $2.7 billion right at the end of the quarter. That shows up in the securities, and then I can see, looking at the repo, that it doesn't show up. You mentioned it shows up in a different liability. How about the swaps? Did you enter any corresponding swaps at that time, or is there additional stuff that you are looking at later? How should we think about that?

So what is our total swap? It was like 2.2; right?

Yes.

Yes, 2.2, which is in the earnings release, 2.263 is the number. There are some -- we did subsequently purchase some long end -- when I say long end, I mean long end of the curve -- swaptions payors.

Just looking at the calendar, what happened was September 28 was a Friday and we purchased about $2.7 billion in securities. We also entered into a number of swaps on that day. Being a Friday, nothing had settled by Sunday, which was the close of the quarter, which is why you've got this little bit of ambiguity in the financials in that regard.

Okay, because if I look at, you had basically $1 billion at the end of last quarter. And so the big change is reflective of the purchases you made and we shouldn't expect to see like a big jump in that as those transactions settle. I guess that would sort of --

Those swaps were entered into in the anticipation that we would be financing that $2.7 billion in securities the following week with repo.

Got you. Appreciate it, and solid quarter. Thanks, guys.

Jeff Rudner, UBS.

Good morning, gentlemen, and thank you for taking my question. I have to admit that, although I have been listening to the entire conference, it has only been with half an ear. I'm calling from Long Island, and we spend more time here standing on gas lines. It's not funny, unfortunately. They tell some people that will have power back until Thanksgiving, which is certainly no laughing matter. But a follow-up question on the one or two that were asked about the dividend policy. When you declare the fourth-quarter dividend, again, your intent is to pay out a taxable income? Is that correct?

That's correct.

Okay, and I know one question was that we would break it out as to what would be normally the regular dividend, and then what is like a special or extra dividend?

That's correct.

Okay, did I hear a figure of about $1.70 in that regard as being the total dividend?

No, you did not.

I did not? Okay, then I -- heard that. So you haven't given the figure as to what you anticipate, although we can do the arithmetic and figure out what the year-end dividend would be?

That part is correct. Right now, when we announce that dividend, which will be sometime in December so that we comply with the REIT requirements to treat it as a 2012 distribution, it will be -- obviously, those numbers will be a little bit in flux, will be an estimate of what portion is the -- let's call it the regular dividend versus the portion that's attributable to trading gains and losses.

Okay. The September dividend, the third quarter dividend was $0.85. Is it somewhat reasonable to anticipate that at least for the fourth quarter, the regular declared dividend would be the same, $0.85?

Again, the dividend for the third quarter reflects the core earnings for the third quarter. And that would be the anticipation, that it would reflect the core earnings for the fourth quarter as well.

Jim Young, West Family Investments.

Your current focus is on the agency bonds, yet you have the flexibility to invest in other asset classes, including non-agency RMBS, asset-backed and CMBS. Can you share with us how you are currently thinking about allocating capital potentially to those other areas?

Yes, we have essentially -- we have the ability and expertise to invest in nonagencies, as most of you may or may not know. If you don't know, we were one of [PPIP] managers and certainly one of the top performing managers. Right at the moment, we believe that there's better risk-adjusted returns with agencies. Non-agencies are, of course, performing extremely well and we always monitor all sectors of the RMBS market.

I will say that in general, we have told people this is going to be an agency REIT. And as long as we think that the risk-adjusted returns are attractive there, it will remain so. So, while we -- as a firm, we continue to like the non-agency market, we see the best risk-adjusted returns in the agencies.

Thank you, and there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Well, thanks, everybody. Thanks to all the analysts for calling and asking questions. I appreciate all the hardship that you guys on the East Coast are faced with, and again, thanks for making the effort to call and pose your questions today. We look forward to seeing many of you in person, in the coming months. And at this time, we wish you all a goodbye.

Ladies and gentlemen, this concludes the Western Asset Mortgage Capital Corporation's third quarter, 2012 earnings conference call. You may now disconnect. Thanks for using ACT Conferencing.