During the fourth quarter the interest income of $145.4 million surged 3.5% sequentially, largely due to a hike in interest yielding assets. At the same time, the interest expense of $65.1 million climbed 8%, despite a 2 basis points decline in the hedged cost of funds. Other income of $23.2 million advanced around 40% over the prior quarter due to gain on sale of investments, while operating expenses of $10.2 million edged up 2% over the same time period due to management fee, partially offset by a decline in general and administrative expenses. As a result, Invesco Mortgage Capital was able to report a net income of $93.3 million, up 7.5% from the third quarter of the prior year.
Asset Portfolio
Figure 1 shows the percentage of each type of asset and the extent of diversification the company has in its asset portfolio at the end of the fourth quarter of the prior year. It is evident that around 69% of the assets are composed up of Agency residential mortgage backed securities, followed by non-Agency RMBS at 17 and commercial MBS at 11%. Agency collateralized mortgage obligations are 3% of the fourth quarter’s entire asset portfolio.
Within the Agency residential mortgage backed securities one can see further diversification. Figure 2 shows that 30-year fixed rate MBS dominate within the Agency RMBS as it holds around 78% of the Agency RMBS, followed by 15-year fixed rate securities at 17%.
The Agency RMBS have a net weighted average coupon of 4.13%, while Agency CMOs have a coupon of 2.89%. The net weighted average coupon of non-Agency RMBS have a coupon of 4.2% and Commercial MBS have the highest coupon of 5.27%.
In comparison, at the end of the third quarter, MITT reported 4% weighted average coupon for its overall MBS holdings, compared to the weighted average coupon of 4.1%, 3.86%, and 3.54% for American Capital Agency, Annaly Capital Management, and Armour Residential, respectively.
Asset Yield, Interest Expense & Net Interest Income
Since Commercial MBS have the highest coupon, they are the highest yielding assets, with a period end weighted average yield of 4.96%, followed by Non-Agency RMBS offering 4.61%. Agency MBS and Agency CMO offer yields of 2.77% and 2.35%, respectively. Therefore, the total weighted average asset yield comes out to be 3.27%. It is worth mentioning here that the asset yield declined only 2 basis points over the linked quarter. The decline in net asset yield is blamed to the ultra low interest rate environment, partially offset by a hike in CMBS and non-Agency RMBS average balances.
The company seems to have benefited from the ultra low interest rate environment as far as its hedged cost of funds is concerned. The fourth quarter average cost of funds slipped 2 basis points from 1.67% to 1.65%. Non-Agency RMBS remained the largest contributor in the cost of funds, followed by Commercial MBS. The unhedged cost of funds increased 10 basis points from 68 basis points at the end of the third quarter to 78 basis points at the end of the fourth quarter. Much of the rise in unhedged cost was a result of hike in the cost of Agency RMBS.
