Invesco Mortgage Capital Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Invesco Mortgage Capital Inc.	ivr20170331ex322.htm
EX-32.1 - EXHIBIT 32.1 - Invesco Mortgage Capital Inc.	ivr20170331ex321.htm
EX-31.2 - EXHIBIT 31.2 - Invesco Mortgage Capital Inc.	ivr20170331ex312.htm
EX-31.1 - EXHIBIT 31.1 - Invesco Mortgage Capital Inc.	ivr20170331ex311.htm

Table of Contents

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 March 31, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
			Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 May 1, 2017, there were 111,604,609 outstanding shares of common stock of Invesco Mortgage Capital Inc.

Table of Contents

INVESCO MORTGAGE CAPITAL INC.

TABLE OF CONTENTS



		Page
PART I FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	1

	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016	2

	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016	3

	Unaudited Condensed Consolidated Statement of Equity for the three months ended March 31, 2017	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	64

PART II OTHER INFORMATION		65

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	65

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	67

Table of Contents

PART I


ITEM 1.	FINANCIAL STATEMENTS

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	As of
$ in thousands except share amounts	March 31, 2017		December 31, 2016
ASSETS
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $15,562,355 and $14,422,198, respectively)	15,921,097		14,981,331
Commercial loans, held-for-investment	275,944		273,355
Cash and cash equivalents	55,877		161,788
Due from counterparties	—		86,450
Investment related receivable	285,910		43,886
Accrued interest receivable	49,703		46,945
Derivative assets, at fair value	5,799		3,186
Other assets	112,957		109,297
Total assets	16,707,287		15,706,238
LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements	12,289,899		11,160,669
Secured loans	1,650,000		1,650,000
Exchangeable senior notes	248,530		397,041
Derivative liabilities, at fair value	45,623		134,228
Dividends and distributions payable	50,928		50,924
Investment related payable	72,572		9,232
Accrued interest payable	11,206		21,066
Collateral held payable	3,732		1,700
Accounts payable and accrued expenses	1,821		1,534
Due to affiliate	9,346		9,660
Total liabilities	14,383,657		13,436,054
Commitments and contingencies (See Note 16):
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; 111,604,609 and 111,594,595 shares issued and outstanding, respectively	1,116		1,116
Additional paid in capital	2,380,053		2,379,863
Accumulated other comprehensive income	303,765		293,668
Retained earnings (distributions in excess of earnings)	(675,815	)	(718,303	)
Total stockholders’ equity	2,294,335		2,241,560
Non-controlling interest	29,295		28,624
Total equity	2,323,630		2,270,184
Total liabilities and equity	16,707,287		15,706,238

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



	1

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended March 31,
$ in thousands, except share amounts	2017		2016
Interest Income
Mortgage-backed and credit risk transfer securities	118,873		122,246
Commercial loans	5,764		4,893
Total interest income	124,637		127,139
Interest Expense
Repurchase agreements	29,947		41,800
Secured loans	3,413		2,715
Exchangeable senior notes	5,008		5,613
Total interest expense	38,368		50,128
Net interest income	86,269		77,011
Other Income (loss)
Gain (loss) on investments, net	(1,853	)	11,601
Equity in earnings (losses) of unconsolidated ventures	(1,534	)	1,061
Gain (loss) on derivative instruments, net	5,462		(238,543	)
Realized and unrealized credit derivative income (loss), net	19,955		8,410
Net loss on extinguishment of debt	(4,711	)	—
Other investment income (loss), net	1,329		(318	)
Total other income (loss)	18,648		(217,789	)
Expenses
Management fee – related party	8,801		9,512
General and administrative	2,084		2,037
Total expenses	10,885		11,549
Net income (loss)	94,032		(152,327	)
Net income (loss) attributable to non-controlling interest	1,186		(1,883	)
Net income (loss) attributable to Invesco Mortgage Capital Inc.	92,846		(150,444	)
Dividends to preferred stockholders	5,716		5,716
Net income (loss) attributable to common stockholders	87,130		(156,160	)
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Basic	0.78		(1.38	)
Diluted	0.73		(1.38	)
Dividends declared per common share	0.40		0.40

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



	2

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended March 31,
$ in thousands	2017		2016
Net income (loss)	94,032		(152,327	)
Other comprehensive income (loss):
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	16,289		121,460
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	850		(10,544	)
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	(6,298	)	12,924
Currency translation adjustments on investment in unconsolidated venture	(615	)	(49	)
Total other comprehensive income (loss)	10,226		123,791
Comprehensive income (loss)	104,258		(28,536	)
Less: Comprehensive income (loss) attributable to non-controlling interest	(1,315	)	341
Less: Dividends to preferred stockholders	(5,716	)	(5,716	)
Comprehensive income (loss) attributable to common stockholders	97,227		(33,911	)

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



	3

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

For the three months ended March 31, 2017

(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	Series A Preferred Stock		Series B Preferred Stock			Common Stock										Total Equity
$ in thousands except share amounts	Shares	Amount	Shares	Amount		Shares	Amount									Total Equity
Balance at December 31, 2016	5,600,000	135,356	6,200,000	149,860		111,594,595	1,116	2,379,863	293,668	(718,303	)	2,241,560		28,624		2,270,184
Net income (loss)	—	—	—	—		—	—	—	—	92,846		92,846		1,186		94,032
Other comprehensive income (loss)	—	—	—	—		—	—	—	10,097	—		10,097		129		10,226
Stock awards	—	—	—	—		10,014	—	—	—	—		—		—		—
Common stock dividends	—	—	—	—		—	—	—	—	(44,642	)	(44,642	)	—		(44,642	)
Common unit dividends	—	—	—	—		—	—	—	—	—		—		(570	)	(570	)
Preferred stock dividends	—	—	—	—		—	—	—	—	(5,716	)	(5,716	)	—		(5,716	)
Amortization of equity-based compensation	—	—	—	—		—	—	115	—	—		115		1		116
Rebalancing of ownership percentage of non-controlling interest	—	—	—	—		—	—	75	—	—		75		(75	)	—
Balance at March 31, 2017	5,600,000	135,356	6,200,000	149,860		111,604,609	1,116	2,380,053	303,765	(675,815	)	2,294,335		29,295		2,323,630

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



	4

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
$ in thousands	2017		2016
Cash Flows from Operating Activities
Net income (loss)	94,032		(152,327	)
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	27,196		24,048
Amortization of commercial loan origination fees	(82	)	(59	)
Unrealized (gain) loss on derivative instruments, net	(13,438	)	166,467
Unrealized (gain) loss on credit derivatives, net	(14,148	)	(3,016	)
(Gain) loss on investments, net	1,853		(11,601	)
Realized (gain) loss on derivative instruments, net	(14,918	)	42,985
Realized (gain) loss on credit derivatives, net	—		920
Equity in (earnings) losses of unconsolidated ventures	1,534		(1,061	)
Amortization of equity-based compensation	116		117
Amortization of deferred securitization and financing costs	528		614
Amortization of net deferred losses on de-designated interest rate swaps	(6,298	)	12,924
Net loss on extinguishment of debt	4,711		—
(Gain) loss on foreign currency transactions, net	(513	)	1,125
Changes in operating assets and liabilities:
(Increase) decrease in operating assets	(2,618	)	2,249
Decrease in operating liabilities	(7,103	)	(4,527	)
Net cash provided by operating activities	70,852		78,858
Cash Flows from Investing Activities
Purchase of mortgage-backed and credit risk transfer securities	(1,846,444	)	(47,716	)
(Contributions to) distributions from investment in unconsolidated ventures, net	(2,410	)	(116	)
Purchase of exchange-traded fund	(3,508	)	—
Principal payments from mortgage-backed and credit risk transfer securities	553,882		528,138
Proceeds from sale of mortgage-backed and credit risk transfer securities	180,809		684,345
Payments on sale of credit derivatives	—		(920	)
Proceeds from/ (payments for) settlement or termination of forwards, swaps and swaptions, net	14,918		(37,228	)
Origination and advances of commercial loans, net of origination fees	(2,014	)	(69,830	)
Net cash provided by (used in) investing activities	(1,104,767	)	1,056,673
Cash Flows from Financing Activities
Proceeds from issuance of common stock	—		35
Repurchase of common stock	—		(25,000	)
Due from counterparties	—		(116,766	)
Change in collateral held payable	2,032		(4,900	)
Proceeds from repurchase agreements	30,147,699		29,578,250
Principal repayments of repurchase agreements	(29,017,053	)	(30,517,139	)
Proceeds from secured loans	—		125,000
Principal repayments of secured loans	—		(125,000	)
Principal repayments of exchangeable senior notes	(153,750	)	—
Payments of deferred costs	—		(140	)
Payments of dividends and distributions	(50,924	)	(51,734	)
Net cash provided by (used in) financing activities	928,004		(1,137,394	)
Net change in cash and cash equivalents	(105,911	)	(1,863	)
Cash and cash equivalents, beginning of period	161,788		53,199
Cash and cash equivalents, end of period	55,877		51,336
Supplement Disclosure of Cash Flow Information
Interest paid	51,058		43,110
Non-cash Investing and Financing Activities Information
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities	(17,139	)	110,916
Dividends and distributions declared not paid	50,928		50,917
Net change in investment related payable (receivable)	174,217		131,413
Net change in repurchase agreements, not settled	(1,416	)	—
Swap terminated, not settled	—		4,272
Change in due from counterparties	86,450		(7,109	)

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



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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”, "we") is a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm. We conduct our business through IAS Operating Partnership LP (the “Operating Partnership”), as its sole general partner. As of March 31, 2017, we owned 98.7% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. We have one operating segment.

We primarily invest 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 or the Federal Home Loan Mortgage Corporation (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.

We 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 commencing with our taxable year ended December 31, 2009. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits exclusion from the "Investment Company" definition under the Investment Company Act of 1940.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016.

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Company and our controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. 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 our financial condition and results of operations for the periods presented.

Revision of Previously Issued Financial Statements

During the second quarter of 2016, we corrected errors in our accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality. We concluded that the errors were immaterial to our interim report on Form 10-Q for the quarter ended March 31, 2016. We have revised our financial statements for the quarter ended March 31, 2016 in this filing on Form 10-Q.

Refer to Note 17 - "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.



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Significant Accounting Policies

There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2016.

Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements

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. We are required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted. We have determined that this new accounting standard will not have an impact on our financial condition or results of operations but will simplify financial statement disclosures.

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. We are required to adopt the new guidance in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the potential impacts of the new guidance on our 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. Additionally, in November 2016, the FASB issued new guidance on classification and presentation of changes in restricted cash on the statement of cash flows. We are required to adopt the new accounting standards in the first quarter of 2018 using a retrospective transition method for each period presented. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We are currently evaluating the potential impacts of the new guidance on our consolidated financial statements.

In March 2017, the FASB issued new guidance which will affect entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The new guidance will shorten the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The new guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. We are required to adopt the new guidance in the first quarter of 2019 using a modified retrospective method. Early adoption is permitted. We are evaluating the potential impacts of the new guidance on our consolidated financial statements.

Note 3 – Variable Interest Entities ("VIEs")

Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, 2017 is presented in the table below.



$ in thousands	Carrying Amount	Company's Maximum Risk of Loss
CMBS	2,669,070	2,669,070
Non-Agency RMBS	1,774,088	1,774,088
Investments in unconsolidated ventures	33,336	33,336
Total	4,476,494	4,476,494

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



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Note 4 – Mortgage-Backed and Credit Risk Transfer Securities

The following tables summarize our mortgage-backed securities ("MBS") and GSE CRT portfolio by asset type as of March 31, 2017 and December 31, 2016.



March 31, 2017
$ 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	3,328,574	143,271		3,471,845	(53,614	)	3,418,231	3.10	%	2.19	%	2.03	%
30 year fixed-rate	4,262,025	218,000		4,480,025	12,299		4,492,324	4.04	%	2.95	%	2.64	%
ARM^*	283,979	2,258		286,237	4,453		290,690	2.69	%	2.61	%	2.31	%
Hybrid ARM	2,050,405	31,786		2,082,191	19,128		2,101,319	2.69	%	2.53	%	2.29	%
Total Agency pass-through⁽⁴⁾	9,924,983	395,315		10,320,298	(17,734	)	10,302,564	3.41	%	2.60	%	2.36	%
Agency-CMO⁽⁵⁾	1,548,330	(1,226,067	)	322,263	(2,545	)	319,718	2.10	%	2.01	%	0.58	%
Non-Agency RMBS^(6)(7)(8)	3,530,751	(1,854,807	)	1,675,944	98,144		1,774,088	2.20	%	5.72	%	5.58	%
GSE CRT^(9)(10)	772,404	25,885		798,289	57,368		855,657	2.82	%	2.31	%	2.15	%
CMBS^(11)(12)	3,201,930	(591,152	)	2,610,778	58,292		2,669,070	3.80	%	4.39	%	4.20	%
Total	18,978,398	(3,250,826	)	15,727,572	193,525		15,921,097	3.12	%	3.20	%	2.97	%

* Adjustable-rate mortgage ("ARM")


(1)	Net weighted average coupon as of March 31, 2017 is presented net of servicing and other fees.


(2)	Period-end weighted average yield is based on amortized cost as of March 31, 2017 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 average balance of the amortized cost of the investments. All yields are annualized.


(4)	We have elected the fair value option for Agency RMBS purchased on or after September 1, 2016 which represent 17.6% of principal/notional balance, 17.4% of amortized cost and 17.4% of fair value.


(5)	Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 84.7% of principal/notional balance, 25.8% of amortized cost and 25.8% of fair value.


(6)	Non-Agency RMBS held by us is 47.3% fixed rate, 45.4% variable rate, and 7.3% floating rate based on fair value.


(7)	Of the total discount in non-Agency RMBS, $252.7 million is non-accretable based on estimated future cash flows of the securities.


(8)	Non-Agency RMBS includes interest-only securities which represent 45.4% of principal/notional balance, 1.6% of amortized cost and 1.4% of fair value.


(9)	We have elected the fair value option for GSE CRT purchased on or after August 24, 2015, which represent 25.8% 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.


(10)	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.


(11)	CMBS includes interest-only securities which represent 19.3% of principal/notional balance, 0.7% of amortized cost and 0.8% of fair value.


(12)	We have elected the fair value option for CMBS purchased on or after September 1, 2016 which represent 9.0% of principal/notional balance, 7.9% of amortized cost and 7.7% of fair value.



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December 31, 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	3,460,625	151,526		3,612,151	(54,223	)	3,557,928	3.11	%	2.19	%	1.99	%
30 year fixed-rate	2,780,806	185,521		2,966,327	15,390		2,981,717	4.37	%	2.61	%	2.57	%
ARM	301,900	2,520		304,420	3,453		307,873	2.69	%	2.59	%	2.16	%
Hybrid ARM	2,423,152	42,360		2,465,512	8,789		2,474,301	2.70	%	2.52	%	2.02	%
Total Agency pass-through⁽⁴⁾	8,966,483	381,927		9,348,410	(26,591	)	9,321,819	3.37	%	2.42	%	2.20	%
Agency-CMO⁽⁵⁾	1,712,120	(1,368,916	)	343,204	837		344,041	2.16	%	3.08	%	2.07	%
Non-Agency RMBS^(6)(7)(8)	3,838,314	(1,934,269	)	1,904,045	91,506		1,995,551	2.21	%	5.22	%	5.22	%
GSE CRT^(9)(10)	707,899	24,320		732,219	35,981		768,200	2.38	%	1.51	%	1.24	%
CMBS^(11)(12)	3,050,747	(559,857	)	2,490,890	60,830		2,551,720	3.80	%	4.21	%	4.17	%
Total	18,275,563	(3,456,795	)	14,818,768	162,563		14,981,331	3.05	%	3.05	%	2.87	%


(1)	Net weighted average coupon as of December 31, 2016 is presented net of servicing and other fees.


(2)	Period-end weighted average yield is based on amortized cost as of December 31, 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 average of the amortized cost of the investments. All yields are annualized.


(4)	We have elected the fair value option for Agency RMBS purchased on or after September 1, 2016 which represent 4.3% of principal/notional balance, 4.3% of amortized cost and 4.2% of fair value.


(5)	Agency collateralized mortgage obligation ("Agency CMO") includes interest-only securities ("Agency IO"), which represent 85.5% of principal (notional) balance, 26.8% of amortized cost and 21.7% of fair value.


(6)	Non-Agency RMBS held by us is 45.5% variable rate, 47.2% fixed rate, and 7.3% floating rate based on fair value.


(7)	Of the total discount in non-Agency RMBS, $252.5 million is non-accretable based on estimated future cash flows of the securities.


(8)	Non-Agency RMBS includes interest-only securities, which represent 43.5% of principal/notional balance, 1.5% of amortized cost and 1.3% of fair value.


(9)	We have elected the fair value option for GSE CRT purchased on or after August 24, 2015, which represent 19.2% 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.


(10)	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.


(11)	CMBS includes interest-only securities which represent 20.3% of principal/notional balance, 0.8% of amortized cost and 0.9% of fair value.


(12)	We have 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.

The following table summarizes our non-Agency RMBS portfolio by asset type based on fair value as of March 31, 2017 and December 31, 2016.



$ in thousands	March 31, 2017	% of Non-Agency		December 31, 2016	% of Non-Agency
Prime	855,877	48.2	%	889,658	44.6	%
Alt-A	431,426	24.3	%	447,213	22.4	%
Re-REMIC	265,607	15.0	%	364,301	18.2	%
Subprime/reperforming	221,178	12.5	%	294,379	14.8	%
Total Non-Agency	1,774,088	100.0	%	1,995,551	100.0	%



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The following table summarizes the credit enhancement provided to our re-securitization of real estate mortgage investment conduit ("Re-REMIC") holdings as of March 31, 2017 and December 31, 2016.



	Percentage of Re-REMIC Holdings at Fair Value
Re-REMIC Subordination⁽¹⁾	March 31, 2017		December 31, 2016
0% - 10%	23.8	%	17.6	%
10% - 20%	4.0	%	7.4	%
20% - 30%	9.9	%	13.5	%
30% - 40%	19.1	%	15.7	%
40% - 50%	21.7	%	27.0	%
50% - 60%	19.7	%	16.1	%
60% - 70%	1.8	%	2.7	%
Total	100.0	%	100.0	%

(1)

Subordination refers to the credit enhancement provided to the Re-REMIC tranche held by us 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 us. 45.0% of our Re-REMIC holdings are not senior tranches.

The components of the carrying value of our MBS and GSE CRT portfolio at March 31, 2017 and December 31, 2016 are presented below.



$ in thousands	March 31, 2017		December 31, 2016
Principal balance	18,978,398		18,275,563
Unamortized premium	485,364		476,314
Unamortized discount	(3,736,190	)	(3,933,109	)
Gross unrealized gains	329,271		302,099
Gross unrealized losses	(135,746	)	(139,536	)
Fair value	15,921,097		14,981,331

The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of March 31, 2017 and December 31, 2016.



$ in thousands	March 31, 2017	December 31, 2016
Less than one year	109,860	121,076
Greater than one year and less than five years	6,842,335	6,719,923
Greater than or equal to five years	8,968,902	8,140,332
Total	15,921,097	14,981,331



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The following tables present the estimated fair value and gross unrealized losses of our MBS and GSE CRTs by length of time that such securities have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016.

March 31, 2017



	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	2,674,548	(65,750	)	123	62,208	(1,287	)	18	2,736,756	(67,037	)	141
30 year fixed-rate	1,531,154	(18,908	)	62	527,591	(18,801	)	27	2,058,745	(37,709	)	89
ARM	22,748	(4	)	2	—	—		—	22,748	(4	)	2
Hybrid ARM	675,408	(3,219	)	49	5,415	(36	)	3	680,823	(3,255	)	52
Total Agency pass-through⁽¹⁾	4,903,858	(87,881	)	236	595,214	(20,124	)	48	5,499,072	(108,005	)	284
Agency-CMO⁽²⁾	139,050	(6,246	)	26	25,773	(1,492	)	5	164,823	(7,738	)	31
Non-Agency RMBS	210,776	(4,911	)	34	279,410	(5,060	)	34	490,186	(9,971	)	68
GSE CRT	—	—		—	—	—		—	—	—		—
CMBS⁽³⁾	570,812	(9,447	)	54	19,950	(585	)	5	590,762	(10,032	)	59
Total	5,824,496	(108,485	)	350	920,347	(27,261	)	92	6,744,843	(135,746	)	442


(1)	Amounts disclosed include Agency RMBS with a fair value of $901.1 million for which the fair value option has been elected. Such securities have unrealized losses of $6.4 million.


(2)	Fair value includes unrealized losses on Agency IO of $4.6 million and unrealized losses on CMO of $3.2 million.


(3)	Amounts disclosed includes CMBS with a fair value of $176.1 million for which the fair value option has been elected. Such securities have unrealized losses of $3.3 million.

December 31, 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	2,781,777	(66,506	)	127	65,964	(1,556	)	17	2,847,741	(68,062	)	144
30 year fixed-rate	747,719	(15,409	)	45	547,763	(18,004	)	27	1,295,482	(33,413	)	72
ARM	120,540	(326	)	9	1,091	(7	)	1	121,631	(333	)	10
Hybrid ARM	1,356,687	(9,922	)	99	252	(4	)	2	1,356,939	(9,926	)	101
Total Agency pass-through⁽¹⁾	5,006,723	(92,163	)	280	615,070	(19,571	)	47	5,621,793	(111,734	)	327
Agency-CMO⁽²⁾	163,114	(3,812	)	28	22,792	(952	)	3	185,906	(4,764	)	31
Non-Agency RMBS	287,647	(7,861	)	42	497,863	(6,671	)	36	785,510	(14,532	)	78
GSE CRT⁽³⁾	—	—		—	35,935	(969	)	3	35,935	(969	)	3
CMBS⁽⁴⁾	401,016	(6,733	)	36	47,219	(804	)	6	448,235	(7,537	)	42
Total	5,858,500	(110,569	)	386	1,218,879	(28,967	)	95	7,077,379	(139,536	)	481


(1)	Amounts disclosed include Agency RMBS with a fair value of $149.7 million for which the fair value option has been elected. Such securities have unrealized losses of $4.0 million.


(2)	Fair value includes unrealized losses on Agency IO of $3.0 million unrealized losses and unrealized losses on CMO of $1.7 million.


(3)	Fair value includes unrealized losses on both the debt host contract and the embedded derivative.


(4)	Amounts disclosed includes CMBS with a fair value of $13.9 million for which the fair value option has been elected. Such securities have unrealized losses of $613,000.



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Gross unrealized losses on our Agency RMBS and CMO were $108.0 million and $3.2 million, respectively, at March 31, 2017. Due to the inherent credit quality of Agency RMBS and CMO, we determined that at March 31, 2017, any unrealized losses on our Agency RMBS and CMO portfolio are not other than temporary.

Gross unrealized losses on our Agency IO, non-Agency RMBS, GSE CRT and CMBS were $24.6 million at March 31, 2017. We did 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 our assessment for other-than-temporary impairment on a quarterly basis.

We assess our 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.

We recorded $532,000 and $5.7 million in other-than-temporary impairments ("OTTI") on RMBS interest-only and non-Agency RMBS securities during the three months ended March 31, 2017 and 2016, respectively. As we have 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 condensed consolidated statements of operations. As of March 31, 2017, we did not intend to sell the securities and determined that it was not more likely than not that we will be required to sell the securities.

The following table presents the changes in OTTI included in earnings for the three months ended March 31, 2017 and 2016.



$ in thousands	Three Months ended March 31, 2017	Three Months ended March 31, 2016
Cumulative credit loss at beginning of period	8,909	—
Additions:
Other-than-temporary impairments not previously recognized	349	5,683
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments	183	—
Cumulative credit loss at end of period	9,441	5,683

The following table summarizes the changes in accumulated other comprehensive income (loss) related to our GSE CRT debt host contracts and available-for-sale MBS for the three months ended March 31, 2017 and 2016. We reclassify unrealized gains and losses from other comprehensive income to gain (loss) on investments, net when we sell our investments.

The table excludes MBS and GSE CRT that are accounted for under the fair value option. As of March 31, 2017, $2.3 billion or 14.6% of our MBS and GSE CRT are accounted for under the fair value option.



$ in thousands	Three Months ended March 31, 2017	Three Months ended March 31, 2016
Accumulated other comprehensive income (loss) from MBS and GSE CRT securities:
Unrealized gain (loss) on MBS and GSE CRT at beginning of period	146,301	177,799
Unrealized gain (loss) on MBS and GSE CRT	16,289	121,460
Reclassification of unrealized (gain) loss on sale of MBS and GSE CRT to gain (loss) on investments, net	850	(10,544	)
Balance at the end of period	163,440	288,715



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The following table summarizes the components of our total gain (loss) on investments, net for the three months ended March 31, 2017 and 2016.



$ in thousands	Three Months ended March 31, 2017		Three Months ended March 31, 2016
Gross realized gain on sale of investments	904		13,015
Gross realized loss on sale of investments	(1,911	)	(2,471	)
Other-than-temporary impairment losses	(532	)	(5,683	)
Net unrealized gains and losses on MBS accounted for under the fair value option	(3,602	)	6,676
Net unrealized gains and losses on GSE CRT accounted for under the fair value option	3,279		64
Net unrealized gains and losses on trading securities	9		—
Total gain (loss) on investments, net	(1,853	)	11,601

The following table presents components of interest income recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2017 and 2016. 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 March 31, 2017



$ in thousands	Coupon Interest	Net (Premium Amortization)/Discount Accretion		Interest Income
Agency	91,231	(28,578	)	62,653
Non-Agency	20,614	4,387		25,001
GSE CRT	4,487	(371	)	4,116
CMBS	29,676	(2,634	)	27,042
Other	61	—		61
Total	146,069	(27,196	)	118,873

For the three months ended March 31, 2016



$ in thousands	Coupon Interest	Net (Premium Amortization)/Discount Accretion		Interest Income
Agency	85,771	(24,185	)	61,586
Non-Agency	25,849	3,844		29,693
GSE CRT	2,197	(767	)	1,430
CMBS	32,264	(2,940	)	29,324
Other	213	—		213
Total	146,294	(24,048	)	122,246



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Note 5 – Commercial Loans Held-for-Investment

The following table summarizes commercial loans held-for-investment as of March 31, 2017 and December 31, 2016 that we purchased or originated.

March 31, 2017



$ 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	276,175	(231	)	275,944	8.29	%	1.5
Total	10	276,175	(231	)	275,944	8.29	%	1.5

December 31, 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	273,666	(311	)	273,355	8.14	%	1.6
Total	10	273,666	(311	)	273,355	8.14	%	1.6


(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 March 31, 2017 and December 31, 2016 based on our analysis of credit quality factors as described in Note 2 - "Summary of Significant Accounting Policies" included in the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2016.

Note 6 – Other Assets

The following table summarizes our other assets as of March 31, 2017 and December 31, 2016.



$ in thousands	March 31, 2017	December 31, 2016
FHLBI stock	74,250	74,250
Investments in unconsolidated ventures	33,336	33,301
Investment in exchange-traded fund	4,017	500
Prepaid expenses and other assets	1,354	1,246
Total	112,957	109,297

IAS Services LLC, our wholly-owned subsidiary, is required to purchase and hold FHLBI stock as a condition of membership in the Federal Home Loan Bank of Indianapolis ("FHLBI"). The stock is recorded at cost.

We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 16 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures.

We have invested in an exchange-traded fund that is managed by an affiliate of our Manager. The exchange-traded fund invests in our target assets.



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Note 7 – Borrowings

We finance the majority of our investment portfolio through repurchase agreements, secured loans and exchangeable senior notes. The following table summarizes certain characteristics of our borrowings at March 31, 2017 and December 31, 2016. Refer to Note 8 - "Collateral Positions" for collateral pledged under our repurchase agreements and secured loans.



$ in thousands	March 31, 2017
				Weighted
		Weighted		Average
		Average		Remaining
	Amount	Interest		Maturity
	Outstanding	Rate		(days)
Repurchase Agreements:
Agency RMBS	9,335,954	1.00	%	19
Non-Agency RMBS	1,297,265	2.27	%	29
GSE CRT	624,270	2.41	%	18
CMBS	1,032,410	2.11	%	21
Total Repurchase Agreements	12,289,899	1.30	%	20
Secured Loans	1,650,000	0.94	%	2,592
Exchangeable Senior Notes ⁽¹⁾	250,000	5.00	%	349
Total Borrowings	14,189,899	1.32	%	325



$ in thousands	December 31, 2016
				Weighted
		Weighted		Average
		Average		Remaining
	Amount	Interest		Maturity
	Outstanding	Rate		(days)
Repurchase Agreements:
Agency RMBS	8,148,220	0.93	%	32
Non-Agency RMBS	1,519,859	2.06	%	28
GSE CRT	547,872	2.25	%	16
CMBS	944,718	1.86	%	16
Total Repurchase Agreements	11,160,669	1.23	%	30
Secured Loans	1,650,000	0.74	%	2,682
Exchangeable Senior Notes ⁽¹⁾	400,000	5.00	%	439
Total Borrowings	13,210,669	1.28	%	373


(1)	The carrying value of exchangeable senior notes is $248.5 million and $397.0 million as of March 31, 2017 and December 31, 2016, respectively. The carrying value is net of debt issuance costs of $1.5 million and $3.0 million as of March 31, 2017 and December 31, 2016, respectively.

The following table shows the aggregate amount of maturities of our outstanding borrowings:



$ in thousands	As of March 31,
2018	12,539,899
2019	—
2020	300,000
2021	100,000
2022	—
Thereafter	1,250,000
Total	14,189,899



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The following tables summarize certain characteristics of our repurchase agreements and secured loans at March 31, 2017 and December 31, 2016.



March 31, 2017
$ in thousands	Amount Outstanding	Percent of Total Amount Outstanding		MBS and GSE CRT Pledged as Collateral ⁽¹⁾
Repurchase Agreement Counterparties:
HSBC Securities (USA) Inc	1,435,609	10.3	%	1,504,531
ING Financial Market LLC	1,367,581	9.8	%	1,449,055
Pierpont Securities LLC	1,174,293	8.4	%	1,235,839
Royal Bank of Canada	1,101,290	7.9	%	1,297,732
Mitsubishi UFJ Securities (USA), Inc.	706,479	5.1	%	747,029
Industrial and Commercial Bank of China Financial Services LLC	649,721	4.7	%	685,868
Scotia Capital	615,633	4.4	%	645,427
E D & F Man Capital Markets Inc	535,907	3.8	%	567,809
South Street Securities LLC	511,931	3.7	%	538,155
JP Morgan Securities Inc.	450,553	3.2	%	522,448
KGS-Alpha Capital Markets, L.P.	422,352	3.0	%	447,141
Societe Generale	399,239	2.9	%	514,425
Goldman, Sachs & Co.	394,291	2.8	%	510,037
Citigroup Global Markets Inc.	383,440	2.8	%	491,145
Natixis, New York Branch	346,827	2.5	%	374,779
Guggenheim Liquidity Services, LLC	339,976	2.4	%	358,674
BNP Paribas Securities Corp.	294,341	2.1	%	330,253
Daiwa Capital Markets America Inc	233,117	1.7	%	249,468
All other counterparties⁽²⁾	927,319	6.7	%	1,133,144
Total Repurchase Agreement Counterparties	12,289,899	88.2	%	13,602,959
Secured Loans Counterparty:
FHLBI	1,650,000	11.8	%	1,917,029
Total	13,939,899	100.0	%	15,519,988


(1)	Amount pledged as collateral is measured at fair value as described in Note 2 - "Summary of Significant Accounting Policies" included in the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2016.


(2)	Represents amounts outstanding with seven counterparties.



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December 31, 2016
$ in thousands	Amount Outstanding	Percent of Total Amount Outstanding		MBS and GSE CRT Pledged as Collateral ⁽¹⁾
Repurchase Agreement Counterparties:
HSBC Securities (USA) Inc	1,401,966	11.2	%	1,468,793
ING Financial Market LLC	1,142,200	8.9	%	1,216,492
Royal Bank of Canada	1,098,631	8.6	%	1,293,336
Industrial and Commercial Bank of China Financial Services LLC	707,616	5.5	%	748,503
Mitsubishi UFJ Securities (USA), Inc.	703,382	5.5	%	740,404
Pierpont Securities LLC	681,853	5.3	%	717,663
South Street Securities LLC	675,660	5.3	%	713,330
Goldman, Sachs & Co.	486,430	3.8	%	623,400
Scotia Capital	479,105	3.7	%	500,578
JP Morgan Securities Inc.	477,947	3.7	%	554,494
KGS-Alpha Capital Markets, L.P.	441,541	3.4	%	475,858
Citigroup Global Markets Inc.	427,185	3.3	%	534,875
E D & F Man Capital Markets Inc.	405,615	3.2	%	430,896
Guggenheim Liquidity Services, LLC	356,149	2.8	%	377,030
Natixis, New York Branch	336,202	2.6	%	362,432
Societe Generale	325,393	2.5	%	427,200
BNP Paribas Securities Corp.	307,641	2.4	%	346,484
All other counterparties⁽²⁾	706,153	5.4	%

Invesco Mortgage Capital Inc. - FORM 10-Q - May 4, 2017

Attached files