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EX-32.2 - EXHIBIT 32.2 - Invesco Mortgage Capital Inc.ivr20170630ex322.htm
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EX-31.2 - EXHIBIT 31.2 - Invesco Mortgage Capital Inc.ivr20170630ex312.htm
EX-31.1 - EXHIBIT 31.1 - Invesco Mortgage Capital Inc.ivr20170630ex311.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 June 30, 2017
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
ivrsinglelogojpega25.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, 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 August 3, 2017, there were 111,609,901 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
June 30, 2017
 
December 31, 2016
ASSETS
 
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $15,367,150 and $14,422,198, respectively)
16,083,284

 
14,981,331

Commercial loans, held-for-investment
278,866

 
273,355

Cash and cash equivalents
64,069

 
161,788

Due from counterparties
1,246

 
86,450

Investment related receivable
83,181

 
43,886

Accrued interest receivable
49,852

 
46,945

Derivative assets, at fair value
11,005

 
3,186

Other assets
102,428

 
109,297

Total assets
16,673,931

 
15,706,238

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
12,118,948

 
11,160,669

Secured loans
1,650,000

 
1,650,000

Exchangeable senior notes, net
217,804

 
397,041

Derivative liabilities, at fair value
44,147

 
134,228

Dividends and distributions payable
50,930

 
50,924

Investment related payable
202,051

 
9,232

Accrued interest payable
14,987

 
21,066

Collateral held payable
3,471

 
1,700

Accounts payable and accrued expenses
1,790

 
1,534

Due to affiliate
9,709

 
9,660

Total liabilities
14,313,837

 
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; 111,609,901 and 111,594,595 shares issued and outstanding, respectively
1,116

 
1,116

Additional paid in capital
2,380,243

 
2,379,863

Accumulated other comprehensive income
337,391

 
293,668

Retained earnings (distributions in excess of earnings)
(673,625
)
 
(718,303
)
Total stockholders’ equity
2,330,341

 
2,241,560

Non-controlling interest
29,753

 
28,624

Total equity
2,360,094

 
2,270,184

Total liabilities and equity
16,673,931

 
15,706,238

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 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands, except share amounts
2017
 
2016
 
2017
 
2016
Interest Income

 

 

 

Mortgage-backed and credit risk transfer securities
121,027

 
112,860

 
239,900

 
235,106

Commercial loans
6,021

 
5,947

 
11,785

 
10,840

Total interest income
127,048

 
118,807

 
251,685

 
245,946

Interest Expense
 
 

 

 

Repurchase agreements
36,072

 
31,260

 
66,019

 
73,060

Secured loans
4,535

 
2,688

 
7,948

 
5,403

Exchangeable senior notes
3,504

 
5,614

 
8,512

 
11,227

Total interest expense
44,111

 
39,562

 
82,479

 
89,690

Net interest income
82,937

 
79,245

 
169,206

 
156,256

Other Income (loss)

 

 

 

Gain (loss) on investments, net
11,175

 
1,414

 
9,322

 
13,015

Equity in earnings (losses) of unconsolidated ventures
(154
)
 
202

 
(1,688
)
 
1,263

Gain (loss) on derivative instruments, net
(53,513
)
 
(90,363
)
 
(48,051
)
 
(328,906
)
Realized and unrealized credit derivative income (loss), net
21,403

 
17,228

 
41,358

 
25,638

Net loss on extinguishment of debt
(526
)
 

 
(5,237
)
 

Other investment income (loss), net
2,533

 
(2,745
)
 
3,862

 
(3,063
)
Total other income (loss)
(19,082
)
 
(74,264
)
 
(434
)
 
(292,053
)
Expenses
 
 
 
 
 
 
 
Management fee – related party
9,027

 
9,061

 
17,828

 
18,573

General and administrative
1,608

 
1,896

 
3,692

 
3,933

Total expenses
10,635

 
10,957

 
21,520

 
22,506

Net income (loss)
53,220

 
(5,976
)
 
147,252

 
(158,303
)
Net income (loss) attributable to non-controlling interest
670

 
(75
)
 
1,856

 
(1,958
)
Net income (loss) attributable to Invesco Mortgage Capital Inc.
52,550

 
(5,901
)
 
145,396

 
(156,345
)
Dividends to preferred stockholders
5,716

 
5,716

 
11,432

 
11,432

Net income (loss) attributable to common stockholders
46,834

 
(11,617
)
 
133,964

 
(167,777
)
Earnings (loss) per share:
 
 


 


 


Net income (loss) attributable to common stockholders
 
 

 

 

Basic
0.42

 
(0.10
)
 
1.20

 
(1.49
)
Diluted
0.41

 
(0.10
)
 
1.15

 
(1.49
)
Dividends declared per common share
0.40

 
0.40

 
0.80

 
0.80

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 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands
2017
 
2016
 
2017
 
2016
Net income (loss)
53,220

 
(5,976
)
 
147,252

 
(158,303
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
39,633

 
117,116

 
55,922

 
238,576

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
651

 
(1,037
)
 
1,501

 
(11,581
)
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
(6,369
)
 
3,238

 
(12,667
)
 
16,162

Currency translation adjustments on investment in unconsolidated venture
139

 
274

 
(476
)
 
225

Total other comprehensive income (loss)
34,054

 
119,591

 
44,280

 
243,382

Comprehensive income (loss)
87,274

 
113,615

 
191,532

 
85,079

Less: Comprehensive (income) loss attributable to non-controlling interest
(1,099
)
 
(1,435
)
 
(2,414
)
 
(1,094
)
Less: Dividends to preferred stockholders
(5,716
)
 
(5,716
)
 
(11,432
)
 
(11,432
)
Comprehensive income (loss) attributable to common stockholders
80,459

 
106,464

 
177,686

 
72,553

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 six months ended June 30, 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
 
 
Common Stock
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
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

 

 

 

 

 

 

 

 
145,396

 
145,396

 
1,856

 
147,252

Other comprehensive income

 

 

 

 

 

 

 
43,722

 

 
43,722

 
558

 
44,280

Stock awards

 

 

 

 
15,306

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 
(89,286
)
 
(89,286
)
 

 
(89,286
)
Common unit dividends

 

 

 

 

 

 

 

 

 

 
(1,140
)
 
(1,140
)
Preferred stock dividends

 

 

 

 

 

 

 

 
(11,432
)
 
(11,432
)
 

 
(11,432
)
Amortization of equity-based compensation

 

 

 

 

 

 
233

 

 

 
233

 
3

 
236

Rebalancing of ownership percentage of non-controlling interest

 

 

 

 

 

 
147

 
1

 

 
148

 
(148
)
 

Balance at June 30, 2017
5,600,000

 
135,356

 
6,200,000

 
149,860

 
111,609,901

 
1,116

 
2,380,243

 
337,391

 
(673,625
)
 
2,330,341

 
29,753

 
2,360,094

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)
  
Six Months Ended June 30,
$ in thousands
2017
 
2016
Cash Flows from Operating Activities
 
 
 
Net income (loss)
147,252

 
(158,303
)
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
53,436

 
53,664

Amortization of commercial loan origination fees
(164
)
 
(139
)
Unrealized (gain) loss on derivative instruments, net
(20,120
)
 
211,261

Unrealized (gain) loss on credit derivatives, net
(29,707
)
 
(19,229
)
(Gain) loss on investments, net
(9,322
)
 
(13,015
)
Realized (gain) loss on derivative instruments, net
25,311

 
63,569

Realized (gain) loss on credit derivatives, net

 
6,017

Equity in (earnings) losses of unconsolidated ventures
1,688

 
(1,263
)
Amortization of equity-based compensation
263

 
265

Amortization of deferred securitization and financing costs
912

 
1,227

Amortization of net deferred losses on de-designated interest rate swaps
(12,667
)
 
16,162

Net loss on extinguishment of debt
5,237

 

(Gain) loss on foreign currency transactions, net
(2,229
)
 
4,741

Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in operating assets
(2,497
)
 
1,893

Decrease in operating liabilities
(3,016
)
 
(5,039
)
Net cash provided by operating activities
154,377

 
161,811

Cash Flows from Investing Activities
 
 
 
Purchase of mortgage-backed and credit risk transfer securities
(2,533,663
)
 
(1,061,651
)
Purchase of U.S. Treasury securities

 
(152,256
)
Proceeds from sale of U.S. Treasury securities

 
122,736

(Contributions to) distributions from investments in unconsolidated ventures, net
7,826

 
6,863

Purchase of exchange-traded fund
(3,508
)
 

Sale of exchange-traded fund
51

 

Change in other assets

 
1,125

Principal payments from mortgage-backed and credit risk transfer securities
1,065,577

 
1,131,028

Proceeds from sale of mortgage-backed and credit risk transfer securities
572,616

 
659,959

Payments on sale of credit derivatives

 
(6,017
)
Proceeds from/ (payments for) settlement or termination of forwards, swaps and swaptions, net
(25,311
)
 
(62,083
)
Principal payments from commercial loans held-for-investment

 
15,000

Origination and advances of commercial loans, net of origination fees
(3,170
)
 
(83,005
)
Net cash provided by (used in) investing activities
(919,582
)
 
571,699

Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock

 
35

Repurchase of common stock

 
(25,000
)
Due from counterparties
(1,246
)
 
(158,132
)
Change in collateral held payable
1,771

 
660

Proceeds from repurchase agreements
63,154,822

 
61,581,699

Principal repayments of repurchase agreements
(62,200,623
)
 
(61,939,100
)
Proceeds from secured loans

 
125,000

Principal repayments of secured loans

 
(125,000
)
Extinguishment of exchangeable senior notes
(185,386
)
 

Payments of deferred costs

 
(136
)
Payments of dividends and distributions
(101,852
)
 
(102,651
)
Net cash provided by (used in) financing activities
667,486

 
(642,625
)
Net change in cash and cash equivalents
(97,719
)
 
90,885

Cash and cash equivalents, beginning of period
161,788

 
53,199

Cash and cash equivalents, end of period
64,069

 
144,084

Supplement Disclosure of Cash Flow Information
 
 
 
Interest paid
97,003

 
74,037

Non-cash Investing and Financing Activities Information
 
 
 
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities
57,423

 
226,995

Dividends and distributions declared not paid
50,930

 
50,919

Net change in investment related payable (receivable)
(163,489
)
 
206,034

Net change in repurchase agreements, not settled
4,081

 

Change in due from counterparties
86,450

 
1,126

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", "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 June 30, 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.
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 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

 
6
 



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. We are currently 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 June 30, 2017 is presented in the table below.
$ in thousands
Carrying Amount
 
Company's Maximum Risk of Loss
CMBS
2,777,516

 
2,777,516

Non-Agency RMBS
1,575,840

 
1,575,840

Investments in unconsolidated ventures
23,311

 
23,311

Total
4,376,667

 
4,376,667

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

 
7
 



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 June 30, 2017 and December 31, 2016.
June 30, 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
3,187,931

 
134,856

 
3,322,787

 
(46,007
)
 
3,276,780

 
3.09
%
 
2.19
%
 
1.97
%
30 year fixed-rate
4,816,054

 
232,385

 
5,048,439

 
20,677

 
5,069,116

 
3.95
%
 
3.10
%
 
2.83
%
ARM*
269,123

 
1,988

 
271,111

 
3,463

 
274,574

 
2.68
%
 
2.58
%
 
2.27
%
Hybrid ARM
1,891,257

 
30,099

 
1,921,356

 
12,659

 
1,934,015

 
2.71
%
 
2.54
%
 
2.29
%
Total Agency pass-through(4)
10,164,365

 
399,328

 
10,563,693

 
(9,208
)
 
10,554,485

 
3.42
%
 
2.69
%
 
2.44
%
Agency-CMO(5)
1,429,977

 
(1,129,678
)
 
300,299

 
(2,033
)
 
298,266

 
2.04
%
 
2.87
%
 
0.34
%
Non-Agency RMBS(6)(7)(8)
3,247,516

 
(1,793,760
)
 
1,453,756

 
122,084

 
1,575,840

 
2.18
%
 
5.80
%
 
5.90
%
GSE CRT(9)(10)
769,217

 
25,537

 
794,754

 
82,423

 
877,177

 
3.06
%
 
2.40
%
 
2.62
%
CMBS(11)(12)
3,317,888

 
(612,386
)
 
2,705,502

 
72,014

 
2,777,516

 
3.90
%
 
4.62
%
 
4.45
%
Total
18,928,963

 
(3,110,959
)
 
15,818,004

 
265,280

 
16,083,284

 
3.17
%
 
3.30
%
 
3.07
%
* Adjustable-rate mortgage ("ARM")
 
(1)
Net weighted average coupon as of June 30, 2017 is presented net of servicing and other fees.
(2)
Period-end weighted average yield is based on amortized cost as of June 30, 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 23.7% of principal/notional balance, 23.5% of amortized cost and 23.5% of fair value.
(5)
Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 84.3% of principal/notional balance, 24.1% of amortized cost and 23.9% of fair value.
(6)
Non-Agency RMBS held by us is 43.8% fixed rate, 48.0% variable rate, and 8.2% floating rate based on fair value.
(7)
Of the total discount in non-Agency RMBS, $258.2 million is non-accretable based on estimated future cash flows of the securities.
(8)
Non-Agency RMBS includes interest-only securities which represent 47.7% of principal/notional balance, 1.8% of amortized cost and 1.5% of fair value.
(9)
We have elected the fair value option for GSE CRT purchased on or after August 24, 2015, which represent 26.1% 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 that is recorded as realized and unrealized credit derivative income (loss), net.
(11)
CMBS includes interest-only securities which represent 18.5% of principal/notional balance, 0.7% of amortized cost and 0.7% of fair value.
(12)
We have elected the fair value option for CMBS purchased on or after September 1, 2016 which represent 10.6% of principal/notional balance, 11.3% of amortized cost and 11.0% of fair value.


 
8
 



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 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 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 that is 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 June 30, 2017 and December 31, 2016.
$ in thousands
June 30, 2017
 
% of Non-Agency
 
December 31, 2016
 
% of Non-Agency
Prime
699,638

 
44.4
%
 
889,658

 
44.6
%
Alt-A
421,492

 
26.7
%
 
447,213

 
22.4
%
Re-REMIC
237,766

 
15.1
%
 
364,301

 
18.2
%
Subprime/reperforming
216,944

 
13.8
%
 
294,379

 
14.8
%
Total Non-Agency
1,575,840

 
100.0
%
 
1,995,551

 
100.0
%

 
9
 



The following table summarizes the credit enhancement provided to our re-securitization of real estate mortgage investment conduit ("Re-REMIC") holdings as of June 30, 2017 and December 31, 2016.
  
Percentage of Re-REMIC Holdings at Fair Value
Re-REMIC Subordination(1)
June 30, 2017
 
December 31, 2016
0% - 10%
26.3
%
 
17.6
%
10% - 20%
3.9
%
 
7.4
%
20% - 30%
9.9
%
 
13.5
%
30% - 40%
19.4
%
 
15.7
%
40% - 50%
18.4
%
 
27.0
%
50% - 60%
20.3
%
 
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. 48.3% of our Re-REMIC holdings are not senior tranches.
The components of the carrying value of our MBS and GSE CRT portfolio at June 30, 2017 and December 31, 2016 are presented below. 
$ in thousands
June 30, 2017
 
December 31, 2016
Principal balance
18,928,963

 
18,275,563

Unamortized premium
484,242

 
476,314

Unamortized discount
(3,595,201
)
 
(3,933,109
)
Gross unrealized gains
379,923

 
302,099

Gross unrealized losses
(114,643
)
 
(139,536
)
Fair value
16,083,284

 
14,981,331

The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of June 30, 2017 and December 31, 2016
$ in thousands
June 30, 2017
 
December 31, 2016
Less than one year
117,913

 
121,076

Greater than one year and less than five years
8,306,399

 
6,719,923

Greater than or equal to five years
7,658,972

 
8,140,332

Total
16,083,284

 
14,981,331



 
10
 



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 June 30, 2017 and December 31, 2016.
June 30, 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
2,534,116

 
(54,361
)
 
129

 
111,912

 
(2,469
)
 
19

 
2,646,028

 
(56,830
)
 
148

30 year fixed-rate
1,351,307

 
(16,221
)
 
59

 
507,832

 
(16,337
)
 
27

 
1,859,139

 
(32,558
)
 
86

ARM
82,986

 
(89
)
 
9

 

 

 

 
82,986

 
(89
)
 
9

Hybrid ARM
799,528

 
(4,824
)
 
73

 
7,048

 
(105
)
 
4

 
806,576

 
(4,929
)
 
77

Total Agency pass-through(1)
4,767,937

 
(75,495
)
 
270

 
626,792

 
(18,911
)
 
50

 
5,394,729

 
(94,406
)
 
320

Agency-CMO(2)
124,257

 
(5,340
)
 
26

 
21,443

 
(1,012
)
 
4

 
145,700

 
(6,352
)
 
30

Non-Agency RMBS
113,298

 
(2,385
)
 
23

 
166,184

 
(2,403
)
 
24

 
279,482

 
(4,788
)
 
47

CMBS(3)
487,895

 
(8,767
)
 
42

 
19,970

 
(330
)
 
5

 
507,865

 
(9,097
)
 
47

Total
5,493,387

 
(91,987
)
 
361

 
834,389

 
(22,656
)
 
83

 
6,327,776

 
(114,643
)
 
444

(1)
Amounts disclosed include Agency RMBS with a fair value of $801.6 million for which the fair value option has been elected. Such securities have unrealized losses of $6.5 million.
(2)
Fair value includes unrealized losses on Agency IO of $3.9 million and unrealized losses on CMO of $2.4 million.
(3)
Amounts disclosed includes CMBS with a fair value of $168.0 million for which the fair value option has been elected. Such securities have unrealized losses of $2.3 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.
Gross unrealized losses on our Agency RMBS and CMO were $94.4 million and $2.4 million, respectively, at June 30, 2017. Due to the inherent credit quality of Agency RMBS and CMO, we determined that at June 30, 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 $17.8 million at June 30, 2017. We did not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as

 
11
 



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.
The following table represents the other-than-temporary impairment losses ("OTTI") included in earnings for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands
2017
 
2016
 
2017
 
2016
RMBS interest-only securities
3,585

 
1,472

 
3,876

 
7,155

Non-Agency RMBS (1)
513

 
53

 
754

 
53

Total
4,098

 
1,525

 
4,630

 
7,208

(1)
Amounts disclosed relate to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.
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 June 30, 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 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 and six months ended June 30, 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 June 30, 2017, $3.1 billion or 19.3% of our MBS and GSE CRT are accounted for under the fair value option.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands
2017
 
2016
 
2017
 
2016
Accumulated other comprehensive income (loss) from MBS and GSE CRT securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on MBS and GSE CRT at beginning of period
163,440

 
288,715

 
146,301

 
177,799

Unrealized gain (loss) on MBS and GSE CRT
39,633

 
117,116

 
55,922

 
238,576

Reclassification of unrealized (gain) loss on sale of MBS and GSE CRT to gain (loss) on investments, net
651

 
(1,037
)
 
1,501

 
(11,581
)
Balance at the end of period
203,724

 
404,794

 
203,724

 
404,794



 
12
 



The following table summarizes the components of our total gain (loss) on investments, net for the three and six months ended June 30, 2017 and 2016.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
$ in thousands
2017
 
2016
 
2017
 
2016
Gross realized gains on sale of investments
1,311

 
1,037

 
2,215

 
14,052

Gross realized losses on sale of investments
(1,962
)
 

 
(3,873
)
 
(2,471
)
Other-than-temporary impairment losses
(4,098
)
 
(1,525
)
 
(4,630
)
 
(7,208
)
Net unrealized gains and losses on MBS accounted for under the fair value option
7,715

 
1,266

 
4,113

 
7,942

Net unrealized gains and losses on GSE CRT accounted for under the fair value option
8,195

 
173

 
11,474

 
237

Net unrealized gains and losses on trading securities
14

 
463

 
23

 
463

Total gain (loss) on investments, net
11,175

 
1,414

 
9,322

 
13,015

The following table presents components of interest income recognized on our MBS and GSE CRT portfolio for the three and six months ended June 30, 2017 and 2016. GSE CRT interest income excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.
For the three months ended June 30, 2017
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
91,979

 
(27,775
)
 
64,204

Non-Agency
18,131

 
3,734

 
21,865

GSE CRT
5,556

 
(347
)
 
5,209

CMBS
31,506

 
(1,852
)
 
29,654

Other
95

 

 
95

Total
147,267

 
(26,240
)
 
121,027

For the three months ended June 30, 2016
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
84,440

 
(28,277
)
 
56,163

Non-Agency
24,127

 
2,292

 
26,419

GSE CRT
2,136

 
(775
)
 
1,361

CMBS
31,476

 
(2,839
)
 
28,637

Other
297

 
(17
)
 
280

Total
142,476

 
(29,616
)
 
112,860

For the six months ended June 30, 2017
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
183,210

 
(56,353
)
 
126,857

Non-Agency
38,745

 
8,121

 
46,866

GSE CRT
10,043

 
(718
)
 
9,325

CMBS
61,182

 
(4,486
)
 
56,696

Other
156

 

 
156

Total
293,336

 
(53,436
)
 
239,900


 
13
 



For the six months ended June 30, 2016
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency
170,211

 
(52,462
)
 
117,749

Non-Agency
49,976

 
6,136

 
56,112

GSE CRT
4,333

 
(1,542
)
 
2,791

CMBS
63,740

 
(5,779
)
 
57,961

Other
510

 
(17
)
 
493

Total
288,770

 
(53,664
)
 
235,106

Note 5 – Commercial Loans Held-for-Investment
The following table summarizes commercial loans held-for-investment as of June 30, 2017 and December 31, 2016 that we purchased or originated.
June 30, 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

 
279,121

 
(255
)
 
278,866

 
8.50
%
 
1.4
Total
10

 
279,121

 
(255
)
 
278,866

 
8.50
%
 
1.4
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 June 30, 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 June 30, 2017 and December 31, 2016.
$ in thousands
June 30, 2017
 
December 31, 2016
FHLBI stock
74,250

 
74,250

Investments in unconsolidated ventures
23,311

 
33,301

Investment in exchange-traded fund
3,979

 
500

Prepaid expenses and other assets
888

 
1,246

Total
102,428

 
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.

 
14
 



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 June 30, 2017 and December 31, 2016. Refer to Note 8 - "Collateral Positions" for collateral pledged under our repurchase agreements and secured loans.
$ in thousands
June 30, 2017
 
 
 
 
Weighted
 
 
Weighted
 
Average
 
 
Average
 
Remaining
Amount
 
Interest
 
Maturity
Outstanding
 
Rate
 
(days)
Repurchase Agreements:
 
 
 
 
 
Agency RMBS
9,227,679

 
1.29
%
 
20

Non-Agency RMBS
1,130,943

 
2.50
%
 
29

GSE CRT
661,432

 
2.58
%
 
7

CMBS
1,098,894

 
2.33
%
 
16

Total Repurchase Agreements
12,118,948

 
1.56
%
 
21

Secured Loans
1,650,000

 
1.23
%
 
2,501

Exchangeable Senior Notes (1)
218,755

 
5.00
%
 
258

Total Borrowings
13,987,703

 
1.58
%
 
317

$ 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)