What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-06-22 · 296 added, 274 removed, 877 unchanged (39% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

$ in thousands except share amounts March 31, 2020 December 31, 2019

$ in thousands except share amounts June 30, 2020 December 31, 2019

Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $ 1,070,928 and $ 21,132,742 , respectively)

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Due from counterparties — 32,568

Investment related receivable (including pledged securities of $ 534,524 as of March 31, 2020)

832,043 67,976

Investment related receivable 14,232 67,976

Derivative assets, at fair value — 18,533

Other assets (including pledged security of $ 21,577 and $ 44,654 , respectively)

Other assets (including pledged security of $ 44,654 as of December 31, 2019)

79,512 166,180

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands, except share amounts 2020 2019 2020 2019

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Repurchase agreements (1)

( 1,270 ) 117,978 77,772 219,853

Secured loans 1,712 11,258 8,358 22,402

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Realized and unrealized credit derivative income (loss), net ( 2,738 ) ( 2,438 ) ( 35,790 ) 5,446

Net loss on extinguishment of debt ( 4,806 ) —

Net gain (loss) on extinguishment of debt 3,701 — ( 1,107 ) —

Other investment income (loss), net 731 1,007 1,534 2,036

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Diluted ( 1.80 ) 0.06 ( 11.91 ) 1.08

(1) Negative interest expense on repurchase agreements for the three months ended June 30, 2020 consists of $ 3.2 million of current period interest expense on repurchase agreements and $ 4.5 million of amortization of net deferred gains on de-designated interest rate swaps.

For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity".

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

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the three months ended March 31, 2020 and 2019

For the three months ended March 31, 2020 and June 30, 2020

Capital Accumulated

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Cumulative effect of adoption of new accounting principle — — — — — — — — — — 342 342

Net income (loss) — — — — — — — — — — ( 1,616,192 ) ( 1,616,192 )

Other comprehensive income (loss) — — — — — — — — — ( 159,235 ) — ( 159,235 )

Net loss — — — — — — — — — — ( 1,616,192 ) ( 1,616,192 )

Other comprehensive loss — — — — — — — — — ( 159,235 ) — ( 159,235 )

Proceeds from issuance of common stock, net of offering costs — — — — — — 20,700,000 207 346,819 — — 347,026

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Balance at March 31, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 164,966,357 1,650 3,239,602 129,728 ( 2,523,923 ) 1,410,381

Net loss — — — — — — — — — — ( 288,839 ) ( 288,839 )

Other comprehensive loss — — — — — — — — — ( 23,380 ) — ( 23,380 )

Stock awards — — — — — — 22,500 — — — — —

Common stock dividends — — — — — — 16,338,511 163 74,071 — ( 3,626 ) 70,608

Preferred stock dividends — — — — — — — — — — ( 11,106 ) ( 11,106 )

Amortization of equity-based compensation — — — — — — — — 128 — — 128

Balance at June 30, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 181,327,368 1,813 3,313,801 106,348 ( 2,827,494 ) 1,157,792

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

INVESCO MORTGAGE CAPITAL INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)

For the three months ended March 31, 2019 and June 30, 2019

Capital Accumulated

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Net income — — — — — — — — — — 138,790 138,790

Other comprehensive income (loss) — — — — — — — — — 56,369 — 56,369

Other comprehensive income — — — — — — — — — 56,369 — 56,369

Proceeds from issuance of common stock, net of offering costs — — — — — — 16,672,000 167 258,386 — — 258,553

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Balance at March 31, 2019 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 128,267,497 1,282 2,642,050 277,182 ( 812,124 ) 2,671,714

Net income — — — — — — — — — — 18,336 18,336

Other comprehensive income — — — — — — — — — 40,831 — 40,831

Proceeds from issuance of common stock, net of offering costs — — — — — — 521,136 5 8,149 — — 8,154

Stock awards — — — — — — 6,895 — — — — —

Common stock dividends — — — — — — — — — — ( 57,958 ) ( 57,958 )

Preferred stock dividends — — — — — — — — — — ( 11,106 ) ( 11,106 )

Amortization of equity-based compensation — — — — — — — — 130 — — 130

Balance at June 30, 2019 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 128,795,528 1,287 2,650,329 318,013 ( 862,852 ) 2,670,101

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

$ in thousands 2020 2019

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Other amortization ( 14,311 ) ( 11,505 )

Net loss on extinguishment of debt 4,806 —

Net (gain) loss on extinguishment of debt 1,107 —

Changes in operating assets and liabilities:

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Proceeds from sale of mortgage-backed and credit risk transfer securities 23,119,928 1,670,394

Proceeds from sale of credit derivatives 2,283 —

Payment on the sale of credit derivatives ( 14,131 ) —

Settlement (termination) of futures, currency forwards and interest rate swaps, net ( 904,358 ) ( 539,626 )

Redemption of Federal Home Loan Bank of Indianapolis stock 36,562 —

Net change in due from counterparties and collateral held payable on derivative instruments ( 170 ) ( 9,435 )

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Dividends declared not paid 6,339 60,671

Increase in Agency CMBS purchase commitments 410,654 90,291

Increase (decrease) in Agency CMBS purchase commitments ( 99,557 ) 246,709

Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments 29,477 ( 17,740 )

Dividend paid in common stock 74,234 —

Offering costs not paid ( 101 ) ( 171 )

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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.

During the three months ended March 31, 2020, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic that resulted in a material adverse change in our financial condition.

We recorded a $ 1.6 billion net loss attributable to stockholders and our stockholders' equity declined from $ 2.9 billion as of December 31, 2019 to $ 1.4 billion as of March 31, 2020.

We operate our business in a manner that permits our exclusion from the "Investment Company" definition under the Investment Company Act of 1940.

During the six months ended June 30, 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic that resulted in a material adverse change in our financial condition.

In the three and six months ended June 30, 2020, we recorded a net loss of $ 299.9 million and $ 1.9 billion, respectively.

Our stockholders' equity declined from $ 2.9 billion as of December 31, 2019 t o $ 1.2 billion as of June 30, 2020.

Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties in the latter half of March 2020.

We were unable to meet margin calls as of March 23, 2020 and were not in compliance with the terms of our various borrowings arrangements as of March 31, 2020 as described in Note 7 - "Borrowings".

To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $ 16.2 billion and repaid $ 11.2 billion of our repurchase agreements during the quarter ended March 31, 2020.

Our investment portfolio decreased from $ 21.9 billion as of December 31, 2019 to $ 8.1 billion as of March 31, 2020 primarily due to these asset sales.

As a result, we were unable to meet margin calls and were not in compliance with the terms of our various borrowings arrangements as of March 31, 2020 as described in Note 6 - "Borrowings".

To generate liquidity a nd reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $ 23.1 billion and repaid $ 17.5 billion of our repurchase agreements and $ 910.0 million of Federal Home Loan Bank of Indianapolis "FHLBI" secured loans during the six months ended June 30, 2020.

Our investment portfolio decreased from $ 21.9 billion as of December 31, 2019 to $ 1.6 billion as of J une 30, 2020 primarily due to these asset sales.

We also terminated our entire interest rate swap portfolio as our exposure to interest rate risk decreased as we sold Agency assets.

We have continued to focus on generating liquidity and reducing leverage in the second quarter of 2020.

Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $ 6.2 billion at March 31, 2020 for cash proceeds of $ 5.9 billion and our loan participation interest for cash proceeds of $ 21.6 million.

Our investment portfolio decreased from $ 8.1 billion as of March 31, 2020 to approximately $ 1.6 billion, excluding cash and Agency CMBS purchase commitments, as of May 31, 2020 primarily due to these asset sales.

We repaid all of our repurchase agreements and $ 512.5 million of Federal Home Loan Bank of Indianapolis "FHLBI" secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements.

As of the filing date of this Quarterly Report, the balance of our secured loans is $ 837.5 million .

Fo r further details of events between March 31, 2020 and the filing date of this Quarterly Report see Note 15 - "Subsequent Events".

While the Federal Reserve has taken a number of proactive measures to bolster liquidity in the second quarter of 2020, we expect market conditions for the mortgage REIT industry to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic.

The COVID-19 pandemic caused our support personnel to transition to a remote workforce beginning in March 2020 and resulted in delays in receiving information from our custodian an d various counterparties and clearing certain sales trades.

In turn, this delayed the filing of this Quarterly Report.

Our Manager has provided our investment team and support personnel with access to all systems necessary to fulfill their responsibilities and are in constant communication with one another and our external professional advisors.

While the Federal Reserve has taken a number of proactive measures to bolster liquidity, we expect market conditions for the mortgage REIT industry to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic.

Note 2 – Summary of Significant Accounting Policies

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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.

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

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Our available-for-sale GSE CRTs are hybrid financial instruments consisting of a debt host contract and an embedded credit derivative.

The embedded credit derivative is carried at fair value with changes in fair value recorded in earnings.

The embedded credit derivative is carried at fair value with changes in fair value reported in earnings.

For non-Agency RMBS and non-Agency CMBS, we use a discounted cash flow method to estimate and recognize an allowance for credit losses.

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Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows.

We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price.

We estimate future expected cash flows at the time of purchase and determine the effective interest rate based

on these estimated cash flows and our purchase price.

Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment.

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We elected the fair value option for all MBS purchased on or after September 1, 2016 and GSE CRTs purchased on or after August 24, 2015.

Accordingly, the impact of the new guidance on accounting for our debt securities is limited to those securities we purchased prior to election of the fair value option and held on January 1, 2020.

For further information on the composition of

our investment portfolio see Note 4 - "Mortgage Backed and Credit Risk Transfer Securities".

During the three months ended March 31, 2020, we recorded $ 78.8 million of impairment on non-Agency securities that we intend to sell or more likely than not will be required to sell before we recover the amortized cost basis of the security.

Accordingly , the impact of the new guidance on accounting for our debt securities is limited to those securities purchased prior to election of the fair value option and held on January 1, 2020.

For further information on the composition of our investment portfolio, see Note 4 - "Mortgage Backed and Credit Risk Transfer Securities".

During the three and six months ended June 30, 2020 , we recorded $ 6.3 million and $ 85.1 million, respectively, of impairment on non-Agency securities that we intend to sell or more likely than not will be required to sell before we recover the amortized cost basis of the security.

We recorded the impairment within gain (loss) on investments, net in our condensed consolidated statements of operations.

As of March 31, 2020, we have not recorded a credit loss allowance on any of our securities.

We had one commercial loan as of December 31, 2019 that was measured at amortized cost.

As of June 30, 2020, we have not recorded a credit loss allowance on any of our securities.

We had one commercial loan as of December 31, 2019 that was measured at amortized c ost.

We implemented the new guidance for this loan by electing the fair value option and recording a cumulative effect adjustment to increase retained earnings by $ 342,000 on January 1, 2020.

We recognized $ 1.7 million of unrealized losses on our commercial loan in our condensed consolidated statement of operations during the three months ended March 31, 2020.

We recognized $ 785,000 and $ 2.5 million of unrealized losses on our commercial loan in our condensed consolidated statement of operations during the three and six months ended June 30, 2020, respectively.

Accounting Pronouncements Recently Issued

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Note 3 – Variable Interest Entities ("VIEs")

Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, 2020 is presented in the table below.

Our maximum risk of loss in VIEs in which we are not the primary beneficiary at June 30, 2020 is presented in the table below.

$ in thousands Carrying Amount Company's Maximum Risk of Loss

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Note 4 – Mortgage-Backed and Credit Risk Transfer Securities

As discussed in Note 1 - "Organization and Business Operations", we sold MBS and GSE CRTs for cash proceeds of $ 16.2 billion during the three months ended March 31, 2020 to generate liquidity and reduce leverage given unprecedented market conditions as a result of the global COVID -19 pandemic.

Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $ 6.2 billion as of March 31, 2020 as discussed in Note 15 - "Subsequent Events".

The following tables summarize our MBS and GSE CRT portfolio by asset type as of March 31, 2020 and December 31, 2019.

March 31, 2020

As dis cussed in Note 1 - "Organization and Business Operations", we sold MBS and GSE CRTs for cash proceeds of $ 23.1 billion during the six months ended June 30, 2020 to generate liquidity and reduce leverage given unprecedented market conditions as a res ult of the COVID -19 pandemic.

The following tables summarize our MBS and GSE CRT portfolio by asset type as of June 30, 2020 and December 31, 2019.

June 30, 2020

$ in thousands Principal/ Notional

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30 year fixed-rate 6,113 261 6,374 454 6,828 4.35 %

2,557 — 2,557 115 2,672 3.28 %

Total Agency RMBS pass-through 9,059 327 9,386 567 9,953 4.01 %

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22,087 ( 22,087 ) — — — — %

Agency CMBS (3)

2,070,199 32,398 2,102,597 175,430 2,278,027 2.90 %

Non-Agency CMBS 1,491,783 ( 34,021 ) 1,457,762 153 1,457,915 5.50 %

3,889,234 ( 795,998 ) 3,093,236 ( 224,185 ) 2,869,051 6.13 %

Non-Agency RMBS (3)(4)(5)

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Total 2,761,750 ( 1,160,035 ) 1,601,715 ( 17,557 ) 1,584,158 5.17 %

* Adjustable-rate mortgage ("ARM")

(1) Period-end weighted average yield is based on amortized cost as of March 31, 2020 and incorporates future prepayment and loss assumptions.

(1) Period-end weighted average yield is based on amortized cost as of June 30, 2020 and incorporates future prepayment and loss assumptions.

(2) Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 100.0 % of principal/notional balance, 0.0 % of amortized cost and 0.0 % of fair value.

(3) Includes Agency CMBS purchase commitments with a fair value of approximately $ 507.2 million.

(4) Non-Agency CMBS includes interest-only securities which represent 14.9 % of principal/notional balance, 0.3 % of amortized cost and 0.4 % of fair value.

(3) Non-Agency RMBS is 66.5 % fixed rate, 32.7 % variable rate, and 0.8 % floating rate based on fair value.

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Total 23,354,075 ( 2,321,799 ) 21,032,276 739,510 21,771,786 3.85 %

* Adjustable-rate mortgage ("ARM")

(1) Period-end weighted average yield is based on amortized cost as of December 31, 2019 and incorporates future prepayment and loss assumptions.

(2) Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 56.3 % o f principal (notional) balance, 6.4 % of amortized cost and 6.4 % of fair value.

(2) Agency-CMO includes Agency IO, which represent 56.3 % o f principal (notional) balance, 6.4 % of amortized cost and 6.4 % of fair value.

(3) Includes Agency CMBS purchase commitments with a fair value of approximately $ 96.2 million .

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(8) GSE CRT 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.

The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of March 31, 2020 and December 31, 2019.

The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of June 30, 2020 and December 31, 2019.

We have elected the fair value option for all of our RMBS interest-only securities, our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015.

As of March 31, 2020 and December 31, 2019, approximately 65 % and 80 %, respectively, of our MBS and GSE CRTs are accounted for under the fair value option.

March 31, 2020 December 31, 2019

As of June 30, 2020 and December 31, 2019, approximately 15 % and 80 %, respectively, of our MBS and GSE CRTs are accounted for under the fair value option.

Our percentage of MBS and GSE CRTs accounted for under the fair value option declined as of June 30, 2020 due to sales of securities accounted for under the fair value option during the six months ended June 30, 2020.

June 30, 2020 December 31, 2019

$ in thousands Available-for-sale Securities Securities under Fair Value Option Total

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Total 1,353,225 230,933 1,584,158 4,405,426 17,366,360 21,771,786

The components of the carrying value of our MBS and GSE CRT portfolio at March 31, 2020 and December 31, 2019 are presented below.

March 31, 2020

The components of the carrying value of our MBS and GSE CRT portfolio at June 30, 2020 and December 31, 2019 are presented below.

June 30, 2020

$ in thousands MBS and GSE CRT Securities Interest-Only Securities Total

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Realization occurs upon sale or settlement of such securities.

Further detail on the components of our total gains (losses) on investments, net for the three months ended March 31, 2020 and 2019 is provided below within this Note 4.

The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of March 31, 2020 and December 31, 2019 .

$ in thousands March 31, 2020 December 31, 2019

Further detail on the components of our total gains (losses) on investments, net for the three and six months ended June 30, 2020 and 2019 is provided below within this Note 4.

The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of June 30, 2020 and December 31, 2019 .

$ in thousands June 30, 2020 December 31, 2019

Less than one year 174,682 268,536

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Total 1,584,158 21,771,786

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, 2020 and December 31, 2019.

March 31, 2020

June 30, 2020

Less than 12 Months 12 Months or More Total (3)

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Losses Number

Agency-CMO 3,278 ( 668 ) 11 2,201 ( 442 ) 7 5,479 ( 1,110 ) 18

Agency CMBS 194,960 ( 3,054 ) 7 — — — 194,960 ( 3,054 ) 7

Non-Agency CMBS (1) (2)

189,532 ( 43,325 ) 24 — — — 189,532 ( 43,325 ) 24

GSE CRT 95,747 ( 12,956 ) 6 — — — 95,747 ( 12,956 ) 6

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Total 291,831 ( 63,151 ) 42 15 ( 15 ) 3 291,846 ( 63,166 ) 45

(1) Unrealized losses relate to securities or embedded derivatives that are recorded at fair value through earnings.

There were no unrealize d losses on available-for-sale securities as of March 31, 2020 as those losses were recorded as impairments of the securities' amortized cost basis because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

(1) Includes non-Agency CMBS with a fair value of $ 129.7 million for which the fair value option has been elected.

These securities have unrealized losses of $ 40.2 million.

(2) Unrealized losses on available-for-sale non-Agency CMBS are primarily due to the COVID-19 pandemic and its impact on market liquidity and underlying commercial real estate fundamentals.

We have not recorded an allowance for credit losses on these securities as of June 30, 2020 based on a comparison of discounted expected cash flows to current amortized cost basis.

(3) Unrealized losses, other than those on available-for-sale non-Agency CMBS, relate to securities or embedded derivatives that are recorded at fair value through earnings.

December 31, 2019

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On January 1, 2020, we adopted accounting guidance that requires us to estimate an allowance for credit losses on available-for-sale securities in unrealized loss positions.

As of March 31, 2020, there was no allowance for credit losses recorded because we did not hold any available-for-sale securities that were in unrealized loss positions.

We did not record any provisions for credit losses on our condensed consolidated statement of operations during the three months ended March 31, 2020.

We recorded impairments of $ 78.8 million on our condensed consolidated statement of operations during the three months ended March 31, 2020 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

We still held these securities as of March 31, 2020.

As of June 30, 2020, we have not recorded an allowance for credit losses on any of our securities.

We did not record any provisions for credit losses on our condensed consolidated statement of operations during the three and six months ended June 30, 2020 .

We recorded impairments of $ 6.3 million and $ 85.1 million on our condensed consolidated statement of operations during the three and six months ended June 30, 2020, respectively, because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

Prior to January 1, 2020, we assessed our investment securities for other-than-temporary impairment (" OTTI") on a quarterly basis.

When the fair value of an investment was less than its amortized cost at the balance sheet date of the reporting period for which impairment was assessed, the impairment was designated as either "temporary" or "other-than-temporary." This analysis included a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment.

When the fair value of an investment was less than its amortized cost at the balance sheet date of the reporting

period for which impairment was assessed, the impairment was designated as either "temporary" or "other-than-temporary." This analysis included 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 included, but were not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.

The following table summarizes OTTI included in earnings for the three months ended March 2019:

Three Months Ended March 31,

The following table summarizes OTTI included in earnings during the three and six months ended June 30, 2019:

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2019 2019

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Non-Agency RMBS (1)

Total 1,200 2,976

(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.

OTTI on RMBS interest-only securities was recorded as a reclassification from an unrealized to realized loss within gain (loss) on investments, net on the condensed consolidated statements of operations because we account for these securities under the fair value option.

The following table summarizes the components of our total gain (loss) on investments, net for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The following table summarizes the components of our total gain (loss) on investments, net for the three and six months ended June 30, 2020 and 2019.

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Net unrealized gains and losses on commercial loan and loan participation interest 3,023 — ( 2,469 ) —

Realized loss on loan participation interest ( 3,808 ) — ( 3,808 ) —

Total gain (loss) on investments, net ( 306,366 ) 302,182 ( 1,061,849 ) 570,564

The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2020 and 2019.

GSE CRT interest income excludes coupon interest associated with embedded derivatives of $ 4.7 million for the three months ended March 31, 2020 (2019:

$ 5.4 million) that is recorded as realized and unrealized credit derivative income (loss), net.

For the three months ended March 31, 2020

The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three and six months ended June 30, 2020 and 2019.

GSE CRT interest income excludes coupon interest associated with embedded derivatives of $ 1.1 million and $ 5.8 million for the three and six months ended June 30, 2020 (2019:

$ 5.3 million and $ 10.7 million), respectively, that is recorded as realized and unrealized credit derivative income (loss), net.

For the three months ended June 30, 2020

$ in thousands Coupon

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Total 26,841 2,787 29,628

For the three months ended March 31, 2019

For the three months ended June 30, 2019

$ in thousands Coupon

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Total 214,501 ( 13,764 ) 200,737

For the six months ended June 30, 2020

$ in thousands Coupon

Interest Net (Premium

Amortization)/Discount

Accretion Interest

Agency RMBS 107,439 ( 21,807 ) 85,632

Agency CMBS 35,822 ( 1,744 ) 34,078

Non-Agency CMBS 62,662 9,531 72,193

Non-Agency RMBS 12,284 2,520 14,804

GSE CRT 10,007 ( 2,286 ) 7,721

Other 736 — 736

Total 228,950 ( 13,786 ) 215,164

For the six months ended June 30, 2019

$ in thousands Coupon

Interest Net (Premium

Amortization)/Discount

Accretion Interest

Agency RMBS 251,483 ( 29,347 ) 222,136

Agency CMBS 28,333 ( 1,440 ) 26,893

Non-Agency CMBS 79,445 6,381 85,826

Non-Agency RMBS 28,144 6,722 34,866

GSE CRT 18,022 ( 3,030 ) 14,992

Other 1,516 — 1,516

Total 406,943 ( 20,714 ) 386,229

Note 5 – Other Assets

The following table summarizes our other assets as of March 31, 2020 and December 31, 2019:

$ in thousands March 31, 2020 December 31, 2019

The following table summarizes our other assets as of June 30, 2020 and December 31, 2019:

$ in thousands June 30, 2020 December 31, 2019

FHLBI stock 37,688 74,250

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The stock is recorded at cost.

We have a participation interest in a secured loan collateralized by mortgage servicing rights that bears interest at a floating rate based on LIBOR plus a spread.

The weighted average asset yield for the participation interest was 6.32 % as of March 31, 2020 and 5.82 % as of December 31, 2019.

We recorded an unrealized loss of $ 3.8 million on the participation interest in the three months ended March 31, 2020 and no unrealized gain or loss in the three months ended March 31, 2019 .

We had a participation interest in a secured loan collateralized by mortgage servicing rights that bears interest at a floating rate based on LIBOR plus a spread.

We sold our participation interest for $ 21.6 million on April 1, 2020.

The weighted average asset yield for the participation interest was 5.82 % as of December 31, 2019.

We recorded a realized loss of $ 3.8 million upon sale of the participation interest.

We have an investment in a commercial loan that matures in February 2021.

The loan had a weighted average coupon rate of 10.08 % as of March 31, 2020 and 10.19 % as of December 31, 2019.

The loan had a weighted average coupon rate of 8.67 % as of June 30, 2020 and 10.19 % as of December 31, 2019.

As discussed in Note 2- "Summary of Significant Accounting Policies", we elected the fair value option for this loan on January 1, 2020 and recorded a cumulative effect adjustment to increase retained earnings by $ 342,000 on January 1, 2020.

We recorded an unrealized loss on this loan of $ 1.7 million in the three months ended March 31, 2020 based on a discounted cash flow valuation prepared by an independent pricing service.

We recorded an unrealized loss on this loan of $ 785,000 and $ 2.5 million during the three and six months ended June 30, 2020, respectively, based on a discounted cash flow valuation prepared by an independent pricing service.

We previously reported this loan at amortized cost on our condensed consolidated balance sheet.

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Note 6 – Borrowings

We finance the majority of our investment portfolio through repurchase agreements and secured loans.

The following tables summarize certain characteristics of our borrowings at March 31, 2020 and December 31, 2019.

Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements and secured loans.

$ in thousands March 31, 2020

W e have historically financed the majority of our investment portfolio through repurchase agreements and secured loans.

We repaid all of our repurchase agreements as of May 7, 2020 and did not have any repurchase agreement borrowings as of June 30, 2020.

The following tables summarize certain characteristics of our borrowings at June 30, 2020 and December 31, 2019.

Refer to Note 7 - "Collat eral Positions" for collateral pledged and held under our repurchase agreements and secured loans.

$ in thousands June 30, 2020

Weighted Average

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Outstanding Rate (days)

Repurchase Agreements:

Agency RMBS 1,571,471 1.40 % 13

Agency CMBS 1,622,054 1.37 % 18

Non-Agency CMBS 1,833,234 2.16 % 8

Non-Agency RMBS 549,868 2.22 % 7

GSE CRT 692,081 2.15 % 11

Loan participation interest 19,038 2.50 % 149

Total Repurchase Agreements 6,287,746 1.77 % 13

Secured Loans 740,000 0.62 % 158

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Borrowings maturing within:

March 31, 2020

4/1/2020 - 3/31/2021 (1)

4/1/2021 - 3/31/2022 —

4/1/2022 - 3/31/2023 —

4/1/2023 - 3/31/2024 —

June 30, 2020

7/1/2020 - 6/30/2021 740,000

Thereafter (1)

Total 740,000

(1) As discussed in Note 15 - "Subsequent Events", in April 2020 FHLBI accelerated the repayment date of our $ 1.35 billion of secured loans that were outstanding because we were not in compliance with all of the financial covenants of our secured loan agreements at March 31, 2020.

We repaid $ 512.5 million of our secured loans between April 1, 2020 and May 31, 2020.

The remaining balance of our secured loans of $ 837.5 million is due by December 2020.

Repurchase Agreements

As discussed in Note 1 - “Organization and Business Operations”, we received an unusually high number of margin calls from our repurchase agreement counterparties during March 2020 following significant spread widening in both Agency and non-Agency securities.

We were unable to meet margin calls as of March 23, 2020 and were not in compliance with all of the financial covenants of our repurchase agreements as of March 31, 2020.

Certain of our repurchase agreement counterparties entered into forbearance discussions with us during the period between March 23, 2020 and March 31, 2020 and permitted our repurchase agreements to remain outstanding while we were not in compliance.

In addition, between March 23, 2020 and March 31, 2020, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt in our condensed consolidated statement of operations.

We repaid all of our repurchase agreements as of May 7, 2020 as discussed in Note 15 - “Subsequent Events”.

Our repurchase agreement collateral pledged ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/amount outstanding) was 106 % as of March 31, 2020 (December 31, 2019:

Secured Loans

As of March 31, 2020, IAS Services LLC had $ 1.35 billion in outstanding secured loans from the FHLBI.

These secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread.

For the three months ended March 31, 2020, IAS Services LLC had weighted average borrowings of $ 1.48 billion with a weighted average borrowing rate of 1.83 % and a weighted average maturity of 5.0 years.

We were not in compliance with all of the financial covenants of our secured loan agreements as of March 31, 2020.

As a result, the FHLBI modified the terms of our secured loans and accelerated the repayment date of our secured loans in the second quarter of 2020 as discussed in Note 15 - "Subsequent Events".

As of June 30, 2020, IAS Services LLC had $ 740.0 million in outstanding secured loans from the FHLBI.

These secured loans hav e variable rates that are based on the FHLBI's short-term cost of funds.

For the six months ended June 30, 2020, IAS Services LLC had weighted average borrowings of $ 1.13 billion with a weighted average borrowing rate of 1.48 %, and a weighted average maturity of 0.4 years.

In April 2020, the FHLBI modified the terms of our secured loans because we were not in compliance with all of the financial covenants of our secured loan agreements as of March 31, 2020.

The modified loan terms require repayment of our secured loans by December 2020 but allow for prepayment at any time without penalty.

We intend to repay our secured loans by December 2020 with proceeds from sales of mortgage-backed securities that are collateralizing our secured loans.

We determined that the modification of our loan terms was a troubled debt restructuring tha t did not impact the accounting for our secured loans.

As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI.

Repurchase Agreements

As a result, we were unable to meet margin and were not in compliance with all of the financial covenants of our repurchase agreements as of March 31, 2020.

Certain of our repurchase agreement counterparties entered into forbearance discussions with us and permitted our repurchase agreements to remain outstanding while we were not in compliance.

In addition, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

Gains and losses associated with the termination of these repurchase agreements are reported as a net gain (loss) on extinguishment of debt in our condensed consolidated statement of operations.

We repaid all of our repurchase agreements as of May 7, 2020 and did not have any repurchase agreement borrowings as of June 30, 2020.

Note 7 - Collateral Positions

The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, secured loans, interest rate swaps and currency forward contracts as of March 31, 2020 and December 31, 2019.

Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of how we determine fair value.

RMBS, CMBS and GSE CRT collateral pledged is included in mortgage-backed and credit risk transfer securities on our condensed consolidated balance sheets.

Loan participation interest collateral pledged is included in other assets on our condensed consolidated balance sheets.

Loan participation interest collateral pledged was included in other assets on our condensed consolidated balance sheets.

Cash collateral pledged on secured loans, centrally cleared interest rate swaps, and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets.

Cash collateral pledged on repurchase agreements is classified as due from counterparties on our condensed consolidated balance sheets.

Cash collateral pledged on repurchase agreements was classified as due from counterparties on our condensed consolidated balance sheets.

Agency CMBS purchase commitments that are recorded as mortgage-backed and credit risk transfer securities on our condensed consolidated balance sheets cannot be pledged as collateral until these securities settle.

We held approximately $ 507.2 million and $ 96.2 million of these securities as of March 31, 2020 and December 31, 2019, respectively.

We held approximately $ 96.2 million of these securities as of December 31, 2019.

We did no t have any Agency CMBS purchase commitments as of June 30, 2020.

Cash collateral held on repurchase agreements that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable.

Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral.

As of March 31, 2020 and December 31, 2019, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets.

$ in thousands As of

Collateral Pledged March 31, 2020 December 31, 2019

Collateral Pledged June 30, 2020 December 31, 2019

Repurchase Agreements:

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Total collateral pledged 1,072,337 21,326,959

8,657,296 21,326,959

Collateral Held March 31, 2020 December 31, 2019

Collateral Held June 30, 2020 December 31, 2019

Repurchase Agreements:

Cash 50,135 10

Non-cash collateral — 181

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Total collateral held:

Cash 50,135 170

Non-cash collateral — 181

Total collateral held — 351

(1) Includes pledged securities of $ 534.5 million sold but not settled as of March 31, 2020 that are recorded as an investment related receivable on our condensed consolidated balance sheet.

Securities associated with unsettled trades remain legally pledged until the related repurchase agreement is repaid.

There were no securities pledged as collateral associated with unsettled trades as of December 31, 2019.

Repurchase Agreements

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We would be required to provide additional collateral or fund margin calls if the value of pledged assets declined.

Our repurchase agreement collateral pledged ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/amount outstanding) was 109 % as of December 31, 2019.

We did no t have any repurchase agreements as of June 30, 2020.

Secured Loans

The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with FHLBI and FHFA rules.

Collateral pledged with the FHLBI is held in trust for the benefit of the FHLBI and is not commingled with our other assets.

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IAS Services LLC would be required to provide additional collateral to meet margin calls if the value of pledged assets declines.

See Note 15 - "Subsequent Events" for a discussion of the status of our FHLBI secured loans as of the filing date of this Quarterly Report.

See Note 6 - "Borrowings" for a discussion of the status of our FHLBI secured loans.

Interest Rate Swaps

All of the interest rate swaps that we entered into during the three months ended March 31, 2020 were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange (“CME”) and LCH Limited (“LCH”) through a Futures Commission Merchant (“FCM”).

All of the interest rate swaps that we have entered into during 2020 were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange (“CME”) and LCH Limited (“LCH”) through a Futures Commission Merchant (“FCM”).

We are required to pledge initial margin and daily variation margin for our centrally cleared interest rate swaps that is based on the fair value of our contracts as determined by our FCM.

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Our FCM agreements include cross default provisions.

We were not a party to any interest rate swaps as of March 31, 2020.

We were not a party to any interest rate swaps as of June 30, 2020.

Currency Forward Contracts

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Interest rate swaps involve making fixed-rate payments to a counterparty in exchange for the receipt of variable-rate amounts over the life of the agreements without exchange of the underlying notional amount.

consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

We reclassified $ 10.1 million as a decrease (March 31, 2019:

$ 5.9 million as a decrease) to interest expense for the three months ended March 31, 2020.

We increased the amount of gains and losses reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $ 4.2 million because it is probable that the original forecasted repurchase agreement transactions will not occur by the end of the originally specified time period .

Amounts recorded in accumulated other comprehensive income ("AOCI") before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

We reclassified $ 4.5 million and $ 14.6 million as a decrease (June 30, 2019:

$ 5.9 million and $ 11.8 million as a decrease) to interest expense for the three and six months ended June 30, 2020, respectively.

We increased the amount of gains and losses reclassified as a decrease to interest expense during the three and six months ended June 30, 2020 by $ 2.7 million because it is probable that the original forecasted repurchase agreement transactions will not occur by the end of the originally specified time period .

During the next 12 months, we estimate that $ 20.0 million will be reclas sified as a decrease to interest expense, repurchase agreements.

As of March 31, 2020, $ 65.8 million (December 31, 2019:

As of June 30, 2020, $ 61.3 million (December 31, 2019:

$ 75.9 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and will be reclassified as a decrease to interest expense, repurchase agreements over a period of time through December 15, 2023.

We did no t have any interest rate swaps outstanding as of March 31, 2020.

We did no t have any interest rate swaps outstanding as of June 30, 2020.

As of December 31, 2019, we had interest rate swaps with the following maturities outstand ing:

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Treasury futures contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.

We did not have any futures contract outstanding as of March 31, 2020 and December 31, 2019.

We did not have any futures contract outstanding as of June 30, 2020 and December 31, 2019.

We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies.

We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.

As of March 31, 2020, we had $ 22.7 million (December 31, 2019:

As of June 30, 2020, we had $ 22.9 million (December 31, 2019:

$ 23.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in Euro.

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Embedded derivatives associated with GSE CRTs are recorded within mortgage-backed and credit risk transfer securities, at fair value, on the condensed consolidated balance sheets.

At March 31, 2020 and December 31, 2019, terms of the GSE CRT embedded derivatives are:

$ in thousands March 31, 2020 December 31, 2019

At June 30, 2020 and December 31, 2019, terms of the GSE CRT embedded derivatives are:

$ in thousands June 30, 2020 December 31, 2019

Fair value amount ( 17,223 ) 10,281

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Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.

$ in thousands

Derivative Assets Derivative Liabilities

As of March 31, 2020 As of December 31, 2019 As of March 31, 2020 As of December 31, 2019

As of June 30, 2020 As of December 31, 2019 As of June 30, 2020 As of December 31, 2019

Sheet Fair Value Fair Value Balance

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Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of our credit derivatives on the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019.

The tables below present the effect of our credit derivatives on the condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019.

$ in thousands

Three months ended March 31, 2020

Three months ended June 30, 2020

not designated as

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$ in thousands

Three months ended March 31, 2019

Three months ended June 30, 2019

not designated as

1 unchanged sentence

GSE CRT Embedded Derivatives — 5,300 ( 7,738 ) ( 2,438 )

The following tables summarizes the effect of interest rate swaps, futures contracts and currency forward contracts reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019:

$ in thousands Six months ended June 30, 2020

not designated as

hedging instrument Realized gain (loss), net GSE CRT embedded derivative coupon interest Unrealized gain (loss), net Realized and unrealized credit derivative income (loss), net

GSE CRT Embedded Derivatives ( 14,131 ) 5,845 ( 27,504 ) ( 35,790 )

$ in thousands Six months ended June 30, 2019

not designated as

hedging instrument Realized gain (loss), net GSE CRT embedded derivative coupon interest Unrealized gain (loss), net Realized and unrealized credit derivative income (loss), net

GSE CRT Embedded Derivatives — 10,650 ( 5,204 ) 5,446

$ in thousands

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps ( 904,704 ) 11,924 ( 18,532 ) ( 911,312 )

Currency Forward Contracts ( 138 ) — ( 205 ) ( 343 )

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$ in thousands

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

not designated as

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Total ( 307,239 ) 7,525 ( 45,019 ) ( 344,733 )

$ in thousands Six Months Ended June 30, 2020

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps ( 904,704 ) 11,924 ( 18,532 ) ( 911,312 )

Currency Forward Contracts 346 — ( 156 ) 190

Total ( 904,358 ) 11,924 ( 18,688 ) ( 911,122 )

$ in thousands Six Months Ended June 30, 2019

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps ( 407,723 ) 12,034 ( 26,931 ) ( 422,620 )

Futures Contracts ( 132,641 ) — 8,454 ( 124,187 )

Currency Forward Contracts 738 — ( 124 ) 614

Total ( 539,626 ) 12,034 ( 18,601 ) ( 546,193 )

Note 9 – Offsetting Assets and Liabilities

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Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets.

The following tables present information about the assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.

The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral.

Our derivative asset of $ 18.5 million as of December 31, 2019 related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin.

As of March 31, 2020

As of June 30, 2020

Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets

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( 507 ) — ( 507 ) — 480 ( 27 )

Repurchase Agreements (3)

( 6,287,746 ) — ( 6,287,746 ) 6,287,746 — —

Secured Loans (3)

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(2) The fair value of securities pledged as initial margin against our centrally cleared swaps was $ 189.8 million as of December 31, 2019.

Cash collateral pledged on our currency forward contracts and centrally cleared interest rate swaps was $ 320,000 and $ 116.4 million as of March 31, 2020 and December 31, 2019, respectively.

Cash collateral pledged on our currency forward contracts and centrally cleared interest rate swaps was $ 480,000 and $ 116.4 million as of June 30, 2020 and December 31, 2019, respectively.

Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and is therefore excluded from the tables above.

We held cash collateral on our derivatives of $ 160,000 at December 31, 2019.

(3) The fair value of securities pledged against our borrowing under repurchase agreements was $ 6.6 billion and $ 19.1 billion at March 31, 2020 and December 31, 2019, respectively.

We pledged cash collateral of $ 394.4 million and held cash collateral of $ 50.1 million under repurchase agreements as of March 31, 2020.

(4) The fair value of securities pledged against IAS Services LLC's borrowings under secured loans was $ 1.4 billion and $ 1.9 billion at March 31, 2020 and December 31, 2019, respectively.

We pledged cash collateral against secured loans of $ 221.4 million and $ 600,000 as of March 31, 2020 and December 31, 2019, respectively.

(3) The fair value of securities pledged against IAS Services LLC's borrowings under secured loans was $ 1.1 billion and $ 1.9 billion at June 30, 2020 and December 31, 2019, respectively.

We pledged cash collateral against secured loans of $ 929,000 and $ 600,000 as of June 30, 2020 and December 31, 2019, respectively.

(4) The fair value of securities pledged against our borrowing under repurchase agreements was $ 19.1 billion at December 31, 2019.

We pledged cash collateral of $ 32.6 million and held cash collateral of $ 10,000 under repurchase agreements as of December 31, 2019.

Note 10 – Fair Value of Financial Instruments

8 unchanged sentences

The following tables present our assets and liabilities measured at fair value on a recurring basis.

March 31, 2020

June 30, 2020

Fair Value Measurements Using:

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The hybrid financial instruments consist of debt host contracts classified as Level 2 and embedded derivatives classified as Level 3.

As of March 31, 2020, the embedded derivative is a liability of $ 29.8 million.

As of June 30, 2020, the net embedded derivative liability position of $ 17.2 million includes $ 100,000 of embedded derivatives in an asset position and $ 17.3 million of embedded derivatives in a liability position.

As of December 31, 2019, the net embedded derivative asset position of $ 10.3 million includes $ 19.5 million of embedded derivatives in an asset position and $ 9.2 million of embedded derivatives in a liability position.

(3) Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds.

As of March 31, 2020 and December 31, 2019, the weighted average remaining term of our investments in unconsolidated ventures was 1.9 years for both periods.

(4) Includes $ 21.6 million and $ 44.7 million of a loan participation interest as of March 31, 2020 and December 31, 2019, respectively and $ 22.6 million of a commercial loan as of March 31, 2020.

We elected the fair value option for our commercial loan as of January 1, 2020 and valued it based on a third party appraisal as of March 31, 2020.

We sold the loan participation interest on April 1, 2020 and valued it at its sales price as of March 31, 2020.

As of June 30, 2020 and December 31, 2019, the weighted average remaining term of our investments in unconsolidated ventures was 1.9 years and 2.2 years, respectively.

(4) Includes $ 44.7 million of a loan participation interest as of December 31, 2019 and $ 21.8 million of a commercial loan as of June 30, 2020.

We elected the fair value option for our commercial loan as of January 1, 2020 and valued the loan based on a third party appraisal as of June 30, 2020.

We sold the loan participation interest on April 1, 2020.

The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives, which we have valued utilizing Level 3 inputs:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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The following table shows a reconciliation of the beginning and ending fair value measurements of our loan participation interest, which we have valued utilizing Level 3 inputs:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Repayments — ( 5,942 ) ( 19,269 ) ( 7,673 )

Total net unrealized losses included in net income:

Unrealized losses ( 3,808 ) —

Sales ( 21,577 ) — ( 21,577 ) —

Total net gains and losses included in net income:

Realized losses ( 3,808 ) — ( 3,808 ) —

Net unrealized gains and losses 3,808 — — —

Ending balance — 47,885 — 47,885

Unrealized losses on our loan participation interest are included in gain (loss) on investments, net in our condensed consolidated statements of operations.

Realized and unrealized losses on our loan participation interest are included in gain (loss) on investments, net in our condensed consolidated statements of operations.

The following table shows a reconciliation of the beginning balance of our commercial loan at amortized cost and ending balance at fair value, which we have valued utilizing Level 3 inputs:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands 2020 2020

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Fair Value at Valuation Unobservable Weighted

$ in thousands March 31, 2020 Technique Input Range Average

$ in thousands June 30, 2020 Technique Input Range Average

GSE CRT Embedded Derivatives ( 17,223 ) Market Comparables, Vendor Pricing Weighted average life 1.9 - 2.8 years

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Fair Value at Valuation Unobservable

$ in thousands March 31, 2020 Technique Input Rate

$ in thousands June 30, 2020 Technique Input Rate

Commercial Loan 21,792 Discounted Cash Flow Discount rate 23.4 %

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

$ in thousands Carrying

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• The estimated fair value of secured loans is a Level 3 fair value measurement.

The secured loans have floating rates based on an index plus a spread and the spread is typically consistent with those demanded in the market.

As of June 30, 2020, the secured loans have variable rates based on the FHLBI's short-term cost of funds.

As of December 31, 2020, the secured loans had floating rates based on an index plus a spread and the spread was typically consistent w ith those demanded in the

Accordingly, the interest rates on these secured loans are at market, and thus the carrying amount approximates fair value.

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Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business.

During the three months ended March 31, 2020, we reimbursed our Manager $ 242,000 (March 31, 2019:

$ 183,000 ) for costs of support personnel that are fully dedicated to our business.

We have invested $ 2.6 million as of March 31, 2020 (December 31, 2019:

During the three and six months ended June 30, 2020, we reimbursed our Manager $ 242,000 and $ 484,000 (June 30, 2019:

$ 213,000 and $ 396,000 ), respectively, for costs of support personnel.

We have invested $ 1.4 million as of June 30, 2020 (December 31, 2019:

$ 154.0 million) in money market or mutual funds managed by affiliates of our Manager.

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GAAP and certain non-cash items upon approval by a majority of our independent directors.

Prior to October 1, 2019, we paid our Manager a management fee equal to 1.50 % of our stockholders’ equity per annum.

The fee was calculated and payable quarterly in arrears.

For purposes of calculating the management fee, stockholders’ equity was equal to the sum of the net proceeds from all issuances of equity securities since inception including proceeds from the issuance of operating partnership units to an affiliate of our Manager, plus retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in then current or prior periods), less any amount paid to repurchase common stock since inception.

Stockholders' equity excluded (i) any unrealized gains, losses or other items that did not affect realized net income (regardless of whether such items were included in other comprehensive income or loss, or in net income);

(ii) cumulative net realized losses that are not attributable to permanently impaired investments and that related to the investments for which market movement was accounted for in other comprehensive income;

provided, however, that such adjustment did not exceed cumulative unrealized net gains in other comprehensive income;

(iii) one-time events pursuant to changes in U.S.

and (iv) certain non-cash items after discussions between our Manager and our independent directors and approval by a majority of our independent directors.

We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager.

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Our reimbursement obligation is not subject to any dollar limitation.

The following table summarizes the costs incurred on our behalf by our Manager for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The following table summarizes the costs incurred on our behalf by our Manager for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

2 unchanged sentences

Total incurred costs, originally paid by our Manager 3,115 1,733 5,391 3,657

Termination Fee

If we terminate our management agreement, we owe our Manager a termination fee equal to three times the sum of our average annual management fee during the 24 -month period before termination, calculated as of the end of the most recently completed fiscal quarter.

Note 12 – Stockholders’ Equity

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As of July 2017, we have the option to redeem shares of our Series A Preferred Stock for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of redemption.

We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption.

We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $ 25.00 per

share, plus any accumulated and unpaid dividends through the date of the redemption.

Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company prior to those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control.

In March 2019, we entered into an equity distribution agreement with a placement agent under which we may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions.

We may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent.

These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented).

We have not sold any shares of preferred stock under this equity distribution agreement through the filing date of this Quarterly Report.

On February 6, 2020, we completed a public offering of 20,700,000 shares of common stock at the price of $ 16.78 per share.

Total net proceeds were approximately $ 347.0 million after deducting estimated offering costs.

On June 30, 2020, we issued 16,338,511 shares of common stock in connection with the payment of a common stock dividend.

See "Dividends" below for further discussion of this payment.

We may sell up to 17,000,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent.

These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented).

During the three months ended March 31, 2020, we did not issue any shares of common stock under the equity distribution agreement.

During the three months ended March 31, 2019 , we issued 572,000 shares of common stock under the equity distribution agreement for proceeds of $ 9.1 million, net of approximately $ 193,000 in commissions and fees.

During the six months ended June 30, 2020, we did no t issue any shares of common stock under the equity distribution agreement.

During the three and six months ended June 30, 2019 , we issued 521,136 and 1,093,136 shares, respectively, of common stock under the equity distribution agreement for proceeds of $ 8.2 million and $ 17.2 million, net of approximately $ 170,000 and $ 363,000 in commissions and fees, respectively.

Share Repurchase Program

During the three months ended March 31, 2020 and 2019, we did no t repurchase any shares of our common stock.

As of March 31, 2020, we had authority to purchase 18,163,982 shares of our common stock through our share repurchase program.

Share-Based Compensation

We recognized compensation expense of approximately $ 113,000 (March 31, 2019:

$ 113,000 ) related to awards to our independent directors under our 2009 Equity Incentive Plan ("our Incentive Plan") for the three months ended March 31, 2020.

During the three months ended March 31, 2020 and 2019, we issued 6,170 shares and 7,065 shares of common stock, respectively, to our independent directors.

We recognized compensation expense of approximately $ 18,000 (March 31, 2019:

$ 19,000 ) for the three months ended March 31, 2020 for restricted stock units awarded to employees of our Manager and its affiliates under our Incentive Plan.

At March 31, 2020, there was approximately $ 155,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 48 months, with a weighted-average remaining vesting period of 22 months.

The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three months ended March 31, 2020.

Three Months Ended March 31,

Restricted Stock Units Weighted Average Grant Date Fair Value (1)

Unvested at the beginning of the period 12,520 $ 12.84

Shares granted during the period 2,996 16.08

Shares vested during the period ( 4,844 ) 14.82

Unvested at the end of the period 10,672 $ 12.85

(1) The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.

During the six months ended June 30, 2020 and 2019, we did no t repurchase any shares of our common stock.

As of June 30, 2020, we had authority to purchase 18,163,982 shares of our common stock through our share repurchase program.

Accumulated Other Comprehensive Income

The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three months ended March 31, 2020 and 2019.

The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three and six months ended June 30, 2020 and 2019.

The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option.

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

$ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total

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AOCI balance at end of period ( 553 ) 45,564 61,337 106,348

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

$ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total

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AOCI balance at end of period ( 83 ) 230,227 87,869 318,013

Six Months Ended June 30, 2020

$ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total

Total other comprehensive income/(loss)

Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net — ( 239,876 ) — ( 239,876 )

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 71,739 — 71,739

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 14,570 ) ( 14,570 )

Currency translation adjustments on investment in unconsolidated venture 92 — — 92

Total other comprehensive income/(loss) 92 ( 168,137 ) ( 14,570 ) ( 182,615 )

AOCI balance at beginning of period ( 645 ) 213,701 75,907 288,963

Total other comprehensive income/(loss) 92 ( 168,137 ) ( 14,570 ) ( 182,615 )

AOCI balance at end of period ( 553 ) 45,564 61,337 106,348

Six Months Ended June 30, 2019

$ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total

Total other comprehensive income/(loss)

Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net — 99,537 — 99,537

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 10,026 — 10,026

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 11,767 ) ( 11,767 )

Currency translation adjustments on investment in unconsolidated venture ( 596 ) — — ( 596 )

Total other comprehensive income/(loss) ( 596 ) 109,563 ( 11,767 ) 97,200

AOCI balance at beginning of period 513 120,664 99,636 220,813

Total other comprehensive income/(loss) ( 596 ) 109,563 ( 11,767 ) 97,200

AOCI balance at end of period ( 83 ) 230,227 87,869 318,013

Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements.

On March 24, 2020, we announced that we would delay the payment of quarterly dividends on our common and preferred stock to preserve liquidity until we could more accurately assess the impact of volatile market conditions related to the COVID-19 pandemic.

We had declared a cash dividend of $ 0.50 per share on our common stock on March 17, 2020 that was to be paid on April 28, 2020 to all stockholders of record as o f March 30, 2020;

a cash dividend of $ 0.4844 per share on our Series A Preferred Stock on March 17, 2020 that was to be paid on April 27, 2020 to stockholders of record as of April 1, 2020;

a cash dividend of $ 0.4844 per share on our Series B Preferred Stock on February 18, 2020 that was to be paid on March 27, 2020 to stockholders of record as of March 5, 2020 and a cash dividend of $ 0.46875 per share on our Series C Preferred Stock on February 18, 2020 that was to be paid on March 27, 2020 to stockholders of record as of March 5, 2020.

On May 9, 2020, our board of directors approved payment of the previously declared preferred dividends in cash and payment of our common stock dividend in a combination of cash and shares of our common stock as described in Note 15 - "Subsequent Events".

The table below summarizes the dividends we declared during the three months ended March 31, 2020 and 2019:

The tables below summarize the dividends we declared during the six months ended June 30, 2020 and 2019:

$ in thousands, except per share amounts Dividends Declared

Series A Preferred Stock Per Share In Aggregate Date of Payment

June 17, 2020 0.4844 2,712 July 27, 2020

March 17, 2020 0.4844 2,713 May 22, 2020

June 17, 2019 0.4844 2,712 July 25, 2019

March 18, 2019 0.4844 2,713 April 25, 2019

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Series B Preferred Stock Per Share In Aggregate Date of Payment

May 9, 2020 0.4844 3,004 June 29, 2020

February 18, 2020 0.4844 3,003 May 22, 2020

May 3, 2019 0.4844 3,004 June 27, 2019

February 14, 2019 0.4844 3,003 March 27, 2019

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Series C Preferred Stock Per Share In Aggregate Date of Payment

May 9, 2020 0.46875 5,390 June 29, 2020

February 18, 2020 0.46875 5,391 May 22, 2020

May 3, 2019 0.46875 5,390 June 27, 2019

February 14, 2019 0.46875 5,391 March 27, 2019

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Common Stock Per Share In Aggregate Date of Payment

June 17, 2020 0.02 3,626 July 28, 2020

March 17, 2020 0.50 82,483 June 30, 2020

June 17, 2019 0.45 57,958 July 26, 2019

March 18, 2019 0.45 57,720 April 26, 2019

On May 9, 2020, our board of directors approved payment of our common stock dividend that was declared on March 17, 2020 in a combination of cash and shares of our common stock.

Stockholders had the opportunity to elect payment of the dividend all in cash or all in common shares, subject to a limit of 10% or approximately $ 8.2 million of cash in the aggregate (excluding any cash paid in lieu of issuing fractional shares).

On June 30, 2020, we paid the dividend through the issuance of 16,338,511 shares of common stock and the payment of approximately $ 8.2 million in cash.

The number of shares included in the dividend was calculated based on the $ 4.5435 volume weighted average trading price of our common stock on the New York Stock Exchange on June 17, 18 and 19, 2020.

Note 13 – Earnings (Loss) per Common Share

Earnings (loss) per share for the three months ended March 31, 2020 and 2019 is computed as follows:

Three Months Ended March 31,

Earnings (loss) per share for the three and six months ended June 30, 2020 and 2019 is computed as follows:

Three months ended June 30, Six Months Ended June 30,

In thousands except per share amounts 2020 2019 2020 2019

12 unchanged sentences

Diluted ( 1.80 ) 0.06 ( 11.91 ) 1.08

The following potential common shares were excluded from diluted earnings per share for the three months ended March 31, 2020 as the effect would be antidilutive:

12,065 for restricted stock awards.

The following potential common shares were excluded from diluted earnings per share for the three and six months ended June 30, 2020 as the effect would be antidilutive:

10,672 and 11,366 for restricted stock awards, respectively.

Note 14 – Commitments and Contingencies

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Commitments and contingencies may arise in the ordinary course of business.

Our material off-balance sheet commitments as of March 31, 2020 are discussed below.

As discussed in Note 5 - "Other Assets", we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager.

Our material off-balance sheet commitments and contingencies as of June 30, 2020 are discussed below.

As discussed in Note 5 - "Other Assets", we have invested $ 19.2 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner.

The entities are structured such that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified.

As of March 31, 2020 and December 31, 2019, our undrawn capital and purchase commitments were $ 6.4 million and $ 6.5 million, respectively.

As discussed in Note 5 - "Other Assets", we invested in a loan participation interest in a secured loan.

We had an unfunded commitment to provide future financing for this loan participation interest of $ 49.6 million as of March 31, 2020.

We sold our loan participation interest on April 1, 2020 for $ 21.6 million in cash and no longer have any future financing commitments related to this loan participation interest.

As of June 30, 2020 and December 31, 2019, our undrawn capital and purchase commitments were $ 6.5 million and $ 6.5 million, respectively.

Note 15 – Subsequent Events

Sales of Investments and Repayment of Debt

Due to the ongoing impact of the COVID-19 pandemic and resulting disruption in the financial markets, we took various actions during the second quarter of 2020 to manage our investment portfolio and generate liquidity.

We repaid all of our repurchase agreements and $ 512.5 million of FHLBI secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements.

In April 2020, FHLBI modified the terms of our secured loans because we were not in compliance with all of the financial covenants of our secured loan agreements as of March 31, 2020.

The modified loan terms require repayment of our secured loans by December 2020 but allow for repayment at any time without penalty.

We intend to repay our secured loans by December 2020 with proceeds from sales of mortgage-backed securities that are collateralizing our secured loans.

We determined that the modification of our loan terms was a troubled debt restructuring tha t did not impact the accounting for our secured loans.

The balance of our secured loans is $ 837.5 million as of the filing date of this Quarterly Report.

FHLBI redeemed a portion of our stock in connection with the repayment of our secured loans discussed above.

The balance of our FHLBI stock is $ 37.7 million as of the filing date of this Quarterly Report.

Portfolio Update

As of May 31, 2020, we have a total investment portfolio, excluding cash and Agency CMBS purchase commitments, of approximately $ 1.6 billion consisting of 92 % commercial credit investments, 7 % residential credit investments, and 1 % Agency mortgage-backed securities;

approximately $ 540 million of the investment portfolio is unencumbered.

Our portfolio has not materially changed between May 31, 2020 and the filing date of this Quarterly Report, and we are not a party to any interest rate swap contracts as of the filing date of this Quarterly Report.

Between April 1, 2020 and May 31, 2020, we repaid the outstanding balance of our repurchase agreements (approximately $ 6.3 billion as of March 31, 2020).

In addition, we repaid $ 512.5 million of our secured loans, reducing the outstanding balance of our secure d loans to $ 837.5 million as of the filing date of this Quarterly Report.

As of May 31, 2020, we have a cash balance of $ 327.8 million, approximately $ 55.3 million of which is posted with FHLBI as collateral for our remaining secured loans.

On May 9, 2020, our board of directors approved payment of the previously declared dividend of $ 0.50 per share of common stock (the "first quarter common stock dividend").

The first quarter common stock dividend will be paid on June 30, 2020 in a combination of cash and shares of the Company's common stock to stockholders of record as of May 21, 2020.

The amount of cash paid to shareholders, other than cash paid in lieu of fractional shares, will not exceed 10% of the aggregate amount of the dividend.

Shares issued in connection with our common stock dividend will be reflected in earnings per share prospectively.

We recorded our first quarter common stock dividend as a reduction of retained earnings of $ 82.5 million in the three months ended March 31, 2020.

On May 9, 2020, our board of directors also approved payment of the previously declared accumulated dividends on our Series A, Series B and Series C Preferred Stock described above.

We paid our preferred dividends that were in arrears on May 22, 2020.

We declared the following dividends on our Series B and Series C Preferred Stock on May 9, 2020 to our stockholders of record as of June 5, 2020:

a Series B Preferred Stock dividend of $ 0.4844 per share payable on June 29, 2020 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on June 29, 2020.

We declared the following dividends on our common stock and Series A Preferred Stock on June 17, 2020:

a common stock dividend of $ 0.02 per share payable on July 28, 2020 to stockholders of record as of July 6, 2020 and a Series A Preferred Stock dividend of $ 0.4844 per share payable on July 27, 2020 to stockholders of record as of July 1, 2020.

We declared the following dividends on our Series B and Series C Preferred Stock on August 5, 2020 to our stockholders of record as of September 5, 2020:

a Series B Preferred Stock dividend of $ 0.4844 per share payable on September 28, 2020 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on September 28, 2020.

Repayment of Secured Loans

In July 2020 , we repaid $ 435.0 million of our secured loans with proceeds from asset sales.

The balance of our secured loans as of July 31, 2020 is $ 305.0 million.

Gain on Extinguishment of Debt

As discussed in Note 6 - "Borrowings", certain of our repurchase agreement counterparties seized and sold securities that we had posted as collateral for our repurchase agreements when we were unable to meet margin calls commencing on March 23, 2020.

As of June 30, 2020, we recorded a liability of $ 22.9 million in investment related payables on our condensed consolidated balance sheet for a claim asserted by one of our counterparties.

We entered into a mutual release of claims with this counterparty in July 2020 and settled the claim resulting in a gain on extinguishment of debt of $ 15.9 million that will be recorded in our condensed consolidated statement of operations in the three months ended September 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements