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EXCEL - IDEA: XBRL DOCUMENT - Invesco Mortgage Capital Inc.Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________ 
FORM 10-Q 
_______________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 001-34385

(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Maryland
 
26-2749336
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
1555 Peachtree Street, N.E., Suite 1800
Atlanta, Georgia
 
30309
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 892-0896
(Registrant’s Telephone Number, Including Area Code) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large Accelerated filer
 
ý
 
  
Accelerated filer
 
o
Non-Accelerated filer
 
o
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  ý
As of November 1, 2014, there were 123,102,325 outstanding shares of common stock of Invesco Mortgage Capital Inc.

 
 
 



INVESCO MORTGAGE CAPITAL INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



PART I
ITEM 1.
FINANCIAL STATEMENTS
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
  
As of
 In thousands except share amounts
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
Mortgage-backed securities, at fair value
17,297,034

 
17,348,657

Residential loans, held-for-investment (1)
3,103,434

 
1,810,262

Commercial loans, held-for-investment
144,707

 
64,599

Cash and cash equivalents
128,944

 
210,612

Due from counterparties
28,499

 
1,500

Investment related receivable
55,942

 
515,404

Investments in unconsolidated ventures, at fair value
42,281

 
44,403

Accrued interest receivable
66,295

 
68,246

Derivative assets, at fair value
74,421

 
262,059

Deferred securitization and financing costs
13,485

 
13,894

Other investments
62,500

 
10,000

Other assets
1,521

 
1,343

Total assets (1)
21,019,063

 
20,350,979

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
13,571,889

 
15,451,675

Secured loans
1,250,000

 

Asset-backed securities issued by securitization trusts (1)
2,745,940

 
1,643,741

Exchangeable senior notes
400,000

 
400,000

Derivative liabilities, at fair value
222,559

 
263,204

Dividends and distributions payable
64,976

 
66,087

Investment related payable
12,351

 
28,842

Accrued interest payable
23,080

 
26,492

Collateral held payable
35,446

 
52,698

Accounts payable and accrued expenses
2,567

 
4,304

Due to affiliate
9,854

 
10,701

Total liabilities (1)
18,338,662

 
17,947,744

Equity:
 
 
 
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:
 
 
 
7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)
135,356

 
135,356

7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)
149,918

 

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 123,101,132 and 124,510,246 shares issued and outstanding, respectively
1,231

 
1,245

Additional paid in capital
2,531,914

 
2,552,464

Accumulated other comprehensive income (loss)
310,837

 
(156,993
)
Retained earnings (distributions in excess of earnings)
(477,759
)
 
(155,957
)
Total shareholders’ equity
2,651,497

 
2,376,115

Non-controlling interest
28,904

 
27,120

Total equity
2,680,401

 
2,403,235

Total liabilities and equity
21,019,063

 
20,350,979

(1)
The consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. As of September 30, 2014 and December 31, 2013, total assets of the consolidated VIEs were $3,118,222 and $1,819,295, respectively, and total liabilities of the consolidated VIEs were $2,754,169 and $1,648,400, respectively. Refer to Note 3 - "Variable Interest Entities" for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.

 
1
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
In thousands, except share amounts
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Mortgage-backed securities
144,043

 
157,539

 
447,702

 
486,619

Residential loans
22,713

 
13,417

 
60,888

 
20,443

Commercial loans
2,649

 
372

 
6,329

 
432

Total interest income
169,405

 
171,328

 
514,919

 
507,494

Interest Expense
 
 
 
 
 
 
 
Repurchase agreements
45,756

 
73,695

 
142,649

 
208,487

Secured loans
1,223

 

 
1,399

 

Exchangeable senior notes
5,620

 
5,621

 
16,840

 
12,403

Asset-backed securities
17,660

 
10,266

 
47,421

 
15,722

Total interest expense
70,259

 
89,582

 
208,309

 
236,612

Net interest income
99,146

 
81,746

 
306,610

 
270,882

Provision for loan losses
(209
)
 
87

 
(52
)
 
751

Net interest income after provision for loan losses
99,355

 
81,659

 
306,662

 
270,131

Other Income (loss)
 
 
 
 
 
 
 
Gain (loss) on sale of investments, net
(47,952
)
 
(69,323
)
 
(80,436
)
 
(56,919
)
Equity in earnings and fair value change in unconsolidated ventures
1,145

 
1,422

 
5,480

 
5,169

Gain (loss) on derivative instruments, net
(3,704
)
 
(6,887
)
 
(322,832
)
 
44,424

Realized and unrealized credit default swap income
247

 
297

 
868

 
828

Other investment income (loss), net
(1,358
)
 

 
(1,358
)
 

Total other income (loss)
(51,622
)
 
(74,491
)
 
(398,278
)
 
(6,498
)
Expenses
 
 
 
 
 
 
 
Management fee – related party
9,214

 
10,945

 
27,876

 
32,106

General and administrative
4,079

 
2,259

 
11,014

 
6,845

Total expenses
13,293

 
13,204

 
38,890

 
38,951

Net income (loss)
34,440

 
(6,036
)
 
(130,506
)
 
224,682

Net income (loss) attributable to non-controlling interest
394

 
(63
)
 
(1,485
)
 
2,392

Net income (loss) attributable to Invesco Mortgage Capital Inc.
34,046

 
(5,973
)
 
(129,021
)
 
222,290

Dividends to preferred shareholders
2,713

 
2,713

 
8,138

 
8,138

Undeclared cumulative dividends to preferred shareholders
661

 

 
661

 

Net income (loss) attributable to common shareholders
30,672

 
(8,686
)
 
(137,820
)
 
214,152

Earnings (loss) per share:
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
 
 
 
 
 
 
 
Basic
0.25

 
(0.06
)
 
(1.12
)
 
1.61

Diluted
0.25

 
(0.06
)
 
(1.12
)
 
1.56

Dividends declared per common share
0.50

 
0.50

 
1.50

 
1.80

The accompanying notes are an integral part of these consolidated financial statements.


 
2
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
In thousands except share amounts
2014
 
2013
 
2014
 
2013
Net income (loss)
34,440

 
(6,036
)
 
(130,506
)
 
224,682

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed securities
(113,946
)
 
5,707

 
328,743

 
(763,016
)
Reclassification of unrealized loss on sale of mortgage-backed securities to gain (loss) on sales of investments, net
47,952

 
69,323

 
80,436

 
56,919

Unrealized gain (loss) on derivative instruments

 
(74,098
)
 

 
183,391

Reclassification of unrealized loss on derivative instruments to gain (loss) on derivatives, net

 
43,583

 

 
116,553

Reclassification of amortization of repurchase agreements interest expense to repurchase agreements interest expense
21,227

 

 
64,055

 

Total Other comprehensive income (loss)
(44,767
)
 
44,515

 
473,234

 
(406,153
)
Comprehensive income (loss)
(10,327
)
 
38,479

 
342,728

 
(181,471
)
Less: Comprehensive (income) loss attributable to non-controlling interest
117

 
(402
)
 
(3,919
)
 
1,856

Less: Dividends to preferred shareholders
(2,713
)
 
(2,713
)
 
(8,138
)
 
(8,138
)
Less: Undeclared cumulative dividends to preferred shareholders
(661
)
 

 
(661
)
 

Comprehensive income (loss) attributable to common shareholders
(13,584
)
 
35,364

 
330,010

 
(187,753
)
The accompanying notes are an integral part of these consolidated financial statements.


 
3
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
For the nine months ended September 30, 2014
(Unaudited)
 
 
 
 
 
 
 
Attributable to Common Shareholders
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interest
 
 
 
Series A
Preferred Stock
 
Series B
Preferred Stock
 
 
 
 
In thousands except
 share amounts
 
 
Common Stock
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2014
5,600,000

 
135,356

 

 

 
124,510,246

 
1,245

 
2,552,464

 
(156,993
)
 
(155,957
)
 
2,376,115

 
27,120

 
2,403,235

Net loss

 

 

 

 


 


 

 

 
(129,021
)
 
(129,021
)
 
(1,485
)
 
(130,506
)
Other comprehensive income

 

 

 

 

 

 

 
467,830

 

 
467,830

 
5,404

 
473,234

Proceeds from issuance of common stock, net of offering costs

 

 

 

 
11,459

 

 
191

 

 

 
191

 

 
191

Proceeds from issuance of preferred stock, net of offering costs

 

 
6,200,000

 
149,918

 

 

 

 

 

 
149,918

 

 
149,918

Repurchase of shares of common stock

 

 

 

 
(1,438,213
)
 
(14
)
 
(21,116
)
 

 

 
(21,130
)
 

 
(21,130
)
Stock awards

 

 

 

 
17,640

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 
(184,643
)
 
(184,643
)
 

 
(184,643
)
Common unit dividends

 

 

 

 

 

 

 

 

 

 
(2,138
)
 
(2,138
)
Preferred stock dividends

 

 

 

 

 

 

 

 
(8,138
)
 
(8,138
)
 

 
(8,138
)
Amortization of equity-based compensation

 

 

 

 

 

 
375

 

 


 
375

 
3

 
378

Balance at September 30, 2014
5,600,000

 
135,356

 
6,200,000

 
149,918

 
123,101,132

 
1,231

 
2,531,914

 
310,837

 
(477,759
)
 
2,651,497

 
28,904

 
2,680,401

The accompanying notes are an integral part of this consolidated financial statement.


 
4
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
Nine Months Ended September 30,
In thousands
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net income (loss)
(130,506
)
 
224,682

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of mortgage-backed securities premiums and (discounts), net
99,770

 
145,112

Amortization of residential loans and asset-backed securities premiums (discount), net
2,195

 
117

Amortization of commercial loan origination fees
(1
)
 
(21
)
Provision for loan losses
(52
)
 
751

Unrealized (gain) loss on derivative instruments, net
133,863

 
21,810

Unrealized loss on credit default swap
185

 
743

(Gain) loss on sale of mortgage-backed securities, net
80,436

 
56,919

(Gain) loss on derivative instruments, net
34,877

 
(66,234
)
Equity in earnings and fair value change in unconsolidated ventures
(5,480
)
 
(5,169
)
Amortization of equity-based compensation
378

 
276

Amortization of deferred securitization and financing costs
2,220

 
1,647

Amortization of deferred swap losses from de-designation
64,055

 

Non-cash interest income capitalized in commercial loans
(768
)
 

Loss on foreign currency transactions
1,479



Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in operating assets
1,790

 
(8,929
)
Increase (decrease) in operating liabilities
(6,174
)
 
9,489

Net cash provided by operating activities
278,267

 
381,193

Cash Flows from Investing Activities
 
 
 
Purchase of mortgage-backed securities
(3,752,261
)
 
(6,923,130
)
(Contributions) Distributions from investment in unconsolidated ventures, net
7,602

 
(1,806
)
Change in other investments
(52,500
)
 

Principal payments from mortgage-backed securities
1,422,082

 
2,309,117

Proceeds from sale of mortgage-backed securities
3,069,978

 
3,507,011

Payment of premiums for interest rate swaptions
(10,328
)
 
(72,723
)
Proceeds from termination of interest rate swaptions

 
114,538

Payments for termination of futures contracts and TBAs
(11,604
)
 

Purchase of residential loans held-for-investment
(1,417,864
)
 
(1,562,818
)
Principal payments from residential loans held-for-investment
120,930

 
28,464

Principal payments from commercial loans held-for-investment
400

 

Origination and advances of commercial loans, net of origination fees
(81,201
)
 
(17,050
)
Net cash used in investing activities
(704,766
)
 
(2,618,397
)
Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock
191

 
396,417

Repurchase of common stock
(21,130
)
 

Proceeds (costs) of issuance of preferred stock
150,096

 
(6
)
Due from counterparties
(26,999
)
 
(8,182
)
Collateral held payable
(13,771
)
 
21,045

Proceeds from repurchase agreements
108,739,181

 
140,364,041

Principal repayments of repurchase agreements
(110,638,714
)
 
(140,159,048
)
Proceeds from issuance of exchangeable senior notes

 
400,000

Proceeds from asset-backed securities issued by securitization trusts
1,213,405

 
1,440,755

Principal repayments of asset-backed securities issued by securitization trusts
(109,587
)
 
(27,778
)
Proceeds from secured loans
2,835,247

 

Principal repayments on secured loans
(1,585,247
)
 

Payments of deferred costs
(1,811
)
 
(15,676
)
Payments of dividends and distributions
(196,030
)
 
(261,743
)
Net cash provided by financing activities
344,831

 
2,149,825

Net change in cash and cash equivalents
(81,668
)
 
(87,379
)
Cash and cash equivalents, beginning of period
210,612

 
286,474

Cash and cash equivalents, end of period
128,944

 
199,095

Supplement Disclosure of Cash Flow Information
 
 
 
Interest paid
146,209

 
231,782

Non-cash Investing and Financing Activities Information
 
 
 
Net change in unrealized gain (loss) on mortgage-backed securities and hedged derivatives
409,179

 
(406,153
)
Dividends and distributions declared not paid
64,976

 
71,037

Payable for mortgage-backed securities sold / purchased, net
457,049

 
150,733

Repurchase agreements, not settled
19,747

 
(27,842
)
Collateral held payable, not settled
(3,481
)
 

Net change in due from counterparties

 
63

Offering costs not paid
(178
)
 

The accompanying notes are an integral part of these consolidated financial statements.

 
5
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Business Operations
Invesco Mortgage Capital Inc. (the “Company”) is a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. The Company is externally managed and advised by Invesco Advisers, Inc. (the "Manger"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a leading independent global investment management firm.
The Company conducts its business through IAS Operating Partnership LP (the “Operating Partnership”) as its sole general partner. As of September 30, 2014, the Company owned 98.9% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.1%. The Company has one operating segment.
The Company primarily invests in:
Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association, or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");
RMBS that are not guaranteed by a U.S. government agency (“non-Agency RMBS”);
Credit risk transfer securities issued by government-sponsored enterprises ("GSE CRT");
Commercial mortgage-backed securities ("CMBS");
Residential and commercial mortgage loans; and
Other real estate-related financing agreements.
The Company generally finances its investments through short- and long-term borrowings structured as repurchase agreements and secured loans. The Company finances its residential loans held-for-investment through asset-backed securities ("ABS") issued by consolidated securitization trusts. The Company has also financed investments through the issuances of debt and equity and may utilize other forms of financing in the future.
The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with the Company's taxable year ended December 31, 2009. To maintain the Company’s REIT qualification, the Company is generally required to distribute at least 90% of its taxable income to its shareholders annually. The Company operates its business in a manner that permits exclusion from the "Investment Company" definition under the Investment Company Act of 1940, as amended.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
Certain disclosures included in the Company’s annual report on Form 10-K are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The Company has condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2013.
In the opinion of management, the consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany transactions, balances, revenues and expense are eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Company and its controlled subsidiaries. The consolidated financial statements also include the consolidation of certain securitization trusts that meet the definition of a variable interest entity ("VIE") because the Company has been deemed to be the primary beneficiary of the securitization trusts. These securitization trusts hold pools of residential mortgage loans and issue series of asset-backed securities payable from the cash flows generated by the underlying pools of residential mortgage loans. The securitizations are non-recourse financing for the residential mortgage loans held-for-investment. Generally, a portion of the asset-backed securities issued by the securitization trusts is sold to unaffiliated third parties and the balance is purchased by the Company. The Company classifies the underlying residential mortgage loans owned by the securitization trusts as residential loans held-for-investment in its consolidated balance sheet. The asset-backed securities issued to third parties are recorded as liabilities on the Company's consolidated balance sheets. The Company records interest income on the residential loans held-for-investment and interest expense on the asset-backed securities issued to third parties in the

 
6
 



Company's consolidated statements of operations. The Company eliminates all intercompany balances and transactions between itself and the consolidated securitization trusts. The Company records the initial underlying assets and liabilities of the consolidated securitization trusts at their fair value upon consolidation into the Company and, as such, no gain or loss is recorded upon consolidation. Refer to Note 3 - "Variable Interest Entities" for additional information regarding the impact of consolidation of securitization trusts.
The consolidated securitization trusts are VIEs because the securitization trusts do not have equity that meets the definition of U.S. GAAP equity at risk. In determining if a securitization trust should be consolidated, the Company evaluates whether it has both (i) the power to direct the activities of the securitization trust that most significantly impact its economic performance and (ii) the right to receive benefits from the securitization trust or the obligation to absorb losses of the securitization trust that could be significant. The Company's determination of whether it is the primary beneficiary of a securitization trust includes both a qualitative and quantitative analysis. The Company determined that it was the primary beneficiary of certain securitization trusts because it was involved in certain aspects of the design of the securitization trusts and has certain default oversight rights on defaulted residential loans. In addition, the Company owns the most subordinated class of asset-backed securities issued by the securitization trusts and has the obligation to absorb losses/right to receive benefits from the securitization trust that could potentially be significant to the securitization trust. The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company's initial consolidation assessment.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities, allowance for loan losses and other-than-temporary impairment charges. Actual results may differ from those estimates.
Translation of Foreign Currencies
The functional currency of the Company and its subsidiaries is U.S. dollars. Transactions in foreign currencies are recorded at the rates of exchange prevailing on the date of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are remeasured at the rates prevailing at the balance sheet date. Gains and losses arising on revaluation are included in the consolidated statements of operations.
The Company generally hedges interest rate and foreign currency exposure with derivative financial instruments. Refer to Note 8 - "Derivatives and Hedging Activities" for further information.
Fair Value Measurements
The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels 1, 2, and 3, as defined). In accordance with U.S. GAAP, the Company is required to provide enhanced disclosures regarding instruments in the Level 3 category (which require significant management judgment), including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities.
To determine fair value of its financial instruments, the Company generally obtains one price per instrument from its primary valuation service. If this service cannot provide a price, the Company will seek a value from other vendors. The valuation services use various observable inputs which may include a combination of benchmark yields, trades, broker/dealer quotes, issuer spreads, bids, offers and benchmark securities to determine prices. Both the Company and the pricing vendor continuously monitor market indicators and economic events to determine if any may have an impact on the valuations.
Overrides of prices from pricing vendors are rare in the current market environment for the assets the Company holds. Examples of instances that would cause an override include if the Company recently traded the same security or there is an indication of market activity that would cause the vendor price to be unreliable. In the rare instance where a price is adjusted, the Company has a control process to monitor the reason for such adjustment.
To gain comfort that vendor prices are representative of current market information, the Company compares the transaction prices of security purchases and sales to the valuation levels provided by the vendors. Price differences exceeding pre-defined tolerance levels are identified and investigated and may be challenged. Trends are monitored over time and if there are indications that the valuations are not comparable to market activity, the vendors are asked to provide detailed information regarding their methodology and inputs. Transparency tools are also available from the vendors which help clients observe data points and/or market inputs used for pricing securities.

 
7
 



In addition, the Company performs due diligence procedures on all vendors on at least an annual basis. A questionnaire is sent to vendors which requests information such as changes in methodologies, business recovery preparedness, internal controls and confirmation that evaluations are generated based on market data. Physical visits are also made to each vendor’s office.
As described in Note 10 - "Financial Instruments," the Company evaluates the source used to provide the market price for each security and makes a determination on its categorization within the fair value hierarchy. If the price of a security is obtained from quoted prices for identical instruments in active markets, the security is classified as a level 1 security. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. If the inputs appear to be unobservable, the security would be classified as a level 3 security.
Mortgage-Backed Securities
The Company records its purchases of mortgage-backed securities on the trade date and classifies its mortgage-backed securities as available-for-sale investments. Although the Company generally intends to hold most of its mortgage-backed securities until maturity, the Company may, from time to time, sell any of its mortgage-backed securities as part of its overall management of its investment portfolio.
Available-for-sale mortgage-backed securities are measured at fair value. Unrealized gains or losses arising from changes in fair value, excluding other-than-temporary impairment, are recognized in accumulated other comprehensive income, a separate component of stockholders' equity, until sale or disposition of the investment. Upon sale or disposition, the cumulative gain or loss previously reported in shareholders' equity is recognized in income. Realized gains and losses from sales of mortgage-backed securities are determined based upon the specific identification method.
The Company considers its portfolio of Agency RMBS to be of high credit quality under applicable accounting guidance. For non-Agency RMBS, GSE CRT and CMBS, the Company does not rely on ratings from third party agencies to determine the credit quality of the investment. The Company uses internal models that analyze the individual loans underlying each security and evaluates factors including, but not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration to estimate the expected future cash flows. The Company places reliance on these internal models in determining credit quality.
While non-Agency RMBS, GSE CRT and CMBS with expected future losses are generally purchased at a discount to par, the potential for a significant adverse change in expected cash flows remains. The Company therefore evaluates each security for other-than-temporary impairment at least quarterly.
The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of recovery in fair value of the security, and (iii) the Company’s intent and ability to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
For debt securities, the Company recognizes in earnings and reflects as a reduction in the cost basis of the security the amount of any other-than-temporary impairment related to credit losses or impairments on securities that the Company intends to sell or for which it is more likely than not that the Company will need to sell before recoveries. The amount of the other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of consolidated shareholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.
Residential Loans Held-For-Investment
Residential loans held-for-investment are residential mortgage loans held by consolidated securitization trusts. Residential loans held-for-investment are carried at unpaid principal balance net of any premiums and an allowance for loan losses. The Company expects that it will be required to continue to consolidate the securitization trusts that hold the residential loans.
The Company establishes an allowance for residential loan losses based on the Company's estimate of credit losses. The Company calculates expected losses by estimating the default rate and expected loss severities on the loans. The Company considers the following factors in its evaluation of the allowance for loan losses:
Loan-to-value ratios, credit scores, geographic concentration and other observable data;
Historical default rates of loans with similar characteristics; and
Expected future macroeconomic trends including changes in home prices and the unemployment rate.

 
8
 



Commercial Loans Held-For-Investment
Commercial loans held-for-investment by the Company are carried at cost, net of any allowance for loan losses. The Company establishes an allowance for commercial loan losses based on loans the Company has determined to be impaired at the reporting date. An individual loan is considered impaired when it is deemed probable that the Company will not be able to recover its investment and any other anticipated futures payments. The Company generally considers the following factors in evaluating whether a commercial loan is impaired:
Loan-to-value ratios;
The most recent financial information available for each loan and associated properties, including net operating income, debt service coverage ratios, occupancy rates, rent rolls, as well as any other factors the Company considers relevant, including, but not limited to, specific loan trigger events that would indicate an adverse change in expected cash flows or payment delinquency;
Economic trends, both macroeconomic as well as those directly affecting the properties associated with the loans, and the supply and demand trends in the market in which the subject property is located; and
The loan sponsor or borrowing entity’s ability to ensure that properties associated with the loan are managed and operated sufficiently.
Where an individual commercial loan is deemed to be impaired, the Company records an allowance to reduce the carrying value of the loan to the current present value of expected future cash flows discounted at the loan’s effective rate, with a corresponding charge to provision for loan losses on the Company's consolidated statements of operations.
Interest Income Recognition
Mortgage-Backed Securities
Interest income on mortgage-backed securities is accrued based on the outstanding principal balance of the securities and their contractual terms. Premiums or discounts associated with the purchase of mortgage-backed securities are amortized or accreted into interest income over the life of the investment using the effective interest method. Management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the Company’s purchase price. As needed, these estimated cash flows are updated and a revised yield is computed based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and the Company's interest income.
Residential Loans
The Company recognizes interest income from residential loans on an accrual basis and amortizes the related premiums into interest income using the effective interest method over the weighted average life of these loans. In estimating the weighted average life of these loans, there are a number of assumptions that are subject to estimation, including the rate and timing of principal payments, defaults, loss severity given default and other factors. Coupon interest is recognized as revenue when earned and deemed collectible or until a loan becomes more than 90 days past due, at which point the loan is placed on nonaccrual status. Interest previously accrued for loans that have been placed on non-accrual status is reversed against interest income in the period it becomes nonaccrual. Residential loans delinquent more than 90 days or in foreclosure are characterized as delinquent. Cash principal and interest that is advanced from servicers after a loan becomes greater than 90 days past due is recorded as a liability due to the servicer. When a delinquent loan previously placed on nonaccrual status has cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan is placed back on accrual status. Alternatively, nonaccrual loans may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.
Commercial Loans
Interest is recognized as revenue when earned and deemed collectible, or until a loan becomes past due based on the terms of the loan agreement, with the related originating fees, net of origination cost, being amortized into interest income using the effective interest method over the life of the loan. Interest received after a loan becomes past due or impaired is used to reduce the outstanding loan principal balance. When a delinquent loan previously placed on nonaccrual status has cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan is placed back on accrual status. Alternately, loans that have been individually impaired may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.

 
9
 



Cash and Cash Equivalents
The Company considers all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. At September 30, 2014, the Company had cash and cash equivalents in excess of the FDIC deposit insurance limit of $250,000 per institution. The Company mitigates its risk of loss by actively monitoring the counterparties.
Due from Counterparties / Collateral Held Payable
Due from counterparties represents cash posted with the Company's counterparties as collateral for the Company’s derivatives and repurchase agreements. Collateral held payable represents cash posted with the Company by counterparties as collateral under the Company’s derivatives and repurchase agreements. To the extent the Company receives collateral other than cash from its counterparties, such assets are not included in the Company’s consolidated balance sheets. Notwithstanding the foregoing, if the Company either sells such assets or pledges the assets as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability is reflected on the consolidated balance sheets.
Investments in Unconsolidated Ventures
The Company’s non-controlling investments in unconsolidated ventures are accounted for under the equity method. Capital contributions, distributions, profits and losses of the entities are allocated in accordance with the terms of the entities’ operating agreements. Such allocations may differ from the stated percentage interests, if any, as a result of preferred returns and allocation formulas as described in such agreements. The Company has made the fair value election for its investments in all unconsolidated ventures. The fair value measurement for the investments in unconsolidated ventures is based on the net asset value per share of the investment, or its equivalent.
Deferred Securitization and Financing Costs
Deferred costs consist of costs associated with the issuance of asset-backed securities by consolidated securitization trusts and costs incurred in connection with the issuance of the Company's exchangeable senior notes. These costs include underwriting, rating agency, legal, accounting and other fees. Deferred costs are amortized as an adjustment to interest expense using the effective interest method based upon actual repayments of the asset-backed securities or over the stated legal maturity of the exchangeable senior notes.
Repurchase Agreements
The Company finances its purchases of mortgage-backed securities primarily through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
In instances where the Company acquires mortgage-backed securities through repurchase agreements with the same counterparty from whom such assets were purchased, the Company records the assets and the related financing on a gross basis on its consolidated balance sheets, and the corresponding interest income and interest expense on a gross basis in its consolidated statements of operations if all of the following criteria are met:
the initial transfer of and repurchase financing are not contractually contingent;
the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed;
the financial asset has an active market and the transfer is executed at market rates; and
the repurchase agreement and financial asset do not mature simultaneously.
The Company currently reflects all proceeds from repurchase agreements borrowings and repayment of repurchase agreement borrowings on a gross basis on the consolidated statements of cash flows. If the transaction does not comply with the criteria for gross presentation, the Company would account for the purchase commitment and repurchase agreement on a net basis and record a forward commitment to purchase such assets as a derivative instrument. Forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. Additionally, the Company records the cash portion of its investment in mortgage-backed securities as an investment related receivable from the counterparty on its consolidated balance sheets.

 
10
 



Secured Loans
In March 2014, the Company's wholly-owned subsidiary, IAS Services LLC, became a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"). As a member of the FHLBI, IAS Services LLC may borrow funds from the FHLBI in the form of secured advances. FHLBI advances are treated as secured financing transactions and are carried at their contractual amounts.
Asset-Backed Securities Issued by Securitization Trusts
Asset-backed securities issued by securitization trusts are recorded at principal balances net of unamortized premiums or discounts.
Dividends and Distributions Payable
Dividends and distributions payable represent dividends declared at the balance sheet date which are payable to common shareholders, preferred shareholders, and an Invesco wholly-owned subsidiary, the non-controlling interest common unit holder of the Operating Partnership.
Earnings (Loss) per Share
The Company calculates basic earnings (loss) per share by dividing net income attributable to common shareholders for the period by weighted-average shares of the Company’s common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as units of limited partnership interest in the Operating Partnership ("OP Units"), exchangeable debt, and unvested restricted stock and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Share-Based Compensation
The Company has adopted an equity incentive plan under which its independent directors, as part of their compensation for serving as directors, are eligible to receive quarterly stock awards. In addition, the Company may compensate the officers and employees of its Manager and its affiliates under this plan pursuant to the management agreement.
Share-based compensation arrangements include share options, restricted and non-restricted share awards, performance-based awards and share appreciation rights. For awards to the Company's independent directors, compensation costs relating to share-based payment transactions are recognized in the consolidated financial statements, based on the fair value of the equity or liability instruments issued on the date of grant. Compensation related to stock awards to employees of the Company's Manager and its affiliates is recorded at the estimated fair value of the award during the vesting period. The Company makes an upward or downward adjustment to compensation expense for the difference in the fair value at the date of grant and the date the award is earned.
Underwriting Commissions and Offering Costs
Underwriting commissions and direct costs incurred in connection with the Company’s common stock offerings are reflected as a reduction of additional paid-in-capital.
Comprehensive Income
The Company's other comprehensive income consists of net income, as presented in the consolidated statements of operations, adjusted for changes in fair value of mortgage-backed securities classified as available for sale securities, changes in the fair value of derivatives accounted for as cash flow hedges, and amortization of repurchase agreement interest expense resulting from the de-designation of derivatives previously accounted for as cash flow hedges. Unrealized gains and losses on the Company's mortgage-backed securities are reclassified into net income upon their sale or termination.
Accounting for Derivative Financial Instruments
U.S. GAAP provides disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. U.S. GAAP requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 
11
 



The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts, such as credit default swaps, that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under U.S. GAAP.
Effective December 31, 2013, the Company voluntarily discontinued hedge accounting for its interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges. No interest rate swaps were terminated in conjunction with this action, and the Company’s risk management and hedging practices were not impacted. However, the Company’s accounting for these transactions changed beginning January 1, 2014. All of the Company’s interest rate swaps had previously been accounted for as cash flow hedges under the applicable guidance. As a result of discontinuing hedge accounting, changes in the fair value of the interest rate swap agreements are recorded in gain (loss) on derivative instruments, net in the Company’s consolidated statements of operations, rather than in accumulated other comprehensive income (loss) (“AOCI”). Also, net interest paid or received under the interest rate swaps, which up through December 31, 2013 was recognized in interest expense, is now recognized in gain (loss) on derivative instruments, net on the Company's consolidated statements of operations. The interest rate swaps continue to be reported as derivative assets or derivative liabilities on the Company’s consolidated balance sheets at their fair value.
As long as the forecasted transactions that were being hedged (i.e., rollovers of the Company’s repurchase agreement borrowings) are still expected to occur, the balance in AOCI from the interest rate swap activity up through December 31, 2013 will remain in AOCI and be recognized in the Company’s consolidated statements of operations as interest expense over the remaining term of the interest rate swaps. Refer to Note 8 - "Derivatives and Hedging Activities" for further information.
The Company evaluates the terms and conditions of its holdings of swaptions, futures contracts and to-be-announced ("TBA") securities to determine if an instrument has the characteristics of an investment or should be considered a derivative under U.S. GAAP. Accordingly swaptions, futures contracts and TBAs having the characteristics of derivatives are accounted for at fair value with such changes recognized in gain (loss) on derivative instruments, net in the consolidated statements of operations. The fair value of these swaptions, futures contracts and TBAs is included in derivative assets or derivative liabilities on the consolidated balance sheets.
Income Taxes
The Company elected to be taxed as a REIT, commencing with the Company's taxable year ended December 31, 2009. Accordingly, the Company will generally not be subject to U.S. federal and applicable state and local corporate income tax to the extent that the Company makes qualifying distributions to its common shareholders, and provided the Company satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on the Company's results of operations and amounts available for distribution to shareholders.
A REIT’s dividend paid deduction for qualifying dividends to the Company’s shareholders is computed using its taxable income as opposed to net income reported on the consolidated financial statements. Taxable income will generally differ from net income because the determination of taxable income is based on tax regulations and not financial accounting principles.
The Company has elected to treat one of its subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.
If a TRS generates net income, the TRS can declare dividends to the Company which will be included in its taxable income and necessitate a distribution to its shareholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required, and the Company can increase book equity of the consolidated entity. The Company has no adjustments regarding its tax accounting treatment of any uncertainties. The Company would recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which would be included in general and administrative expenses.

 
12
 



Reclassifications
Certain prior period reported amounts have been reclassified to be consistent with the current presentation. Such reclassifications had no impact on net income or equity attributable to common shareholders.
Recent Accounting Pronouncements
None
Recent Accounting Pronouncements Not Yet Adopted
In April 2014, the Financial Accounting Standards Board issued updated guidance that changes the requirements for reporting discontinued operations. Under the new guidance, a discontinued operation is defined as a component of an entity or group of components of an entity that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2014, the Financial Accounting Standards Board issued guidance that changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. These transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. In addition, the guidance requires additional disclosures. The guidance is effective for the first interim or annual period beginning after December 15, 2014. Earlier application for a public company is prohibited. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Note 3 – Variable Interest Entities
At September 30, 2014, the Company's maximum risk of loss in VIEs in which the Company is not the primary beneficiary is presented in the table below.
$ in thousands
Carrying Amount
 
Company's Maximum Risk of Loss
Non-Agency RMBS
3,302,080

 
3,302,080

CMBS
3,456,610

 
3,456,610

Total
6,758,690

 
6,758,690

Refer to Note 4 - "Mortgage-Backed Securities" for additional details regarding these investments.
As discussed in Note 2 - "Summary of Significant Accounting Policies," the Company has determined that it is the primary beneficiary of certain securitization trusts. The following table presents a summary of the assets and liabilities of the Company's consolidated securitization trusts as of September 30, 2014 and December 31, 2013. Intercompany balances have been eliminated for purposes of this presentation.
$ in thousands
September 30, 2014
 
December 31, 2013
Residential loans, held-for-investment
3,103,434

 
1,810,262

Accrued interest receivable
9,969

 
5,647

Deferred costs
4,819

 
3,386

Total assets
3,118,222

 
1,819,295

Accrued interest and accrued expenses payable
8,229

 
4,659

Asset-backed securities issued by securitization trusts
2,745,940

 
1,643,741

Total liabilities
2,754,169

 
1,648,400

The Company’s risk with respect to each investment in a securitization trust is limited to its direct ownership in the securitization trust. The residential loans held by the consolidated securitization trusts are held solely to satisfy the liabilities of

 
13
 



the securitization trusts, and the investors in the securitization trusts have no recourse to the general credit of the Company for the asset-backed securities issued by the securitization trusts. The assets of a consolidated securitization trust can only be used to satisfy the obligations of that trust. The Company is not contractually required and has not provided any additional financial support to the securitization trusts for the period ended September 30, 2014.
During the nine months ended September 30, 2014, the Company invested in and consolidated four new securitization trusts. The following table presents the balances of the assets and liabilities of the newly consolidated securitization trusts before consolidation into the Company. The current period activity for the securitization trusts is reflected in the Company’s consolidated financial statements.
$ in thousands
2014
Residential loans, held-for-investment
1,417,863

Accrued interest receivable
4,674

Total assets
1,422,537

Accrued interest and accrued expenses payable
4,674

Asset-backed securities issued by securitization trusts
1,417,863

Total liabilities
1,422,537

The Company did not deconsolidate any securitization trusts during the nine months ended September 30, 2014.
Residential Loans Held by Consolidated Securitization Trusts
Residential loans held by consolidated securitization trusts are carried at unpaid principal balance net of any premiums and an allowance for loan losses. The residential loans are secured by a lien on the underlying residential property.
The following table details the carrying value for residential loans held-for-investment at September 30, 2014 and December 31, 2013.
$ in thousands
September 30, 2014
 
December 31, 2013
Principal balance
3,069,384

 
1,783,983

Unamortized premium (discount), net
34,882

 
27,163

Recorded investment
3,104,266

 
1,811,146

Allowance for loan losses
(832
)
 
(884
)
Carrying value
3,103,434

 
1,810,262

The following table summarizes residential loans held-for-investment at September 30, 2014 by year of origination.
$ in thousands
2014
 
2013
 
2012
 
2009
 
2008
 
2007
 
Total
Portfolio Characteristics:
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Loans(1)
596

 
2,772

 
599

 
7

 
20

 
19

 
4,013

Current Principal Balance
430,494

 
2,107,998

 
493,616

 
3,018

 
19,150

 
15,108

 
3,069,384

Net Weighted Average Coupon Rate
3.95
%
 
3.56
%
 
3.50
%
 
3.71
%
 
5.10
%
 
4.66
%
 
3.62
%
Weighted Average Maturity (years)
29.55

 
28.73

 
28.28

 
24.66

 
23.84

 
22.77

 
28.71

Current Performance:
 
 
 
 
 
 
 
 
 
 

 
 
Current
429,941

 
2,107,998

 
492,333

 
3,018

 
19,150

 
15,108

 
3,067,548

30 Days Delinquent
553

 

 
1,283

 

 

 

 
1,836

60 Days Delinquent

 

 

 

 

 

 

90+ Days Delinquent

 

 

 

 

 

 

Bankruptcy/Foreclosure

 

 

 

 

 

 

Total
430,494

 
2,107,998

 
493,616

 
3,018

 
19,150

 
15,108

 
3,069,384

(1) None for 2011 and 2010

 
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The following table summarizes the geographic concentrations of residential loans held-for-investment at September 30, 2014 based on principal balance outstanding.
State
Percent
California
51.8
%
Illinois
5.0
%
New York
4.4
%
Massachusetts
3.9
%
Texas
3.4
%
Other states (none greater than 4%)
31.5
%
Total
100.0
%
The following table presents future contractual minimum annual principal payments of residential loans held-for-investment at September 30, 2014.
$ in thousands
 
Scheduled Principal
September 30, 2014
Within one year
56,024

One to three years
118,854

Three to five years
129,552

Greater than or equal to five years
2,764,954

Total
3,069,384

Allowance for Loan Losses on Residential Loans Held by Consolidated Securitization Trusts
As discussed in Note 2 - "Summary of Significant Accounting Policies", the Company establishes and maintains an allowance for loan losses on residential loans held by consolidated securitization trusts based on the Company’s estimate of credit losses.
The following table summarizes the activity in the allowance for loan losses for the nine months ended September 30, 2014.
$ in thousands
September 30, 2014
Balance at beginning of period
(884
)
Charge-offs, net

Reduction in provision for loan losses
52

Balance at end of period
(832
)
Asset-Backed Securities Issued by Securitization Trusts
Asset-backed securities issued by securitization trusts are recorded at principal balance net of unamortized premiums or discounts. Asset-backed securities issued by securitization trusts are issued in various tranches and have a weighted average contractual maturity of 29.13 years. The investors in the asset-backed securities are not affiliated with the Company and have no recourse to the general credit of the Company. The asset-backed securities are collateralized by residential loans held in the securitization trusts as summarized in the following table at September 30, 2014.
 
ABS
 
Residential loans
$ in thousands
Outstanding
 
Held as Collateral
Principal balance
2,720,182

 
3,069,384

Unamortized premium
22,075

 
43,730

Unamortized discount
(11,377
)
 
(8,848
)
Interest-only securities (amortized cost)
15,060

 

Allowance for loan losses

 
(832
)
Carrying value
2,745,940

 
3,103,434

Range of weighted average interest rates
2.8% - 4.0%
 
 
Number of securitization trusts consolidated
9

 
 

 
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The following table presents the estimated principal repayment schedule of asset-backed securities issued by securitization trusts at September 30, 2014 based on estimated cash flows of the underlying residential mortgage loans, as adjusted for projected prepayments and losses on such loans. The estimated principal repayments may differ from actual amounts to the extent prepayments and/or loan losses vary.
$ in thousands
 
Estimated principal repayment
September 30, 2014
Within one year
325,437

One to three years
546,744

Three to five years
428,676

Greater than or equal to five years
1,419,325

Total
2,720,182

Note 4 – Mortgage-Backed Securities
All of the Company’s mortgage-backed securities ("MBS") are classified as available-for-sale and reported at fair value, which is determined by obtaining valuations from an independent source. If the fair value of a security is not available from a third-party pricing service, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including other pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors.
The following tables present certain information about the Company’s MBS portfolio as of September 30, 2014 and December 31, 2013.
September 30, 2014
$ in thousands
Principal
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Net
Weighted
Average
Coupon (1)
 
Period-
end
Weighted
Average
Yield (2)
 
Quarterly
Weighted
Average
Yield (3)
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
1,299,392

 
64,705

 
1,364,097

 
25,856

 
1,389,953

 
4.05
%
 
2.55
%
 
2.59
%
30 year fixed-rate
4,583,250

 
308,930

 
4,892,180

 
8,936

 
4,901,116

 
4.30
%
 
2.90
%
 
2.95
%
ARM*
519,631

 
8,752

 
528,383

 
4,497

 
532,880

 
2.85
%
 
2.31
%
 
2.30
%
Hybrid ARM
2,596,919

 
38,712

 
2,635,631

 
14,690

 
2,650,321

 
2.77
%
 
2.39
%
 
2.35
%
Total Agency pass-through
8,999,192

 
421,099

 
9,420,291

 
53,979

 
9,474,270

 
3.74
%
 
2.67
%
 
2.70
%
Agency-CMO(4)
1,876,484

 
(1,413,263
)
 
463,221

 
(9,473
)
 
453,748

 
2.42
%
 
4.42
%
 
3.03
%
Non-Agency RMBS(5)(6)
3,805,256

 
(603,732
)
 
3,201,524

 
100,556

 
3,302,080

 
3.68
%
 
3.92
%
 
4.44
%
GSE CRT(7)
570,500

 
26,549

 
597,049

 
13,277

 
610,326

 
4.82
%
 
4.02
%
 
3.91
%
CMBS(8)
3,300,260

 
56,880

 
3,357,140

 
99,470

 
3,456,610

 
4.82
%
 
4.48
%
 
4.50
%
Total
18,551,692

 
(1,512,467
)
 
17,039,225

 
257,809

 
17,297,034

 
3.78
%
 
3.82
%
 
3.40
%
* Adjustable-rate mortgage ("ARM")
 
(1)
Net weighted average coupon (“WAC”) as of September 30, 2014 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of September 30, 2014 and incorporates future prepayment and loss assumptions.
(3)
Quarterly weighted average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(4)
Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities which represent 28.7% of the balance based on fair value.
(5)
Non-Agency RMBS held by the Company is 55.9% variable rate, 37.2% fixed rate, and 6.9% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $387.2 million is non-accretable.

 
16
 



(7)
GSE CRT are general obligations of Fannie Mae or Freddie Mac that are structured to provide credit protection to the GSE issuer with respect to defaults and other credit events within reference pools of residential mortgage loans that collateralize MBS issued and guaranteed by such GSE.
(8)
CMBS includes commercial real estate mezzanine loan pass-through certificates which represent 1.4% of the balance based on fair value.
December 31, 2013
$ in thousands
Principal
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Net
Weighted
Average
Coupon (1)
 
Period-
end
Weighted
Average
Yield (2)
 
Quarterly
Weighted
Average
Yield (3)
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
1,637,988

 
83,799

 
1,721,787

 
22,494

 
1,744,281

 
4.02
%
 
2.54
%
 
2.61
%
30 year fixed-rate
6,494,723

 
435,680

 
6,930,403

 
(228,250
)
 
6,702,153

 
4.11
%
 
2.96
%
 
3.13
%
ARM
251,693

 
992

 
252,685

 
597

 
253,282

 
2.80
%
 
2.62
%
 
2.41
%
Hybrid ARM
1,764,472

 
9,470

 
1,773,942

 
(3,384
)
 
1,770,558

 
2.69
%
 
2.46
%
 
2.06
%
Total Agency pass-through
10,148,876

 
529,941

 
10,678,817

 
(208,543
)
 
10,470,274

 
3.82
%
 
2.80
%
 
2.90
%
Agency-CMO(4)
1,532,474

 
(1,051,777
)
 
480,697

 
(6,183
)
 
474,514

 
2.76
%
 
3.82
%
 
3.47
%
Non-Agency RMBS(5)(6)
4,217,230

 
(640,797
)
 
3,576,433

 
30,895

 
3,607,328

 
3.72
%
 
2.80
%
 
4.63
%
GSE CRT
144,500

 
22,163

 
166,663

 
1,318

 
167,981

 
7.13
%
 
5.17
%
 
5.85
%
CMBS(7)
4,630,363

 
(2,032,945
)
 
2,597,418

 
31,142

 
2,628,560

 
3.38
%
 
4.62
%
 
4.51
%
Total
20,673,443

 
(3,173,415
)
 
17,500,028

 
(151,371
)
 
17,348,657

 
3.63
%
 
3.30
%
 
3.51
%
 
(1)
Net WAC as of December 31, 2013 is presented net of servicing and other fees.
(2)
Period-end weighted average yield based on amortized cost as of December 31, 2013 incorporates future prepayment and loss assumptions.
(3)
Quarterly weighted average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(4)
Agency-CMO includes interest-only securities, which represent 25.0% of the balance based on fair value.
(5)
Non-Agency RMBS held by the Company is 61.1% variable rate, 33.9% fixed rate, and 5.0% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $438.1 million is non-accretable.
(7)
CMBS includes interest-only securities and commercial real estate mezzanine loan pass-through certificates which represent 7.5% and 1.0% of the balance based on fair value, respectively.
The following table summarizes the Company's non-Agency RMBS portfolio by asset type as of September 30, 2014 and December 31, 2013, respectively:
$ in thousands
September 30, 2014
 
% of Non-Agency
 
December 31, 2013
 
% of Non-Agency
Re-REMIC
1,181,510

 
35.8
%
 
1,444,376

 
40.0
%
Prime
1,033,442

 
31.3
%
 
1,336,821

 
37.1
%
Alt-A
734,708

 
22.2
%
 
801,919

 
22.2
%
Subprime/reperforming
352,420

 
10.7
%
 
24,212

 
0.7
%
Total Non-Agency
3,302,080

 
100.0
%
 
3,607,328

 
100.0
%


 
17
 



The following table summarizes the credit enhancement provided to the Company's re-securitization of real estate mortgage investment conduit ("Re-REMIC") holdings as of September 30, 2014 and December 31, 2013:
  
 
Percentage of Re-REMIC Holdings at Fair Value
Re-REMIC Subordination(1)
 
September 30, 2014
 
December 31, 2013
0% - 10%
 
5.8
%
 
4.8
%
10% - 20%
 
3.9
%
 
3.5
%
20% - 30%
 
13.9
%
 
14.7
%
30% - 40%
 
26.2
%
 
25.2
%
40% - 50%
 
32.6
%
 
38.6
%
50% - 60%
 
13.7
%
 
8.5
%
60% - 70%
 
3.9
%
 
4.7
%
Total
 
100.0
%
 
100.0
%
 
(1)
Subordination refers to the credit enhancement provided to the Re-REMIC tranche held by the Company by any junior Re-REMIC tranche or tranches in a resecuritization. This figure reflects the percentage of the balance of the underlying securities represented by any junior tranche or tranches at the time of resecuritization. Generally, principal losses on the underlying securities in excess of the subordination amount would result in principal losses on the Re-REMIC tranche held by the Company.
The components of the carrying value of the Company’s MBS portfolio at September 30, 2014 and December 31, 2013 are presented below: 
$ in thousands
September 30, 2014
 
December 31, 2013
Principal balance
18,551,692

 
20,673,443

Unamortized premium
559,075

 
646,189

Unamortized discount
(2,071,542
)
 
(3,819,604
)
Gross unrealized gains
413,031

 
291,725

Gross unrealized losses
(155,222
)
 
(443,096
)
Fair value
17,297,034

 
17,348,657

The following table summarizes the Company’s MBS portfolio according to estimated weighted average life classifications as of September 30, 2014 and December 31, 2013: 
$ in thousands
September 30, 2014
 
December 31, 2013
Less than one year
235,268

 
101,251

Greater than one year and less than five years
6,821,502

 
5,958,852

Greater than or equal to five years
10,240,264

 
11,288,554

Total
17,297,034

 
17,348,657



 
18
 



The following tables present the gross unrealized losses and estimated fair value of the Company's MBS securities by length of time that such securities have been in a continuous unrealized loss position at September 30, 2014 and December 31, 2013:

September 30, 2014
  
Less than 12 Months
 
12 Months or More
 
Total
$ in thousands
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
12,855

 
(45
)
 
2

 
118,792

 
(2,339
)
 
7

 
131,647

 
(2,384
)
 
9

30 year fixed-rate
124,596

 
(312
)
 
9

 
2,012,239

 
(83,829
)
 
74

 
2,136,835

 
(84,141
)
 
83

ARM
24,158

 
(157
)
 
1

 
13,011

 
(84
)
 
2

 
37,169

 
(241
)
 
3

Hybrid ARM
886,351

 
(2,490
)
 
43

 
27,474

 
(330
)
 
2

 
913,825

 
(2,820
)
 
45

Total Agency pass-through
1,047,960

 
(3,004
)
 
55

 
2,171,516

 
(86,582
)
 
85

 
3,219,476

 
(89,586
)
 
140

Agency-CMO
164,970

 
(7,423
)
 
20

 
173,999

 
(12,446
)
 
10

 
338,969

 
(19,869
)
 
30

Non-Agency RMBS
437,793

 
(4,871
)
 
32

 
344,122

 
(13,559
)
 
20

 
781,915

 
(18,430
)
 
52

GSE CRT
224,035

 
(10,921
)
 
8

 

 

 

 
224,035

 
(10,921
)
 
8

CMBS
799,379

 
(6,613
)
 
57

 
371,303

 
(9,803
)
 
35

 
1,170,682

 
(16,416
)
 
92

Total
2,674,137

 
(32,832
)
 
172

 
3,060,940

 
(122,390
)
 
150

 
5,735,077

 
(155,222
)
 
322

December 31, 2013
  
Less than 12 Months
 
12 Months or More
 
Total
$ in thousands
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
431,527

 
(4,964
)
 
18

 
11,100

 
(259
)
 
1

 
442,627

 
(5,223
)
 
19

30 year fixed-rate
3,710,679

 
(228,167
)
 
126

 
641,259

 
(56,754
)
 
27

 
4,351,938

 
(284,921
)
 
153

ARM
94,447

 
(968
)
 
7

 

 

 

 
94,447

 
(968
)
 
7

Hybrid ARM
1,129,488

 
(9,715
)
 
48

 

 

 

 
1,129,488

 
(9,715
)
 
48

Total Agency pass-through
5,366,141

 
(243,814
)
 
199

 
652,359

 
(57,013
)
 
28

 
6,018,500

 
(300,827
)
 
227

Agency-CMO
311,935

 
(16,599
)
 
13

 
8,883

 
(3,736
)
 
4

 
320,818

 
(20,335
)
 
17

Non-Agency RMBS
1,307,036

 
(58,326
)
 
76

 
91,651

 
(1,726
)
 
8

 
1,398,687

 
(60,052
)
 
84

GSE CRT

 

 

 

 

 

 

 

 

CMBS
1,118,270

 
(61,882
)
 
84

 

 

 

 
1,118,270

 
(61,882
)
 
84

Total
8,103,382

 
(380,621
)
 
372

 
752,893

 
(62,475
)
 
40

 
8,856,275