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EX-31.2 - EXHIBIT 31.2 - Invesco Mortgage Capital Inc.ivr20150930ex312.htm
EX-31.1 - EXHIBIT 31.1 - Invesco Mortgage Capital Inc.ivr20150930ex311.htm
EX-32.1 - EXHIBIT 32.1 - Invesco Mortgage Capital Inc.ivr20150930ex321.htm
EX-32.2 - EXHIBIT 32.2 - Invesco Mortgage Capital Inc.ivr20150930ex322.htm

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, 2015
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 October 28, 2015, there were 119,455,302 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
CONDENSED CONSOLIDATED BALANCE SHEETS
  
As of
 In thousands except share amounts
September 30, 2015
 
December 31, 2014 
 (As Restated)
 
(Unaudited)
 
 
ASSETS
 
Mortgage-backed and credit risk transfer securities, at fair value
16,814,961

 
17,248,895

Residential loans, held-for-investment (1)
3,307,249

 
3,365,003

Commercial loans, held-for-investment
187,038

 
145,756

Cash and cash equivalents
76,658

 
164,144

Due from counterparties
174,741

 
57,604

Investment related receivable
24,897

 
38,717

Accrued interest receivable
69,064

 
66,044

Derivative assets, at fair value
1,308

 
24,178

Deferred securitization and financing costs
10,689

 
13,080

Other investments
113,297

 
106,498

Other assets
1,444

 
1,098

Total assets (1)
20,781,346

 
21,231,017

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
12,912,131

 
13,622,677

Secured loans
1,675,000

 
1,250,000

Asset-backed securities issued by securitization trusts (1)
2,859,423

 
2,929,820

Exchangeable senior notes
400,000

 
400,000

Derivative liabilities, at fair value
343,897

 
254,026

Dividends and distributions payable
54,067

 
61,757

Investment related payable
54,996

 
17,008

Accrued interest payable
37,296

 
29,670

Collateral held payable

 
14,890

Accounts payable and accrued expenses
3,910

 
2,439

Due to affiliate
11,259

 
9,880

Total liabilities (1)
18,351,979

 
18,592,167

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)
149,860

 
149,860

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 119,453,846 and 123,110,454 shares issued and outstanding, respectively
1,195

 
1,231

Additional paid in capital
2,482,742

 
2,532,130

Accumulated other comprehensive income
446,857

 
424,592

Retained earnings (distributions in excess of earnings)
(813,520
)
 
(632,854
)
Total stockholders’ equity
2,402,490

 
2,610,315

Non-controlling interest
26,877

 
28,535

Total equity
2,429,367

 
2,638,850

Total liabilities and equity
20,781,346

 
21,231,017

(1)
The condensed 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, 2015 and December 31, 2014, total assets of the consolidated VIEs were $3,331,942 and $3,380,597, respectively, and total liabilities of the consolidated VIEs were $2,876,059 and $2,938,512, respectively. Refer to Note 3 - "Variable Interest Entities" for further discussion.
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
In thousands, except share amounts
2015
 
2014 
 (As Restated)
 
2015
 
2014 
 (As Restated)
Interest Income

 

 

 

Mortgage-backed and credit risk transfer securities
129,260

 
139,419

 
390,623

 
436,019

Residential loans (1)
28,380

 
22,713

 
88,001

 
60,888

Commercial loans
3,743

 
2,649

 
11,349

 
6,329

Total interest income
161,383

 
164,781

 
489,973

 
503,236

Interest Expense

 

 

 

Repurchase agreements
41,303

 
45,756

 
125,544

 
142,649

Secured loans
1,622

 
1,223

 
4,639

 
1,399

Exchangeable senior notes
5,620

 
5,620

 
16,840

 
16,840

Asset-backed securities (1)
20,686

 
17,660

 
64,913

 
47,421

Total interest expense
69,231

 
70,259

 
211,936

 
208,309

Net interest income
92,152

 
94,522

 
278,037

 
294,927

(Reduction in) provision for loan losses
(81
)
 
(209
)
 
(213
)
 
(52
)
Net interest income after (reduction in) provision for loan losses
92,233

 
94,731

 
278,250

 
294,979

Other Income (loss)

 

 

 

Gain (loss) on investments, net
(2,958
)
 
(48,364
)
 
10,090

 
(86,333
)
Equity in earnings of unconsolidated ventures
1,894

 
1,145

 
9,131

 
5,480

Gain (loss) on derivative instruments, net
(220,602
)
 
(3,704
)
 
(287,344
)
 
(322,832
)
Realized and unrealized credit derivative income (loss), net
2,928

 
(28,613
)
 
24,904

 
20,929

Other investment income (loss), net
739

 
(1,358
)
 
1,518

 
(1,358
)
Total other income (loss)
(217,999
)
 
(80,894
)
 
(241,701
)
 
(384,114
)
Expenses
 
 
 
 
 
 
 
Management fee – related party
10,058

 
9,214

 
28,816

 
27,876

General and administrative
2,507

 
2,519

 
6,186

 
6,906

Consolidated securitization trusts (1)
2,132

 
1,560

 
6,544

 
4,108

Total expenses
14,697

 
13,293

 
41,546

 
38,890

Net income (loss)
(140,463
)
 
544

 
(4,997
)
 
(128,025
)
Net income (loss) attributable to non-controlling interest
(1,629
)
 
6

 
(80
)
 
(1,456
)
Net income (loss) attributable to Invesco Mortgage Capital Inc.
(138,834
)
 
538

 
(4,917
)
 
(126,569
)
Dividends to preferred stockholders
5,716

 
2,713

 
17,148

 
8,138

Undeclared cumulative dividends to preferred stockholders

 
661

 

 
661

Net income (loss) attributable to common stockholders
(144,550
)
 
(2,836
)
 
(22,065
)
 
(135,368
)
Earnings (loss) per share:


 


 


 


Net income (loss) attributable to common stockholders

 

 

 

Basic
(1.18
)
 
(0.02
)
 
(0.18
)
 
(1.10
)
Diluted
(1.18
)
 
(0.02
)
 
(0.18
)
 
(1.10
)
Dividends declared per common share
0.40

 
0.50

 
1.30

 
1.50

(1)
The condensed consolidated statements of operations include income and expenses of consolidated VIEs. Refer to Note 3 - “Variable Interest Entities” for further discussion.
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
2
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
In thousands
2015
 
2014 
 (As Restated)
 
2015
 
2014 
 (As Restated)
Net income (loss)
(140,463
)
 
544

 
(4,997
)
 
(128,025
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
41,978

 
(81,267
)
 
(25,390
)
 
325,045

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
1,380

 
49,169

 
(3,223
)
 
81,653

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
15,724

 
21,227

 
51,182

 
64,055

Currency translation adjustments on investment in unconsolidated venture
(33
)
 

 
(33
)
 

Total other comprehensive income (loss)
59,049

 
(10,871
)
 
22,536

 
470,753

Comprehensive income (loss)
(81,414
)
 
(10,327
)
 
17,539

 
342,728

Less: Comprehensive income (loss) attributable to non-controlling interest
942

 
117

 
(191
)
 
(3,919
)
Less: Dividends to preferred stockholders
(5,716
)
 
(2,713
)
 
(17,148
)
 
(8,138
)
Less: Undeclared cumulative dividends to preferred shareholders

 
(661
)
 

 
(661
)
Comprehensive income (loss) attributable to common stockholders
(86,188
)
 
(13,584
)
 
200

 
330,010

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


 
3
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the nine months ended September 30, 2015
(Unaudited)
 
 
 
 
 
 
 
Attributable to Common Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 
Total
Stockholders’
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, 2015 (As Restated)
5,600,000

 
135,356

 
6,200,000

 
149,860

 
123,110,454

 
1,231

 
2,532,130

 
424,592

 
(632,854
)
 
2,610,315

 
28,535

 
2,638,850

Net income (loss)

 

 

 

 


 


 

 

 
(4,917
)
 
(4,917
)
 
(80
)
 
(4,997
)
Other comprehensive income

 

 

 

 

 

 

 
22,265

 

 
22,265

 
271

 
22,536

Proceeds from issuance of common stock, net of offering costs

 

 

 

 
10,317

 

 
158

 

 

 
158

 

 
158

Repurchase of shares of common stock

 

 

 

 
(3,695,368
)
 
(36
)
 
(49,963
)
 

 

 
(49,999
)
 

 
(49,999
)
Stock awards

 

 

 

 
28,443

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 
(158,601
)
 
(158,601
)
 


 
(158,601
)
Common unit dividends

 

 

 

 

 

 

 

 

 

 
(1,854
)
 
(1,854
)
Preferred stock dividends

 

 

 

 

 

 

 

 
(17,148
)
 
(17,148
)
 

 
(17,148
)
Amortization of equity-based compensation

 

 

 

 

 

 
417

 

 


 
417

 
5

 
422

Balance at September 30, 2015
5,600,000

 
135,356

 
6,200,000

 
149,860

 
119,453,846

 
1,195

 
2,482,742

 
446,857

 
(813,520
)
 
2,402,490

 
26,877

 
2,429,367

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


 
4
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
Nine Months Ended September 30,
In thousands
2015
 
2014 
 (As Restated)
Cash Flows from Operating Activities
 
 
 
Net income (loss)
(4,997
)
 
(128,025
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net
96,121

 
99,698

Amortization of residential loans and asset-backed securities premiums (discount), net
(639
)
 
2,195

Amortization of commercial loan origination fees
(51
)
 
(1
)
(Reduction in) provision for loan losses
(213
)
 
(52
)
Unrealized (gain) loss on derivative instruments, net
104,546

 
133,863

Unrealized (gain) loss on credit derivatives, net
(7,923
)
 
(8,121
)
(Gain) loss on investments, net
(10,090
)
 
86,333

Realized (gain) loss on derivative instruments, net
44,394

 
34,877

Realized (gain) loss on credit derivatives, net
2,184

 

Equity in earnings of unconsolidated ventures
(9,131
)
 
(5,480
)
Amortization of equity-based compensation
422

 
378

Amortization of deferred securitization and financing costs
2,391

 
2,220

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
51,182

 
64,055

Non-cash interest income capitalized in commercial loans

 
(768
)
(Gain) loss on foreign currency transactions, net
619

 
1,479

Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in operating assets
(3,289
)
 
1,790

Increase (decrease) in operating liabilities
10,512

 
(6,174
)
Net cash provided by operating activities
276,038

 
278,267

Cash Flows from Investing Activities
 
 
 
Purchase of mortgage-backed and credit risk transfer securities
(1,821,811
)
 
(3,752,261
)
Distributions from investment in unconsolidated ventures, net
15,174

 
7,602

Change in other investments
(12,875
)
 
(52,500
)
Principal payments from mortgage-backed and credit risk transfer securities
1,910,904

 
1,422,082

Proceeds from sale of mortgage-backed and credit risk transfer securities
290,561

 
3,069,978

Payments on sale of credit derivatives
(2,184
)
 

Payment of premiums for interest rate swaptions
(1,485
)
 
(10,328
)
Payments for termination of futures/currency forward contracts, swaps, swaptions and TBAs
(34,066
)
 
(11,604
)
Purchase of residential loans held-for-investment
(372,305
)
 
(1,417,864
)
Principal payments from residential loans held-for-investment
424,644

 
120,930

Principal payments from commercial loans held-for-investment
63,132

 
400

Origination and advances of commercial loans, net of origination fees
(104,965
)
 
(81,201
)
Net cash provided by (used in) investing activities
354,724

 
(704,766
)
Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock
158

 
191

Repurchase of common stock
(49,999
)
 
(21,130
)
Cost of issuance of preferred stock
(36
)
 
150,096

Due from counterparties
(118,562
)
 
(26,999
)
Collateral held payable
(14,890
)
 
(13,771
)
Proceeds from repurchase agreements
105,832,915

 
108,739,181

Principal repayments of repurchase agreements
(106,543,411
)
 
(110,638,714
)
Proceeds from asset-backed securities issued by securitization trusts
336,077

 
1,213,405

Principal repayments of asset-backed securities issued by securitization trusts
(400,207
)
 
(109,587
)
Proceeds from secured loans
2,100,000

 
2,835,247

Principal repayments on secured loans
(1,675,000
)
 
(1,585,247
)
Payments of deferred costs

 
(1,811
)
Payments of dividends and distributions
(185,293
)
 
(196,030
)
Net cash (used in) provided by financing activities
(718,248
)
 
344,831

Net change in cash and cash equivalents
(87,486
)
 
(81,668
)
Cash and cash equivalents, beginning of period
164,144

 
210,612

Cash and cash equivalents, end of period
76,658

 
128,944

Supplement Disclosure of Cash Flow Information
 
 
 
Interest paid
162,906

 
146,209

Non-cash Investing and Financing Activities Information
 
 
 
Net change in unrealized gain on mortgage-backed and credit risk transfer securities
(28,613
)
 
406,698

Dividends and distributions declared not paid
54,067

 
64,976

(Receivable) / payable for mortgage-backed and credit risk transfer securities, net
53,089

 
457,049

Repurchase agreements, not settled
(50
)
 
19,747

Collateral held payable, not settled

 
(3,481
)
Net change in due from counterparties
1,425

 

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

 
5
 



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 "Manager"), 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, 2015, the Company owned 98.8% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.2%. 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 that are unsecured obligations 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 REIT taxable income to its stockholders 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
Restatement Background
On August 9, 2015, the Audit Committee of the Board of Directors of the Company concluded, based on the recommendation of management, that each of the Company’s previously issued (i) consolidated financial statements as of and for the years ended December 31, 2013 and 2014, which were included in its Annual Report on Form 10-K for the year ended December 31, 2014, and (ii) interim consolidated financial statements as of and for the quarter ended March 31, 2013 and for all subsequent quarters through the quarter ended March 31, 2015 needed to be restated and should no longer be relied upon. The Company filed Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2014 ("Form 10-K/A") and Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 ("Form 10-Q/A") on August 17, 2015. Additional information regarding the restatement is contained in those filings. Prior period financial information in this Form 10-Q has been amended where necessary to reflect the restatement. Therefore, this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014.
Basis of Presentation and Consolidation
Certain disclosures included in the Company’s Form 10-K/A are not required to be included on an interim basis in the Company’s quarterly reports on Form 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/A for the year ended December 31, 2014.

 
6
 



In the opinion of management, the condensed 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 expenses are eliminated upon consolidation.
The condensed 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 condensed 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 condensed consolidated balance sheets. The asset-backed securities issued to third parties are recorded as liabilities on the Company's condensed consolidated balance sheets. The Company records interest income on the residential loans held-for-investment, interest expense on the asset-backed securities issued to third parties and direct operating expenses incurred by the securitization trusts in the Company's condensed 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 and 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 condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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 and credit risk transfer securities, allowance for loan losses and other-than-temporary impairment charges. Actual results may differ from those estimates.
Significant Accounting Policies
A summary of the Company's significant accounting policies is included in Note 2 to the consolidated financial statements of the Company’s 2014 Annual Report on Form 10-K/A. A summary of additional accounting policies that are significant to the Company's consolidated financial condition and results of operations for the three and nine months ended September 30, 2015 is provided below.
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 condensed consolidated statements of operations.
The Company's reporting currency is U.S. dollars. Upon consolidation, the assets and liabilities of the Company’s investment in an unconsolidated venture whose functional currency is the Euro is translated to U.S. dollars using the period-end exchange rates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year,

 
7
 



which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the investment in the unconsolidated venture are recorded in accumulated other comprehensive income (loss), a component of condensed consolidated stockholders’ equity.
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 the Company understand data points and/or market inputs used for pricing securities.
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 - "Fair Value of 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. Transfers between levels, if any, are determined by the Company at the end of the reporting period.
Mortgage-Backed and Credit Risk Transfer Securities
All of the Company’s mortgage-backed securities ("MBS") except for Agency interest-only securities ("Agency MBS IOs"), are classified as available-for-sale and reported at fair value. Fair value 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, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors.
The Company records its purchases of mortgage-backed and credit risk transfer securities on the trade date. Although the Company generally intends to hold most of its mortgage-backed and credit risk transfer securities until maturity, the Company may, from time to time, sell any of its mortgage-backed and credit risk transfer securities as part of its overall management of its investment portfolio.
Unrealized gains or losses on all MBS, except for Agency MBS IOs, are recorded 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 stockholders' equity is recognized in income. Realized gains and losses from sales of MBS are determined based upon the specific identification method.

 
8
 



Agency MBS IOs are hybrid financial instruments that contain embedded derivatives. Agency MBS IOs are carried at fair value on the Company's consolidated balance sheet with changes in fair value recognized in the Company's condensed consolidated statements of operations because the embedded interest derivative in Agency MBS IOs cannot be reliably measured.
GSE CRTs are unsecured obligations of Fannie Mae and Freddie Mac. Coupon payments on the securities are based on LIBOR and principal payments are based on prepayments and defined credit events in a reference pool of mortgage loans that collateralize Agency RMBS. GSE CRTs are accounted for as hybrid financial instruments consisting of a debt host contract and an embedded derivative. GSE CRTs are measured at fair value. Unrealized gains or losses arising from changes in fair value of the debt host contract, 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 of the debt host contract, the cumulative gain or loss previously reported as a separate component of stockholders’ equity is recognized in income. Realized gains and losses from sales of GSE CRTs are determined based upon the specific identification method. Realized and unrealized gains or losses arising from changes in fair value of the embedded derivative are recognized in realized and unrealized credit derivative income (loss), net in the Company’s condensed consolidated statements of operations.
The Company considers its portfolio of Agency RMBS to be of high credit quality under applicable accounting guidance. For non-Agency RMBS, GSE CRTs 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 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 CRTs and CMBS with expected future losses would generally be 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 amortized 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.
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 condensed consolidated stockholders’ 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.
Commercial Loans Held-For-Investment
Commercial loans held-for-investment by the Company are carried at cost, net of any allowance for loan losses. 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:

 
9
 



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 interest rate, with a corresponding charge to provision for loan losses on the Company's condensed consolidated statements of operations.
Interest Income Recognition
Mortgage-Backed Securities
Interest income on MBS is accrued based on the outstanding principal balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method. Interest income on the Company's non-Agency RMBS (and other prepayable mortgage-backed securities where the Company may not recover substantially all of its initial investment) is based on estimated cash flows. 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. Over the life of the investments, 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.
For Agency RMBS that cannot be prepaid in such a way that the Company would not recover substantially all of its initial investment, interest income recognition is based on contractual cash flows. The Company does not estimate prepayments in applying the effective interest method.
Credit Risk Transfer Securities
Interest income on credit risk transfer securities is accrued based on the coupon rate of the debt host contract which reflects the credit risk of GSE unsecured senior debt with a similar maturity. Premiums or discounts associated with the purchase of credit risk transfer securities are amortized or accreted into interest income over the life of the debt host contract using the effective interest method. The difference between the coupon rate on the hybrid instrument and the coupon rate on the GSE CRT debt host contract is considered premium income associated with the embedded derivative and is recorded in realized and unrealized credit derivative income (loss), net in the Company’s condensed consolidated statements of operations.
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 the loan is placed in nonaccrual status. 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.

 
10
 



Commercial Loans
The Company recognizes interest income from commercial loans when earned and deemed collectible, or until a loan becomes past due based on the terms of the loan agreement. Any related origination fees, net of origination cost are 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.
Repurchase Agreements
Effective January 1, 2015, the Company adopted newly issued accounting guidance for repurchase financings. Under the new standard, the Company no longer applies the "linked" accounting model to instances where the Company purchases mortgage-backed and credit risk transfer securities and enters into repurchase agreements to finance the purchase with the same counterparty. Purchases of mortgage-backed and credit risk transfer securities and repurchase financings are considered separately, and the repurchase agreement component of the transaction is accounted for as a secured borrowing. The Company records the mortgage-backed and credit risk transfer securities and the related repurchase agreement financing on a gross basis in its condensed consolidated balance sheets, and the corresponding interest income and interest expense on a gross basis in its condensed consolidated statements of operations.
None of the Company's repurchase financing transactions prior to January 1, 2015 qualified as linked transactions and therefore were not accounted for as derivatives. Accordingly, the Company did not record a cumulative effect adjustment to retained earnings as of January 1, 2015 as a result of adopting the new guidance.
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. The Company recognizes interest expense on an accrual basis and amortizes the related premiums or discounts into interest expense using the effective interest method over the weighted average contractual maturity of these asset-backed securities.
Comprehensive Income
The Company's comprehensive income consists of net income, as presented in the condensed consolidated statements of operations, adjusted for changes in fair value of MBS classified as available for sale securities; changes in the fair value of the debt host contract associated with GSE CRTs; amortization of repurchase agreement interest expense resulting from the de-designation of derivatives previously accounted for as cash flow hedges and foreign currency translation adjustments. Unrealized gains and losses on the Company's MBS and the debt host contract associated with GSE CRTs 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.
The Company records all derivatives on its condensed 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

 
11
 



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.
The Company is a party to hybrid financial instruments that contain embedded derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded derivative instruments are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the debt host contract), whether the financial instrument is remeasured to fair value through earnings and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded instrument possesses economic characteristics that are not clearly and closely related to the economic characteristics of the debt host contract, (2) the financial instrument is not remeasured to fair value through earnings and (3) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifies as an embedded derivative that is separated from the debt host contract. The embedded derivative is recorded at fair value, and changes in fair value are recorded in realized and unrealized credit derivative income (loss), net in the Company's condensed consolidated statements of operations.
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 condensed 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 condensed consolidated statements of operations. The interest rate swaps continue to be reported as derivative assets or derivative liabilities on the Company’s condensed 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 condensed 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, currency forward 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, currency forward 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 condensed consolidated statements of operations. The fair value of these swaptions, futures contracts, currency forward contracts and TBAs is included in derivative assets or derivative liabilities on the condensed consolidated balance sheets.
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 stockholders.
Recent Accounting Pronouncements Not Yet Adopted
In February 2015, the FASB issued modifications to existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The new guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.
In April 2015, the FASB issued guidance to amend the presentation of debt issuance cost related to a recognized debt liability. Under the new guidance, the debt issuance costs will be presented in the balance sheet as a direct deduction from the carrying amount of the recognized debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected under the new guidance. The standard is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The guidance should be applied on a retrospective basis. The balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle,

 
12
 



the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The new guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.
Note 3 – Variable Interest Entities
The Company's maximum risk of loss in VIEs in which the Company is not the primary beneficiary at September 30, 2015 is presented in the table below.
$ in thousands
Carrying Amount
 
Company's Maximum Risk of Loss
Non-Agency RMBS
2,624,608

 
2,624,608

CMBS
3,304,214

 
3,304,214

Total
5,928,822

 
5,928,822

Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer 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, 2015 and December 31, 2014. Intercompany balances have been eliminated for purposes of this presentation.
$ in thousands
September 30, 2015
 
December 31, 2014
Residential loans, held-for-investment
3,307,249

 
3,365,003

Accrued interest receivable
20,211

 
10,562

Deferred costs
4,482

 
5,032

Total assets
3,331,942

 
3,380,597

Accrued interest and accrued expenses payable
16,636

 
8,692

Asset-backed securities issued by securitization trusts
2,859,423

 
2,929,820

Total liabilities
2,876,059

 
2,938,512

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 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 to provide, and has not provided, any additional financial support to the securitization trusts for the period ended September 30, 2015.
During the nine months ended September 30, 2015, the Company invested in and consolidated one new securitization trust. The following table presents the balances of the assets and liabilities of the newly consolidated securitization trust before consolidation into the Company. The current period activity for the securitization trust is reflected in the Company’s condensed consolidated financial statements.
$ in thousands
2015
Residential loans, held-for-investment
372,305

Accrued interest receivable
1,236

Total assets
373,541

Accrued interest and accrued expenses payable
1,236

Asset-backed securities issued by securitization trusts
372,305

Total liabilities
373,541

The Company did not deconsolidate any securitization trusts during the nine months ended September 30, 2015.

 
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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 discount and 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, 2015 and December 31, 2014.
$ in thousands
September 30, 2015
 
December 31, 2014
Principal balance
3,279,984

 
3,332,192

Unamortized premium (discount), net
27,794

 
33,553

Recorded investment
3,307,778

 
3,365,745

Allowance for loan losses
(529
)
 
(742
)
Carrying value
3,307,249

 
3,365,003

The following table summarizes residential loans held-for-investment at September 30, 2015 by year of origination.
$ in thousands
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
Total
Portfolio Characteristics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Loans
692

 
2,596

 
720

 
86

 
25

 
6

 
14

 
14

 
4,153

Current Principal Balance
513,819

 
1,998,969

 
625,255

 
91,620

 
23,841

 
2,737

 
12,327

 
11,416

 
3,279,984

Net Weighted Average Coupon Rate
3.46
%
 
3.45
%
 
3.24
%
 
3.38
%
 
3.74
%
 
3.69
%
 
5.47
%
 
4.67
%
 
3.42
%
Weighted Average Maturity (years)
28.72

 
27.81

 
27.28

 
25.74

 
25.22

 
23.76

 
22.92

 
21.84

 
27.73

Current Performance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Current
513,819

 
1,997,171

 
625,255

 
91,620

 
23,841

 
2,737

 
11,697

 
11,416

 
3,277,556

30 Days Delinquent

 
560

 

 

 

 

 
630

 

 
1,190

60 Days Delinquent

 

 

 

 

 

 

 

 

90+ Days Delinquent (1)

 
1,238

 

 

 

 

 

 

 
1,238

Bankruptcy/Foreclosure

 

 

 

 

 

 

 

 

Total
513,819

 
1,998,969

 
625,255

 
91,620

 
23,841

 
2,737

 
12,327

 
11,416

 
3,279,984

(1)
The Company has stopped recording interest income on these loans as of September 30, 2015.
The following table summarizes the geographic concentrations of residential loans held-for-investment at September 30, 2015 based on principal balance outstanding.
State
Percent
California
53.1
%
New York
7.6
%
Massachusetts
5.9
%
Illinois
3.6
%
Other states (none greater than 3%)
29.8
%
Total
100.0
%


 
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The following table presents future contractual minimum annual principal payments of residential loans held-for-investment at September 30, 2015.
$ in thousands
 
Scheduled Principal
September 30, 2015
Within one year
58,964

One to three years
125,167

Three to five years
135,008

Greater than or equal to five years
2,960,845

Total
3,279,984

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, 2015 and 2014.
$ in thousands
September 30, 2015
 
September 30, 2014
Balance at beginning of period
(742
)
 
(884
)
Charge-offs, net

 

Reduction in (provision for) loan losses
213

 
52

Balance at end of period
(529
)
 
(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 28.37 years and 28.94 years at September 30, 2015 and December 31, 2014, respectively. The investors in the asset-backed securities are not affiliated with the Company and have no recourse to the general credit of the Company.

 
15
 



The asset-backed securities are collateralized by residential loans held in the securitization trusts as summarized in the following table at September 30, 2015 and December 31, 2014.
 
September 30, 2015
 
December 31, 2014
 
ABS
 
Residential loans
 
ABS
 
Residential loans
$ in thousands
Outstanding
 
Held as Collateral
 
Outstanding
 
Held as Collateral
Principal balance
2,836,398

 
3,279,984

 
2,902,378

 
3,332,192

Interest-only securities
12,930

 

 
15,040

 

Unamortized premium
19,763

 
34,810

 
23,735

 
41,928

Unamortized discount
(9,668
)
 
(7,016
)
 
(11,333
)
 
(8,375
)
Allowance for loan losses

 
(529
)
 

 
(742
)
Carrying value
2,859,423

 
3,307,249

 
2,929,820

 
3,365,003

Range of weighted average interest rates
2.8% - 3.9%

 
 
 
2.8% - 4.0%

 
 
Number of securitization trusts consolidated
11

 
 
 
10

 
 
The following table presents the estimated principal repayment schedule of asset-backed securities issued by securitization trusts at September 30, 2015 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, 2015
Within one year
378,803

One to three years
621,255

Three to five years
464,837

Greater than or equal to five years
1,371,503

Total
2,836,398


 
16
 



Note 4 – Mortgage-Backed and Credit Risk Transfer Securities
The following tables summarize the Company’s MBS and GSE CRT portfolio by asset type as of September 30, 2015 and December 31, 2014.
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 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
1,602,338

 
77,013

 
1,679,351

 
23,031

 
1,702,382

 
3.73
%
 
2.44
%
 
2.26
%
30 year fixed-rate
3,905,465

 
259,092

 
4,164,557

 
50,389

 
4,214,946

 
4.26
%
 
2.70
%
 
2.68
%
ARM*
438,335

 
5,088

 
443,423

 
9,408

 
452,831

 
2.73
%
 
2.63
%
 
2.22
%
Hybrid ARM
3,335,619

 
65,957

 
3,401,576

 
46,037

 
3,447,613

 
2.73
%
 
2.55
%
 
2.18
%
Total Agency pass-through
9,281,757

 
407,150

 
9,688,907

 
128,865

 
9,817,772

 
3.55
%
 
2.60
%
 
2.41
%
Agency-CMO(4)
1,928,406

 
(1,521,514
)
 
406,892

 
9,770

 
416,662

 
2.26
%
 
3.60
%
 
2.31
%
Non-Agency RMBS(5)(6)
3,066,848

 
(526,501
)
 
2,540,347

 
84,261

 
2,624,608

 
3.41
%
 
3.64
%
 
4.94
%
GSE CRT(7)
645,000

 
23,376

 
668,376

 
(16,671
)
 
651,705

 
1.01
%
 
0.51
%
 
0.53
%
CMBS(8)
3,745,038

 
(551,404
)
 
3,193,634

 
110,580

 
3,304,214

 
4.12
%
 
4.44
%
 
4.38
%
Total
18,667,049

 
(2,168,893
)
 
16,498,156

 
316,805

 
16,814,961

 
3.42
%
 
3.05
%
 
3.11
%
* Adjustable-rate mortgage ("ARM")
 
(1)
Net weighted average coupon as of September 30, 2015 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of September 30, 2015 and incorporates future prepayment and loss assumptions but excludes changes in anticipated interest rates.
(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 Agency MBS IOs which represent 31.6% of the balance based on fair value.
(5)
Non-Agency RMBS held by the Company is 51.3% variable rate, 41.5% fixed rate, and 7.2% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $328.4 million is non-accretable.
(7)
GSE CRT weighted average coupon and weighted average yield excludes embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net.
(8)
CMBS includes interest-only securities and commercial real estate mezzanine loan pass-through certificates, which represent 0.8% and 1.3% of the balance based on fair value, respectively.


 
17
 



December 31, 2014 (As Restated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 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
1,236,297

 
60,764

 
1,297,061

 
30,040

 
1,327,101

 
4.05
%
 
2.60
%
 
2.66
%
30 year fixed-rate
4,432,301

 
297,311

 
4,729,612

 
60,681

 
4,790,293

 
4.29
%
 
2.97
%
 
3.05
%
ARM
531,281

 
9,068

 
540,349

 
6,433

 
546,782

 
2.83
%
 
2.27
%
 
2.29
%
Hybrid ARM
2,901,078

 
50,757

 
2,951,835

 
25,083

 
2,976,918

 
2.78
%
 
2.34
%
 
2.24
%
Total Agency pass-through
9,100,957

 
417,900

 
9,518,857

 
122,237

 
9,641,094

 
3.69
%
 
2.68
%
 
2.71
%
Agency-CMO(4)
1,957,296

 
(1,502,785
)
 
454,511

 
(3,616
)
 
450,895

 
2.34
%
 
4.57
%
 
3.62
%
Non-Agency RMBS(5)(6)
3,555,249

 
(583,890
)
 
2,971,359

 
90,288

 
3,061,647

 
3.51
%
 
4.12
%
 
4.86
%
GSE CRT(7)
615,000

 
25,814

 
640,814

 
(15,390
)
 
625,424

 
1.03
%
 
0.49
%
 
0.48
%
CMBS(8)
3,277,208

 
54,893

 
3,332,101

 
137,734

 
3,469,835

 
4.74
%
 
4.39
%
 
4.38
%
Total
18,505,710

 
(1,588,068
)
 
16,917,642

 
331,253

 
17,248,895

 
3.61
%
 
3.24
%
 
3.36
%
 
(1)
Net weighted average coupon as of December 31, 2014 is presented net of servicing and other fees.
(2)
Period-end weighted average yield based on amortized cost as of December 31, 2014 incorporates future prepayment and loss assumptions but excludes changes in anticipated interest rates.
(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 Agency MBS IOs, which represent 29.1% of the balance based on fair value.
(5)
Non-Agency RMBS held by the Company is 52.8% variable rate, 40.1% fixed rate, and 7.1% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $405.5 million is non-accretable.
(7)
GSE CRT weighted average coupon and weighted average yield excludes embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net.
(8)
CMBS includes commercial real estate mezzanine loan pass-through certificates which represent 1.3% of the balance based on fair value.
The following table summarizes the Company's non-Agency RMBS portfolio by asset type as of September 30, 2015 and December 31, 2014.
$ in thousands
September 30, 2015
 
% of Non-Agency
 
December 31, 2014
 
% of Non-Agency
Prime
821,249

 
31.3
%
 
969,849

 
31.7
%
Re-REMIC
790,577

 
30.1
%
 
1,000,635

 
32.7
%
Alt-A
598,198

 
22.8
%
 
694,467

 
22.7
%
Subprime/reperforming
414,584

 
15.8
%
 
396,696

 
12.9
%
Total Non-Agency
2,624,608

 
100.0
%
 
3,061,647

 
100.0
%

 
18
 



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, 2015 and December 31, 2014.
  
Percentage of Re-REMIC Holdings at Fair Value
Re-REMIC Subordination(1)
September 30, 2015
 
December 31, 2014
0% - 10%
9.4
%
 
7.0
%
10% - 20%
5.0
%
 
4.4
%
20% - 30%
12.4
%
 
11.9
%
30% - 40%
25.4
%
 
26.1
%
40% - 50%
32.5
%
 
31.8
%
50% - 60%
11.7
%
 
15.2
%
60% - 70%
3.6
%
 
3.6
%
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. 19.5% of the Company's Re-REMIC holdings are not senior tranches.
The components of the carrying value of the Company’s MBS and GSE CRT portfolio at September 30, 2015 and December 31, 2014 are presented below. 
$ in thousands
September 30, 2015
 
December 31, 2014 
 (As Restated)
Principal balance
18,667,049

 
18,505,710

Unamortized premium
522,515

 
550,071

Unamortized discount
(2,691,408
)
 
(2,138,139
)
Gross unrealized gains
404,948

 
439,513

Gross unrealized losses
(88,143
)
 
(108,260
)
Fair value
16,814,961

 
17,248,895

The following table summarizes the Company’s MBS and GSE CRT portfolio according to estimated weighted average life classifications as of September 30, 2015 and December 31, 2014
$ in thousands
September 30, 2015
 
December 31, 2014
Less than one year
478,122

 
440,471

Greater than one year and less than five years
7,806,669

 
7,997,709

Greater than or equal to five years
8,530,170

 
8,810,715

Total
16,814,961

 
17,248,895



 
19
 



The following tables present the estimated fair value and gross unrealized losses of the Company's MBS and GSE CRTs by length of time that such securities have been in a continuous unrealized loss position at September 30, 2015 and December 31, 2014.
September 30, 2015
  
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
565,796

 
(2,633
)
 
30

 
81,804

 
(804
)
 
6

 
647,600

 
(3,437
)
 
36

30 year fixed-rate
571,870

 
(7,717
)
 
20

 
1,154,766

 
(26,693
)
 
45

 
1,726,636

 
(34,410
)
 
65

ARM
2,277

 
(1
)
 
1

 

 

 

 
2,277

 
(1
)
 
1

Hybrid ARM
484,179

 
(1,761
)
 
21

 

 

 

 
484,179

 
(1,761
)
 
21

Total Agency pass-through
1,624,122

 
(12,112
)
 
72

 
1,236,570

 
(27,497
)
 
51

 
2,860,692

 
(39,609
)
 
123

Agency-CMO
124,401

 
(2,399
)
 
10

 
13,831

 
(6,714
)
 
9

 
138,232

 
(9,113
)
 
19

Non-Agency RMBS
299,461

 
(2,074
)
 
20

 
423,348

 
(12,583
)
 
31

 
722,809

 
(14,657
)
 
51

GSE CRT (1)
230,241

 
(7,236
)
 
13

 
121,475

 
(13,124
)
 
4

 
351,716

 
(20,360
)
 
17

CMBS
428,580

 
(4,133
)
 
38

 
32,191

 
(271
)
 
1

 
460,771

 
(4,404
)
 
39

Total
2,706,805

 
(27,954
)
 
153

 
1,827,415

 
(60,189
)
 
96

 
4,534,220

 
(88,143
)
 
249

(1) Balance includes unrealized losses on both the debt host contract and the embedded derivative.
December 31, 2014 (As Restated)
  
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
10,897

 
(42
)
 
1

 
105,644

 
(1,395
)
 
6

 
116,541

 
(1,437
)
 
7

30 year fixed-rate
137,680

 
(2,662
)
 
5

 
1,756,894

 
(40,181
)
 
62

 
1,894,574

 
(42,843
)
 
67

ARM
24,074

 
(9
)
 
1

 
3,719

 
(23
)
 
1

 
27,793

 
(32
)
 
2

Hybrid ARM
630,775

 
(1,544
)
 
28

 
20,361

 
(197
)
 
2

 
651,136

 
(1,741
)
 
30

Total Agency pass-through
803,426

 
(4,257
)
 
35

 
1,886,618

 
(41,796
)
 
71

 
2,690,044

 
(46,053
)
 
106

Agency-CMO