Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Invesco Mortgage Capital Inc.ivr20160930ex322.htm
EX-32.1 - EXHIBIT 32.1 - Invesco Mortgage Capital Inc.ivr20160930ex321.htm
EX-31.2 - EXHIBIT 31.2 - Invesco Mortgage Capital Inc.ivr20160930ex312.htm
EX-31.1 - EXHIBIT 31.1 - Invesco Mortgage Capital Inc.ivr20160930ex311.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, 2016
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
ivrsinglelogojpega17.jpg

(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, 2016, there were 111,588,883 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
(Unaudited)
  
As of
 $ in thousands except share amounts
September 30, 2016
 
December 31, 2015
ASSETS
 
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $15,493,599 and $15,553,934, respectively)
16,074,077

 
16,065,935

Commercial loans, held-for-investment
273,291

 
209,062

Cash and cash equivalents
47,282

 
53,199

Due from counterparties
241,161

 
110,009

Investment related receivable
44,944

 
154,594

Accrued interest receivable
49,390

 
50,779

Derivative assets, at fair value
505

 
8,659

Other assets
183,514

 
115,072

Total assets
16,914,164

 
16,767,309

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
12,060,502

 
12,126,048

Secured loans
1,650,000

 
1,650,000

Exchangeable senior notes
396,420

 
394,573

Derivative liabilities, at fair value
382,321

 
238,148

Dividends and distributions payable
50,921

 
51,734

Investment related payable
17

 
167

Accrued interest payable
23,915

 
21,604

Collateral held payable

 
4,900

Accounts payable and accrued expenses
1,477

 
2,376

Due to affiliate
10,295

 
10,851

Total liabilities
14,575,868

 
14,500,401

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; 111,588,883 and 113,619,471 shares issued and outstanding, respectively
1,116

 
1,136

Additional paid in capital
2,382,847

 
2,407,372

Accumulated other comprehensive income
585,563

 
318,624

Retained earnings (distributions in excess of earnings)
(943,771
)
 
(771,313
)
Total stockholders’ equity
2,310,971

 
2,241,035

Non-controlling interest
27,325

 
25,873

Total equity
2,338,296

 
2,266,908

Total liabilities and equity
16,914,164

 
16,767,309

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
2016
 
2015
 
2016
 
2015
Interest Income

 

 

 

Mortgage-backed and credit risk transfer securities
112,467

 
128,305

 
347,573

 
395,844

Residential loans (1)

 
28,380

 

 
88,001

Commercial loans
5,680

 
3,743

 
16,520

 
11,349

Total interest income
118,147

 
160,428

 
364,093

 
495,194

Interest Expense

 

 

 

Repurchase agreements
24,892

 
41,303

 
97,952

 
125,544

Secured loans
2,746

 
1,622

 
8,149

 
4,639

Exchangeable senior notes
5,620

 
5,620

 
16,847

 
16,840

Asset-backed securities (1)

 
20,686

 

 
64,913

Total interest expense
33,258

 
69,231

 
122,948

 
211,936

Net interest income
84,889

 
91,197

 
241,145

 
283,258

Reduction in provision for loan losses

 
81

 

 
213

Net interest income after reduction in provision for loan losses
84,889

 
91,278

 
241,145

 
283,471

Other Income (loss)

 

 

 

Gain (loss) on investments, net
(7,155
)
 
(1,967
)
 
5,860

 
11,019

Equity in earnings of unconsolidated ventures
729

 
1,894

 
1,992

 
9,131

Gain (loss) on derivative instruments, net
35,378

 
(220,602
)
 
(293,528
)
 
(287,344
)
Realized and unrealized credit derivative income (loss), net
31,926

 
2,928

 
57,564

 
24,904

Other investment income (loss), net
(554
)
 
739

 
(3,617
)
 
1,518

Total other income (loss)
60,324

 
(217,008
)
 
(231,729
)
 
(240,772
)
Expenses
 
 
 
 
 
 
 
Management fee – related party
6,719

 
10,058

 
25,292

 
28,816

General and administrative
1,836

 
2,507

 
5,769

 
6,186

Consolidated securitization trusts (1)

 
2,132

 

 
6,544

Total expenses
8,555

 
14,697

 
31,061

 
41,546

Net income (loss)
136,658

 
(140,427
)
 
(21,645
)
 
1,153

Net income (loss) attributable to non-controlling interest
1,723

 
(1,628
)
 
(235
)
 
(10
)
Net income (loss) attributable to Invesco Mortgage Capital Inc.
134,935

 
(138,799
)
 
(21,410
)
 
1,163

Dividends to preferred stockholders
5,716

 
5,716

 
17,148

 
17,148

Net income (loss) attributable to common stockholders
129,219

 
(144,515
)
 
(38,558
)
 
(15,985
)
Earnings (loss) per share:
 
 


 


 


Net income (loss) attributable to common stockholders
 
 

 

 

Basic
1.16

 
(1.18
)
 
(0.34
)
 
(0.13
)
Diluted
1.05

 
(1.18
)
 
(0.34
)
 
(0.13
)
Dividends declared per common share
0.40

 
0.40

 
1.20

 
1.30

(1)
The condensed consolidated statements of operations for the three and nine months ended September 30, 2015 include income and expenses of consolidated variable interest entities ("VIEs"). The Company deconsolidated these VIEs in December 2015. Refer to Note 2 - “Summary of Significant Accounting Policies” 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
2016
 
2015
 
2016
 
2015
Net income (loss)
136,658

 
(140,427
)
 
(21,645
)
 
1,153

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
32,015

 
42,933

 
270,591

 
(30,611
)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net

 
389

 
(11,581
)
 
(4,152
)
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
(4,831
)
 
15,724

 
11,331

 
51,182

Currency translation adjustments on investment in unconsolidated venture
(235
)
 
(33
)
 
(10
)
 
(33
)
Total other comprehensive income
26,949

 
59,013

 
270,331

 
16,386

Comprehensive income (loss)
163,607

 
(81,414
)
 
248,686

 
17,539

Less: Comprehensive income (loss) attributable to non-controlling interest
(2,063
)
 
942

 
(3,157
)
 
(191
)
Less: Dividends to preferred stockholders
(5,716
)
 
(5,716
)
 
(17,148
)
 
(17,148
)
Comprehensive income (loss) attributable to common stockholders
155,828

 
(86,188
)
 
228,381

 
200

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, 2016
(Unaudited)
 
 
 
 
 
 
 
Attributable to Common Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income
 
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 December 31, 2015
5,600,000

 
135,356

 
6,200,000

 
149,860

 
113,619,471

 
1,136

 
2,407,372

 
318,624

 
(771,313
)
 
2,241,035

 
25,873

 
2,266,908

Net loss

 

 

 

 

 


 

 

 
(21,410
)
 
(21,410
)
 
(235
)
 
(21,645
)
Other comprehensive income

 

 

 

 

 

 

 
266,939

 

 
266,939

 
3,392

 
270,331

Proceeds from issuance of common stock, net of offering costs

 

 

 

 
3,201

 

 
35

 

 

 
35

 

 
35

Repurchase of shares of common stock

 

 

 

 
(2,063,451
)
 
(20
)
 
(24,980
)
 

 

 
(25,000
)
 

 
(25,000
)
Stock awards

 

 

 

 
29,662

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 
(133,900
)
 
(133,900
)
 

 
(133,900
)
Common unit dividends

 

 

 

 

 

 

 

 

 

 
(1,710
)
 
(1,710
)
Preferred stock dividends

 

 

 

 

 

 

 

 
(17,148
)
 
(17,148
)
 

 
(17,148
)
Amortization of equity-based compensation

 

 

 

 

 

 
420

 

 


 
420

 
5

 
425

Balance at September 30, 2016
5,600,000

 
135,356

 
6,200,000

 
149,860

 
111,588,883

 
1,116

 
2,382,847

 
585,563

 
(943,771
)
 
2,310,971

 
27,325

 
2,338,296

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
2016
 
2015
Cash Flows from Operating Activities
 
 
 
Net income (loss)
(21,645
)
 
1,153

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
85,522

 
90,900

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

 
(639
)
Amortization of commercial loan origination fees
(219
)
 
(51
)
Reduction in provision for loan losses

 
(213
)
Unrealized (gain) loss on derivative instruments, net
150,842

 
104,546

Unrealized (gain) loss on credit derivatives, net
(45,192
)
 
(7,923
)
(Gain) loss on investments, net
(5,860
)
 
(11,019
)
Realized (gain) loss on derivative instruments, net
62,222

 
44,394

Realized (gain) loss on credit derivatives, net
6,017

 
2,184

Equity in earnings of unconsolidated ventures
(1,992
)
 
(9,131
)
Amortization of equity-based compensation
425

 
422

Amortization of deferred securitization and financing costs
1,847

 
2,391

Amortization of net deferred losses on de-designated interest rate swaps
11,331

 
51,182

(Gain) loss on foreign currency transactions, net
6,080

 
619

Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in operating assets
1,260

 
(3,289
)
Increase in operating liabilities
858

 
10,512

Net cash provided by operating activities
251,496

 
276,038

Cash Flows from Investing Activities
 
 
 
Purchase of mortgage-backed and credit risk transfer securities
(2,367,991
)
 
(1,821,811
)
Purchase of U.S. Treasury securities
(403,105
)
 

Proceeds from sale of U.S. Treasury securities
524,478

 

(Contributions) distributions (from) to investment in unconsolidated ventures, net
7,632

 
15,174

Change in other assets
(73,875
)
 
(12,875
)
Principal payments from mortgage-backed and credit risk transfer securities
1,920,352

 
1,910,904

Proceeds from sale of mortgage-backed and credit risk transfer securities
659,959

 
290,561

Payments on sale of credit derivatives
(6,017
)
 
(2,184
)
Payment of premiums for interest rate swaptions

 
(1,485
)
Payments for termination of futures, forwards, swaps and TBAs, net
(60,737
)
 
(34,066
)
Purchase of residential loans held-for-investment

 
(372,305
)
Principal payments from residential loans held-for-investment

 
424,644

Principal payments from commercial loans held-for-investment
15,000

 
63,132

Origination and advances of commercial loans, net of origination fees
(85,033
)
 
(104,965
)
Net cash provided by investing activities
130,663

 
354,724

Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock
35

 
158

Repurchase of common stock
(25,000
)
 
(49,999
)
Cost of issuance of preferred stock

 
(36
)
Due from counterparties
(138,959
)
 
(118,562
)
Change in collateral held payable
(4,900
)
 
(14,890
)
Proceeds from repurchase agreements
97,653,895

 
105,832,915

Principal repayments of repurchase agreements
(97,719,439
)
 
(106,543,411
)
Proceeds from asset-backed securities issued by securitization trusts

 
336,077

Principal repayments of asset-backed securities issued by securitization trusts

 
(400,207
)
Proceeds from secured loans
125,000

 
2,100,000

Principal repayments on secured loans
(125,000
)
 
(1,675,000
)
Payments of deferred costs
(136
)
 

Payments of dividends and distributions
(153,572
)
 
(185,293
)
Net cash used in financing activities
(388,076
)
 
(718,248
)
Net change in cash and cash equivalents
(5,917
)
 
(87,486
)
Cash and cash equivalents, beginning of period
53,199

 
164,144

Cash and cash equivalents, end of period
47,282

 
76,658

Supplement Disclosure of Cash Flow Information
 
 
 
Interest paid
116,401

 
162,906

Non-cash Investing and Financing Activities Information
 
 
 
Net change in unrealized gain on mortgage-backed and credit risk transfer securities
259,010

 
(34,763
)
Dividends and distributions declared not paid
50,921

 
54,067

Net change in investment related payable (receivable)
117,295

 
53,089

Change in due from counterparties
7,807

 
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 conducts its business through IAS Operating Partnership LP (the “Operating Partnership”), a variable interest entity ("VIE"), as its sole general partner. As of September 30, 2016, the Company owned 98.7% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. 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 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 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
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 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 for the year ended December 31, 2015.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement 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. During the period from January 1, 2015 through December 9, 2015, the condensed consolidated financial statements also include the results of operations of certain residential loan securitization trusts (the "residential securitizations") that meet the definition of a VIE. On December 9, 2015, the Company completed the sale of certain beneficial interests in the residential securitizations and deconsolidated the residential securitizations.

 
6
 



Revision of Previously Issued Financial Statements
During the second quarter of 2016, the Company corrected errors in its accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality. The Company concluded that the errors are immaterial to each of the annual and interim consolidated financial statements which were included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and its interim report on Form 10-Q for the quarter ended March 31, 2016. The Company has corrected its financial statements for previous periods included in this filing on Form 10-Q and will correct its previously issued financial statements for these errors as the financial statements are presented in future periodic filings.
Refer to Note 16 - "Revision of Previously Issued Financial Statements" for additional details.
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
There have been no changes to the Company's accounting policies included in Note 2 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, other than the significant accounting policies disclosed below.
U.S. Treasury Securities
U.S. Treasury Securities are classified as trading securities and are recorded at fair value. The Company records its purchases of U.S. Treasury Securities on the trade date. Changes in fair value are recognized in gain (loss) on investments, net in the Company’s consolidated statements of operations. Interest income is accrued based on the outstanding principal balance of the securities and their contractual terms. Premiums are amortized into interest income over the contractual lives of the securities using a level yield method.
Fair Value Measurements
The Company reports its mortgage-backed and credit risk transfer securities and derivative assets and liabilities at fair value as determined by an independent pricing service. The Company generally obtains one price per instrument from its primary pricing service. If the primary pricing service cannot provide a price, the Company will seek a value from other pricing services.
The pricing service uses two types of valuation approaches to determine the valuation of the Company’s various mortgage-backed and credit risk transfer securities: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; and an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. In instances where sufficient market activity may not exist, the pricing service may utilize proprietary valuation models that may consider market transactions in comparable securities and the various relationship between securities in determining fair value and/or market characteristics to estimate relevant cash flows, which are then discounted to calculate the fair values. Observable inputs may include a combination of benchmark yields, executed trades, broker/dealer quotes, issuer spreads, bids, offers and benchmark securities to determine prices. In addition, the valuation models utilized by pricing services may consider additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. Both the Company and the pricing service continuously monitor market indicators and economic events to determine if any may have an impact on the valuations.
The pricing service values interest rate swaps and interest rate swaptions under the income approach using valuation models. The significant inputs in these models are readily available in public markets or can be derived from observable market transactions for substantially the full terms of the contracts.
The pricing service values U.S. Treasury futures, currency forward contracts and to-be-announced securities (“TBAs”) under the market approach through the use of quoted market prices available in an active market.
Overrides of prices from pricing services 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 pricing service price to no longer be indicative of fair value. In the rare instance where a price is adjusted, the Company has a control process to monitor the reason for such adjustment.

 
7
 



To gain comfort that pricing service 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 pricing services. 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 pricing services are asked to provide detailed information regarding their methodology and inputs. Transparency tools are also available from the pricing services which help the Company understand data points and/or market inputs used for pricing securities.
The Company also reviews daily price movements for interest rate swaps, interest rate swaptions, U.S. Treasury futures, currency forward contracts and TBAs. Price movements exceeding pre-defined tolerance levels are investigated using an alternate price from another pricing service as well as available market information. Based on the Company’s findings, the primary pricing service may be challenged, or in rare cases, overridden with an alternate pricing source.
In addition, the Company performs due diligence procedures on all pricing services on at least an annual basis. A questionnaire is sent to pricing services 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 pricing service's office.
As described in Note 10 - "Fair Value of Financial Instruments," the Company evaluates the source used to fair value its assets and liabilities 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") and GSE CRTs are 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 MBS and GSE CRTs on the trade date. Although the Company generally intends to hold most of its MBS and GSE CRTs until maturity, the Company may sell any of its mortgage-backed and credit risk transfer securities as part of its overall management of its investment portfolio.
The Company has elected the fair value option for all of its MBS purchased on or after September 1, 2016. Prior to September 1, 2016, the Company had also elected the fair value option for its RMBS interest-only securities (“RMBS IOs”). RMBS IOs are hybrid financial instruments that contain embedded derivatives. Under the fair value option, changes in fair value are recognized in the Company’s consolidated statements of operations. In the Company's view, this election more appropriately reflects the results of the Company's operations because MBS fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments.
Except for RMBS IOs, MBS purchased prior to September 1, 2016 are classified as available-for-sale securities. Unrealized gains or losses on available-for-sale securities 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.
The Company has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. GSE CRTs are hybrid financial instruments that contain embedded derivatives. Coupon payments on the securities are based on LIBOR, and principal payments are based on prepayments, losses and defined credit events in a reference pool of mortgage loans that collateralize Agency RMBS. The Company elected the fair value option for these securities due to the complexities associated with bifurcation of GSE CRTs into the debt host contract and embedded derivative. Under the fair value option, changes in fair value for GSE CRTs are recognized in the Company's consolidated statements of operations.
GSE CRTs purchased prior to August 24, 2015 are also reported at fair value but are accounted for as hybrid financial instruments consisting of a debt host contract and an embedded derivative. 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 in stockholders’ equity is recognized in income. Realized gains and losses from sales of GSE CRTs are determined based upon the specific identification method.

 
8
 



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 consolidated statements of operations.
The Company’s interest income recognition policies for MBS and GSE CRTs is described below in the Interest Income Recognition section of this Note 2 to the Company’s consolidated financial statements.
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 to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.
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 stockholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.
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 MBS (and other prepayable mortgage-backed securities where the Company may not recover substantially all of its initial investment) is based on estimated future cash flows. Management estimates future expected cash flows at the time of purchase and determines the effective interest rate based on these estimated cash flows and the Company’s purchase price. Over the life of the investments, management updates these estimated future cash flows and computes a revised yield based on the current amortized cost of the investment. In estimating these future 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. When actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security and the security's yield is revised prospectively. Changes in cash flows from the Company's original or most recent projection may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities.
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.

 
9
 



Reverse Repurchase Agreements
Reverse repurchase agreements are treated as collateralized financing transactions. Cash paid to the borrower is recorded as other assets on the Company's consolidated balance sheets. Interest receivable on reverse repurchase agreements is recorded as accrued interest receivable. The Company reflects all proceeds and repayments of reverse repurchase agreement on a net basis in the Company's consolidated statement of cash flows. The Company monitors the market value of the underlying collateral to ensure it remains sufficient to protect the Company in the event of default by the counterparty. If the Company were to sell the underlying collateral, the Company would recognize its obligation to return the underlying collateral as due to counterparties on the Company's 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.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
Effective January 1, 2016, the Company adopted the newly issued accounting guidance for presentation of debt issuance costs. Under the new standard, debt issuance costs are required to be presented in the consolidated balance sheets as a direct deduction from the carrying value of the associated debt liability. The Company adopted the accounting standard on a retrospective basis, which required the restatement of the Company's December 31, 2015 balance sheet. The adoption resulted in a $5.4 million reduction in exchangeable senior notes and a corresponding reduction in other assets.
Effective January 1, 2016, the Company adopted the newly issued accounting guidance for reporting entities that are required to determine whether they should consolidate certain legal entities. The Company adopted the accounting standard on a modified retrospective approach which did not require restatement of prior periods to conform to the post adoption presentation. The Company did not consolidate or deconsolidate any legal entities as a result of implementing the new guidance.
In January 2016, the FASB issued guidance to improve certain aspects of classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The Company is required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of the new guidance on its consolidated financial statements, as well as available transition methods.
In June 2016, the FASB issued an amendment to the guidance on reporting credit losses for assets measured at amortized cost and available-for-sale securities. The Company is required to adopt the new guidance in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the potential impacts of the new guidance on its consolidated financial statements, as well as available transition methods.
In August 2016, the FASB issued new guidance that is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The Company is required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the potential impacts of the new guidance on its 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, 2016 is presented in the table below.
$ in thousands
Carrying Amount
 
Company's Maximum Risk of Loss
CMBS
2,668,290

 
2,668,290

Non-Agency RMBS
2,109,115

 
2,109,115

Investments in unconsolidated ventures
32,763

 
32,763

Total
4,810,168

 
4,810,168

Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 6 - "Other Assets" for additional details regarding these investments.

 
10
 



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, 2016 and December 31, 2015.
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
Principal/ Notional
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
3,453,364

 
153,698

 
3,607,062

 
30,890

 
3,637,952

 
3.13
%
 
2.21
%
 
1.86
%
30 year fixed-rate
3,331,034

 
215,594

 
3,546,628

 
88,937

 
3,635,565

 
4.21
%
 
2.72
%
 
2.55
%
ARM*
321,140

 
2,917

 
324,057

 
7,896

 
331,953

 
2.71
%
 
2.62
%
 
2.18
%
Hybrid ARM
2,593,484

 
46,411

 
2,639,895

 
44,213

 
2,684,108

 
2.71
%
 
2.55
%
 
2.06
%
Total Agency pass-through
9,699,022

 
418,620

 
10,117,642

 
171,936

 
10,289,578

 
3.38
%
 
2.49
%
 
2.17
%
Agency-CMO(4)
1,611,750

 
(1,257,836
)
 
353,914

 
10,122

 
364,036

 
2.22
%
 
3.25
%
 
2.42
%
Non-Agency RMBS(5)(6)(7)
4,078,976

 
(2,065,395
)
 
2,013,581

 
95,534

 
2,109,115

 
2.18
%
 
5.06
%
 
5.06
%
GSE CRT(8)(9)
591,460

 
20,580

 
612,040

 
31,018

 
643,058

 
1.53
%
 
0.83
%
 
0.98
%
CMBS(10)(11)
3,076,101

 
(559,789
)
 
2,516,312

 
151,978

 
2,668,290

 
3.89
%
 
4.33
%
 
4.28
%
Total
19,057,309

 
(3,443,820
)
 
15,613,489

 
460,588

 
16,074,077

 
3.05
%
 
3.07
%
 
2.84
%
* Adjustable-rate mortgage ("ARM")
 
(1)
Net weighted average coupon as of September 30, 2016 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of September 30, 2016 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 ("Agency IO"), which represent 83.5% of principal/notional balance, 24.0% of amortized cost and 24.3% of fair value.
(5)
Non-Agency RMBS held by the Company is 46.8% fixed rate, 46.1% variable rate, and 7.1% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $261.7 million is non-accretable based on the Company's estimated future cash flows of the securities.
(7)
Non-Agency RMBS includes interest-only securities which represent 44.0% of principal/notional balance, 1.5% of amortized cost and 1.4% of fair value.
(8)
The Company has elected the fair value option for GSE CRT purchased on or after August 24, 2015, which represent 3.5% of the balance based on fair value. As a result, GSE CRT accounted for under the fair value option are not bifurcated between the debt host contract and the embedded derivative.
(9)
GSE CRT weighted average coupon and weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option recorded as realized and unrealized credit derivative income (loss), net.
(10)
CMBS includes interest-only securities which represent 20.2% of principal/notional balance, 0.9% of amortized cost and 0.9% of fair value.
(11)
The Company has elected the fair value option for CMBS purchased on or after September 1, 2016 which represent 0.4% of principal/notional balance, 0.6% of amortized cost and 0.5% of fair value.


 
11
 



December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
Principal/Notional
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
1,527,877

 
72,389

 
1,600,266

 
10,664

 
1,610,930

 
3.72
%
 
2.47
%
 
2.40
%
30 year fixed-rate
3,796,091

 
249,285

 
4,045,376

 
18,581

 
4,063,957

 
4.24
%
 
2.81
%
 
2.85
%
ARM
417,424

 
4,625

 
422,049

 
3,976

 
426,025

 
2.72
%
 
2.58
%
 
2.26
%
Hybrid ARM
3,240,967

 
63,324

 
3,304,291

 
5,234

 
3,309,525

 
2.73
%
 
2.56
%
 
2.22
%
Total Agency pass-through
8,982,359

 
389,623

 
9,371,982

 
38,455

 
9,410,437

 
3.54
%
 
2.65
%
 
2.53
%
Agency-CMO(4)
1,774,621

 
(1,386,284
)
 
388,337

 
482

 
388,819

 
2.23
%
 
4.29
%
 
3.42
%
Non-Agency RMBS(5)(6)(7)
4,965,978

 
(2,363,799
)
 
2,602,179

 
90,308

 
2,692,487

 
2.20
%
 
5.11
%
 
4.90
%
GSE CRT(8)(9)
657,500

 
22,593

 
680,093

 
(21,865
)
 
658,228

 
1.32
%
 
0.72
%
 
0.62
%
CMBS(10)
3,429,655

 
(558,749
)
 
2,870,906

 
45,058

 
2,915,964

 
3.95
%
 
4.30
%
 
4.35
%
Total
19,810,113

 
(3,896,616
)
 
15,913,497

 
152,438

 
16,065,935

 
3.08
%
 
3.31
%
 
3.16
%
 
(1)
Net weighted average coupon as of December 31, 2015 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of December 31, 2015 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 ("Agency IO"), which represent 84.4% of principal (notional) balance, 27.5% of amortized cost and 27.6% of fair value.
(5)
Non-Agency RMBS held by the Company is 48.4% variable rate, 45.2% fixed rate, and 6.4% floating rate based on fair value.
(6)
Of the total discount in non-Agency RMBS, $281.6 million is non-accretable based on the Company's estimated future cash flows of the securities.
(7)
Non-Agency RMBS includes interest-only securities, which represent 42.1% of principal/notional balance, 1.3% of amortized cost and1.3% of fair value.
(8)
The Company has elected the fair value option for GSE CRT purchased on or after August 24, 2015, which represent 1.9% of the balance based on fair value. As a result, GSE CRT accounted for under the fair value option are not bifurcated between the debt host contract and the embedded derivative.
(9)
GSE CRT weighted average coupon and weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option recorded as realized and unrealized credit derivative income (loss), net.
(10)
CMBS includes interest-only securities and commercial real estate mezzanine loan pass-through certificates, which represent 0.9% and 0.7% of the balance based on fair value, respectively.
The following table summarizes the Company's non-Agency RMBS portfolio by asset type based on fair value as of September 30, 2016 and December 31, 2015.
$ in thousands
September 30, 2016
 
% of Non-Agency
 
December 31, 2015
 
% of Non-Agency
Prime
938,893

 
44.5
%
 
1,081,428

 
40.2
%
Alt-A
465,127

 
22.1
%
 
544,306

 
20.2
%
Re-REMIC
406,703

 
19.3
%
 
663,853

 
24.7
%
Subprime/reperforming
298,392

 
14.1
%
 
402,900

 
14.9
%
Total Non-Agency
2,109,115

 
100.0
%
 
2,692,487

 
100.0
%

 
12
 



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, 2016 and December 31, 2015.
  
Percentage of Re-REMIC Holdings at Fair Value
Re-REMIC Subordination(1)
September 30, 2016
 
December 31, 2015
0% - 10%
15.9
%
 
11.0
%
10% - 20%
7.3
%
 
5.6
%
20% - 30%
13.5
%
 
12.7
%
30% - 40%
16.1
%
 
20.8
%
40% - 50%
28.5
%
 
32.8
%
50% - 60%
16.1
%
 
13.3
%
60% - 70%
2.6
%
 
3.8
%
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. 32.6% 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, 2016 and December 31, 2015 are presented below. 
$ in thousands
September 30, 2016
 
December 31, 2015
Principal balance
19,057,309

 
19,810,113

Unamortized premium
512,631

 
495,539

Unamortized discount
(3,956,451
)
 
(4,392,155
)
Gross unrealized gains
485,503

 
303,890

Gross unrealized losses
(24,915
)
 
(151,452
)
Fair value
16,074,077

 
16,065,935

The following table summarizes the Company’s MBS and GSE CRT portfolio according to estimated weighted average life classifications as of September 30, 2016 and December 31, 2015
$ in thousands
September 30, 2016
 
December 31, 2015
Less than one year
238,817

 
427,678

Greater than one year and less than five years
10,957,834

 
6,237,547

Greater than or equal to five years
4,877,426

 
9,400,710

Total
16,074,077

 
16,065,935



 
13
 



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, 2016 and December 31, 2015.
September 30, 2016
  
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
785,124

 
(2,384
)
 
36

 
69,916

 
(680
)
 
14

 
855,040

 
(3,064
)
 
50

30 year fixed-rate
36,352

 
(27
)
 
5

 
891,280

 
(5,546
)
 
37

 
927,632

 
(5,573
)
 
42

ARM

 

 

 
1,360

 
(36
)
 
1

 
1,360

 
(36
)
 
1

Hybrid ARM
89,303

 
(217
)
 
7

 
254

 
(4
)
 
2

 
89,557

 
(221
)
 
9

Total Agency pass-through
910,779

 
(2,628
)
 
48

 
962,810

 
(6,266
)
 
54

 
1,873,589

 
(8,894
)
 
102

Agency-CMO (1)
24,918

 
(1,255
)
 
15

 
26,085

 
(759
)
 
4

 
51,003

 
(2,014
)
 
19

Non-Agency RMBS
582,750

 
(7,881
)
 
63

 
265,241

 
(3,824
)
 
27

 
847,991

 
(11,705
)
 
90

GSE CRT (2)

 

 

 
36,080

 
(947
)
 
3

 
36,080

 
(947
)
 
3

CMBS (3)
68,209

 
(318
)
 
10

 
61,382

 
(1,037
)
 
6

 
129,591

 
(1,355
)
 
16

Total
1,586,656

 
(12,082
)
 
136

 
1,351,598

 
(12,833
)
 
94

 
2,938,254

 
(24,915
)
 
230

(1)
Fair value includes unrealized losses on Agency IO of $1.7 million and unrealized losses on CMO of $346,000.
(2)
Fair value includes unrealized losses on both the debt host contract and the embedded derivative.
(3)
Amounts disclosed includes CMBS with a fair value of $10.7 million for which the fair value option has been elected. Such securities have unrealized losses of $36,000.
December 31, 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
600,480

 
(8,081
)
 
33

 
77,506

 
(1,482
)
 
6

 
677,986

 
(9,563
)
 
39

30 year fixed-rate
776,065

 
(14,827
)
 
32

 
1,120,391

 
(39,497
)
 
47

 
1,896,456

 
(54,324
)
 
79

ARM
200,863

 
(501
)
 
11

 

 

 

 
200,863

 
(501
)
 
11

Hybrid ARM
1,913,872

 
(17,082
)
 
111

 

 

 

 
1,913,872

 
(17,082
)
 
111

Total Agency pass-through
3,491,280

 
(40,491
)
 
187

 
1,197,897

 
(40,979
)
 
53

 
4,689,177

 
(81,470
)
 
240

Agency-CMO (1)
166,754

 
(3,296
)
 
14

 
9,118

 
(6,934
)
 
9

 
175,872

 
(10,230
)
 
23

Non-Agency RMBS
872,575

 
(7,286
)
 
66

 
316,010

 
(10,699
)
 
20

 
1,188,585

 
(17,985
)
 
86

GSE CRT (2)
340,116

 
(10,050
)
 
16

 
120,877

 
(13,605
)
 
7

 
460,993

 
(23,655
)
 
23

CMBS
1,224,985

 
(17,328
)
 
85

 
31,533

 
(784
)
 
2

 
1,256,518

 
(18,112
)
 
87

Total
6,095,710

 
(78,451
)
 
368

 
1,675,435

 
(73,001
)
 
91

 
7,771,145

 
(151,452
)
 
459

(1)
Fair value includes unrealized losses on Agency IO of $8.3 million and unrealized losses on CMO of $1.9 million.
(2)
Fair value includes unrealized losses on both the debt host contract and the embedded derivative. Amounts disclosed includes GSE CRT with a fair value of $12.4 million for which the fair value option has been elected. Such securities have unrealized losses of $56,000.
Gross unrealized losses on the Company’s Agency RMBS and CMO were $8.9 million and $346,000, respectively, at September 30, 2016. Due to the inherent credit quality of Agency RMBS and CMO, the Company determined that at September 30, 2016, any unrealized losses on its Agency RMBS and CMO portfolio are not other than temporary.

 
14
 



Gross unrealized losses on the Company’s Agency IO, non-Agency RMBS, GSE CRT and CMBS were $15.7 million at September 30, 2016. The Company does not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as interest rate spreads, prepayment speeds, and market fluctuations. These investment securities are included in the Company’s assessment for other-than-temporary impairment on a quarterly basis.
The Company assesses its investment securities for other-than-temporary impairment on a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary.” This analysis includes a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. Underlying loan characteristics reviewed include, but are not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.
The Company recorded $1.2 million and $8.4 million in other-than-temporary impairments ("OTTI") on RMBS interest-only and non-Agency RMBS securities during the three and nine months ended September 30, 2016, respectively. As the Company had previously elected the fair value option for RMBS interest-only securities, the OTTI was recorded as a reclassification from an unrealized to a realized loss within gain (loss) on investments, net on the consolidated statement of operations. The Company did not record any OTTI for the three and nine months ended September 30, 2015. As of September 30, 2016, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities.
The following table presents the changes in OTTI included in earnings for the three and nine months ended September 30, 2016 and 2015.
$ in thousands
Three Months 
 ended 
 September 30, 2016
 
Three Months 
 ended 
 September 30, 2015
 
Nine Months ended 
 September 30, 2016
 
Nine Months ended 
 September 30, 2015
Cumulative credit loss at beginning of period
7,208

 

 

 

Additions:

 

 

 

Other-than-temporary impairments not previously recognized
1,038

 

 
8,364

 

Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
118

 

 

 

Cumulative credit loss at end of period
8,364

 

 
8,364

 

The following table summarizes the changes in accumulated other comprehensive income (loss) related to the Company’s GSE CRT debt host contracts and available-for-sale MBS for the three and nine months ended September 30, 2016 and 2015.  The Company reclassifies unrealized gains and losses from other comprehensive income to gain (loss) on investments, net when it sells investments.
The table excludes MBS and GSE CRT that are accounted for under the fair value option.
$ in thousands
Three Months 
 ended 
 September 30, 2016
 
Three Months 
 ended 
 September 30, 2015
 
Nine Months ended 
 September 30, 2016
 
Nine Months ended 
 September 30, 2015
Accumulated other comprehensive income (loss) from MBS and GSE CRT securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on MBS and GSE CRT at beginning of period
404,794

 
298,251

 
177,799

 
376,336

Unrealized gain (loss) on MBS and GSE CRT
32,015

 
42,933

 
270,591

 
(30,611
)
Reclassification of unrealized (gain) loss on sale of MBS and GSE CRT to gain (loss) on investments, net

 
389

 
(11,581
)
 
(4,152
)
Balance at the end of period
436,809

 
341,573

 
436,809

 
341,573



 
15
 



The following table summarizes the components of the Company's total gain (loss) on investments, net for the three and nine months ended September 30, 2016 and 2015.
$ in thousands
Three Months 
 ended 
 September 30, 2016
 
Three Months 
 ended 
 September 30, 2015
 
Nine Months ended 
 September 30, 2016
 
Nine Months ended 
 September 30, 2015
Gross realized gain on sale of investments
144

 
991

 
14,196

 
5,498

Gross realized loss on sale of investments
(1,449
)
 
(1,404
)
 
(3,920
)
 
(1,370
)
Other-than-temporary impairment losses
(1,156
)
 

 
(8,364
)
 

Net unrealized gains and losses on MBS accounted for under the fair value option
(5,412
)
 
(1,554
)
 
2,530

 
6,891

Net unrealized gains and losses on GSE CRT accounted for under the fair value option
1,181

 

 
1,418

 

Net unrealized gains and losses on U.S. Treasury securities accounted for as trading securities
(463
)
 

 

 

Total gain (loss) on investments, net
(7,155
)
 
(1,967
)
 
5,860

 
11,019

The following table presents components of interest income recognized on the Company’s MBS and GSE CRT portfolio for the three and nine months ended September 30, 2016 and 2015. GSE CRT interest income excludes coupon interest associated with embedded derivatives not accounted for under the fair value option recorded as realized and unrealized credit derivative income (loss), net.
For the three months ended September 30, 2016
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
88,615

 
(31,773
)
 
56,842

Non-Agency
22,775

 
3,509

 
26,284

GSE CRT
2,268

 
(765
)
 
1,503

CMBS
29,872

 
(2,788
)
 
27,084

Other
795

 
(41
)
 
754

Total
144,325

 
(31,858
)
 
112,467

For the three months ended September 30, 2015
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
93,366

 
(32,153
)
 
61,213

Non-Agency
26,761

 
4,452

 
31,213

GSE CRT
1,663

 
(782
)
 
881

CMBS
38,350

 
(3,342
)
 
35,008

Other
(10
)
 

 
(10
)
Total
160,130

 
(31,825
)
 
128,305


 
16
 



For the nine months ended September 30, 2016
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
258,826

 
(84,235
)
 
174,591

Non-Agency
72,751

 
9,645

 
82,396

GSE CRT
6,601

 
(2,307
)
 
4,294

CMBS
93,612

 
(8,567
)
 
85,045

Other
1,305

 
(58
)
 
1,247

Total
433,095

 
(85,522
)
 
347,573

For the nine months ended September 30, 2015
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
282,132

 
(93,840
)
 
188,292

Non-Agency
85,854

 
13,445

 
99,299

GSE CRT
4,849

 
(2,312
)
 
2,537

CMBS
113,862

 
(8,193
)
 
105,669

Other
47

 

 
47

Total
486,744

 
(90,900
)
 
395,844

Note 5 – Commercial Loans Held-for-Investment
The following table summarizes commercial loans held-for-investment as of September 30, 2016 and December 31, 2015 that were purchased or originated by the Company.
September 30, 2016
$ in thousands
Number of
loans
 
Principal
Balance
 
Unamortized (fees)/
costs, net
 
Carrying
value
 
Weighted Average Coupon
 
Weighted Average Years to Maturity (1)
Mezzanine loans
10

 
273,686

 
(395
)
 
273,291

 
8.07
%
 
1.86
Total
10

 
273,686

 
(395
)
 
273,291

 
8.07
%
 
1.86
December 31, 2015
$ in thousands
Number of
loans
 
Principal
Balance
 
Unamortized (fees)/
costs, net
 
Carrying
value
 
Weighted Average Coupon
 
Weighted Average Years to Maturity (1)
Mezzanine loans
6

 
210,769

 
(1,707
)
 
209,062

 
7.97
%
 
1.75
Total
6

 
210,769

 
(1,707
)
 
209,062

 
7.97
%
 
1.75
(1)
Weighted average years to maturity is based on the contractual maturity date. Certain loans may contain either an option to prepay or an option to extend beyond their contractual maturity dates as specified in the respective loan agreements.
These loans were not impaired, and no allowance for loan loss has been recorded as of September 30, 2016 and December 31, 2015.

 
17
 



Note 6 – Other A