What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-08-06 · 241 added, 221 removed, 952 unchanged (33% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $ 5,509,166 and $ 21,132,742 , respectively)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands, except share amounts 2020 2019 2020 2019

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Diluted 0.53 0.57 ( 10.87 ) 1.65

(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.

(1) Negative interest expense on repurchase agreements for the three months ended September 30, 2020 consists of $ 1.5 million of current period interest expense on repurchase agreements and $ 3.2 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".

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2020

For the three months ended March 31, 2020;

June 30, 2020 and September 30, 2020

Capital Accumulated

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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

Net income — — — — — — — — — — 107,966 107,966

Other comprehensive loss — — — — — — — — — ( 34,649 ) — ( 34,649 )

Proceeds from issuance of common stock, net of offering costs — — — — — — 25,431 — 78 — — 78

Stock awards — — — — — — 22,500 1 — — — 1

Common stock dividends — — — — — — — — — — ( 9,070 ) ( 9,070 )

Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 )

Amortization of equity-based compensation — — — — — — — — 129 — — 129

Balance at September 30, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 181,375,299 1,814 3,314,008 71,699 ( 2,739,705 ) 1,211,140

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

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)

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

For the three months ended March 31, 2019;

June 30, 2019 and September 30, 2019

Capital Accumulated

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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

Net income — — — — — — — — — — 89,003 89,003

Other comprehensive income — — — — — — — — — 7,837 — 7,837

Proceeds from issuance of common stock, net of offering costs — — — — — — 14,000,000 140 219,191 — — 219,331

Stock awards — — — — — — 6,765 — — — — —

Common stock dividends — — — — — — — — — — ( 64,263 ) ( 64,263 )

Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 )

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

Balance at September 30, 2019 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 142,802,293 1,427 2,869,650 325,850 ( 849,219 ) 2,911,032

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

$ in thousands 2020 2019

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Increase (decrease) in operating assets 53,921 ( 13,578 )

Increase (decrease) in operating liabilities ( 42,459 ) 16,877

Decrease in operating liabilities ( 49,027 ) ( 8,591 )

Net cash provided by operating activities 143,712 217,886

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Offering costs not paid ( 78 ) ( 468 )

Net change in repurchase agreements, not settled — 899

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

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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.

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.

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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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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Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities.

For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security, unless those changes relate to credit losses that will be reflected in an allowance for credit losses, and the security's yield is revised prospectively.

For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost

of the security, unless those changes relate to credit losses that will be reflected in an allowance for credit losses, and the security's yield is revised prospectively.

For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows.

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We discontinued reporting our commercial loan at amortized cost because we elected the fair value option for this loan in connection with our adoption of the new guidance for reporting credit losses discussed below.

Effective January 1, 2020, we began valuing our interest rate swaps under the market approach through the use of quoted prices available in an active market.

We discontinued using the income approach to value our interest rate swaps because the information we previously used was no longer available.

Accounting Pronouncements Recently Adopted

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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.

During the three and nine months ended September 30, 2020 , we recorded $ 9.0 million and $ 94.1 million, respectively, of impairment on non-Agency securities that we intended to sell or more likely than not would be required to sell before we recovered 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 June 30, 2020, we have not recorded a credit loss allowance on any of our securities.

As of September 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 $ 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.

We recognized $ 15,000 and $ 2.5 million of unrealized losses on our commercial loan in our condensed consolidated statement of operations during the three and nine months ended September 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 June 30, 2020 is presented in the table below.

Our maximum risk of loss in VIEs in which we are not the primary beneficiary at September 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 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

During the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic and sold a substantial portion of our MBS and GSE CRT portfolio to generate liquidity and reduce leverage.

We resumed investing in Agency RMBS in July 2020.

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

September 30, 2020

$ in thousands Principal/ Notional

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30 year fixed-rate 5,260,201 278,538 5,538,739 ( 2,636 ) 5,536,103 1.91 %

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

Total Agency RMBS pass-through 5,260,201 278,538 5,538,739 ( 2,636 ) 5,536,103 1.91 %

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955,880 ( 937,114 ) 18,766 ( 5,698 ) 13,068 0.36 %

112,252 2,430 114,682 ( 12,796 ) 101,886 1.34 %

GSE CRT 5,332 — 5,332 ( 415 ) 4,917 3.43 %

Total 6,696,927 ( 707,327 ) 5,989,600 ( 8,143 ) 5,981,457 2.32 %

(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.

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

(2) All Agency collateralized mortgage obligations ("Agency-CMO") are interest-only securities ("Agency IO").

(3) Non-Agency RMBS is 69.6 % fixed rate, 29.6 % variable rate, and 0.8 % floating rate based on fair value.

Coupon payments on variable rate investments are based upon changes in the underlying Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.

Coupon payments on variable rate investments are based upon changes in the underlying Hybrid adjustable-rate mortgage ("ARM") loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.

(4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable (calculated using the principal/notional balance) based on estimated future cash flows of the securities.

(5) Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 98.9 % of principal/notional balance, 69.3 % of amortized cost and 46.4 % of fair value.

(6) 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.

December 31, 2019

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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.

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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 June 30, 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 September 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 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

As of September 30, 2020 and December 31, 2019, approximately 94 % 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 increased as of September 30, 2020 due to a change in portfolio composition.

During the first half of 2020, we sold MBS and GSE CRTs previously accounted for as available-for-sale securities to generate liquidity and reduce leverage given unprecedented market conditions as a result of the COVID-19 pandemic.

We resumed investing in Agency RMBS in July 2020 and elected the fair value option for these securities.

September 30, 2020 December 31, 2019

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

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Total 352,484 5,628,973 5,981,457 4,405,426 17,366,360 21,771,786

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

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

September 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 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

Further detail on the components of our total gains (losses) on investments, net for the three and nine months ended September 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 September 30, 2020 and December 31, 2019 .

$ in thousands September 30, 2020 December 31, 2019

Less than one year 112,486 268,536

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Total 5,981,457 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 June 30, 2020 and December 31, 2019.

June 30, 2020

September 30, 2020

Less than 12 Months 12 Months or More Total

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Losses Number

30 year fixed-rate 2,721,331 ( 11,360 ) 37 — — — 2,721,331 ( 11,360 ) 37

Total Agency RMBS pass-through 2,721,331 ( 11,360 ) 37 — — — 2,721,331 ( 11,360 ) 37

Non-Agency CMBS 82,458 ( 11,728 ) 12 — — — 82,458 ( 11,728 ) 12

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

GSE CRT 4,917 ( 415 ) 1 — — — 4,917 ( 415 ) 1

Non-Agency RMBS 5,299 ( 7,072 ) 10 66 ( 56 ) 4 5,365 ( 7,128 ) 14

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

(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.

2,814,005 ( 30,575 ) 60 66 ( 56 ) 4 2,814,071 ( 30,631 ) 64

(1) Fair value option has been elected for all securities in an unrealized loss position.

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 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.

As of September 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 nine months ended September 30, 2020.

We recorded impairments of $ 9.0 million and $ 94.1 million on our condensed consolidated statement of operations during the three and nine months ended September 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 during the three and six months ended June 30, 2019:

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

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2019 2019

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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 and six months ended June 30, 2020 and 2019.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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Other-than-temporary impairment losses — ( 1,826 ) — ( 4,802 )

Net unrealized gains and losses on MBS accounted for under the fair value option ( 34,498 ) 304,692 ( 549,001 ) 584,731

Net unrealized gains and losses on GSE CRT accounted for under the fair value option 139,943 ( 3,339 ) ( 12,426 ) ( 2,105 )

Net unrealized gains and losses on MBS and GSE CRT accounted for under the fair value option 23,994 201,702 ( 537,433 ) 784,328

Net unrealized gains and losses on commercial loan and loan participation interest ( 15 ) — ( 2,484 ) —

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Total gain (loss) on investments, net 65,106 202,413 ( 996,743 ) 772,977

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:

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

GSE CRT interest income excludes coupon interest associated with embedded derivatives of $ 478,000 and $ 6.3 million for the three and nine months ended September 30, 2020 (2019:

$ 5.2 million and $ 15.8 million), respectively, that is recorded as realized and unrealized credit derivative income (loss), net.

For the three months ended June 30, 2020

For the three months ended September 30, 2020

$ in thousands Coupon

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Agency RMBS 16,098 ( 2,520 ) 13,578

Agency CMBS 1,827 ( 78 ) 1,749

Non-Agency CMBS 10,259 3,109 13,368

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GSE CRT 223 ( 274 ) ( 51 )

Other ( 15 ) — ( 15 )

Total 27,466 ( 559 ) 26,907

For the three months ended June 30, 2019

For the three months ended September 30, 2019

$ in thousands Coupon

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Total 213,546 ( 18,608 ) 194,938

For the six months ended June 30, 2020

For the nine months ended September 30, 2020

$ in thousands Coupon

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Total 256,416 ( 14,345 ) 242,071

For the six months ended June 30, 2019

For the nine months ended September 30, 2019

$ in thousands Coupon

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Note 5 – Other Assets

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

$ in thousands June 30, 2020 December 31, 2019

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

$ in thousands September 30, 2020 December 31, 2019

FHLBI stock — 74,250

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Total 43,936 166,180

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

The stock is recorded at cost.

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.

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

During the nine months ended September 30, 2020, FHLBI fully redeemed our stock at cost in connection with the repayment of our secured loans.

We terminated our membership in FHLBI in the third quarter of 2020.

We sold our participation interest in a secured loan collateralized by mortgage servicing rights for $ 21.6 million in April 2020.

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

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

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

The loan had a weighted average coupon rate of 8.66 % as of September 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 $ 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 recorded unrealized losses on this loan of $ 15,000 and $ 2.5 million during the three and nine months ended September 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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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.

We fully repaid our secured loans during the nine months ended September 30, 2020.

The following tables summarize certain characteristics of our borrowings at September 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

$ in thousands September 30, 2020

Weighted Average

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Outstanding Rate (days)

Secured Loans 740,000 0.62 % 158

Repurchase Agreements - Agency RMBS 5,243,288 0.23 % 14

Total Borrowings 5,243,288 0.23 % 14

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Total Borrowings 19,182,303 2.09 % 172

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

$ in thousands As of

Borrowings maturing within:

June 30, 2020

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

Total 740,000

Secured Loans

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.

During the nine months ended September 30, 2020, IAS Services LLC fully repaid its outstanding secured loans from the FHLBI.

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.

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

These secured loans had variable rates that were based on the FHLBI's short-term cost of funds.

For the nine months ended September 30, 2020, IAS Services LLC had weighted average borrowings of $ 784.3 million with a weighted average borrowing rate of 1.47 %.

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.

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.

In the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic.

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.

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

While certain of our repurchase agreement counterparties permitted our repurchase agreements to remain outstanding while we were not in compliance, other counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

We repaid all of our repurchase agreements that may have been in default as of May 7, 2020.

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.

During the three months ended September 30, 2020, we entered into a mutual release of claims with a counterparty resulting in a one-time gain on settlement of a debt obligation of $ 16.0 million that is reported within net gain (loss) on extinguishment of debt on our condensed consolidated statement of operations.

We resumed financing the purchase of Agency RMBS with repurchase agreements in July 2020.

These repurchase agreements generally bear interest at a contractually agreed upon rate and have maturities of approximately one month.

The repurchase agreements are subject to certain financial covenants.

We were in compliance with all of these covenants as of September 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 June 30, 2020 and December 31, 2019.

The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, secured loans, interest rate swaps, currency forward contracts and to-be-announced securities forward contracts ("TBAs") as of September 30, 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.

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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 was classified as due from counterparties on our condensed consolidated balance sheets.

Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is 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 $ 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.

We did no t have any Agency CMBS purchase commitments as of September 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 June 30, 2020 and December 31, 2019, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets.

As of September 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 June 30, 2020 December 31, 2019

Collateral Pledged September 30, 2020 December 31, 2019

Repurchase Agreements:

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Total secured loans collateral pledged — 1,898,489

Interest Rate Swaps and Currency Forward Contracts:

Interest Rate Swaps, Currency Forward Contracts and TBAs:

Agency RMBS — 189,780

Restricted cash 166,193 116,395

Total interest rate swaps and currency forward contracts collateral pledged 480 306,175

Total interest rate swaps, currency forward contracts, and TBAs collateral pledged 167,423 306,175

Total collateral pledged:

4 unchanged sentences

Total collateral pledged 5,679,694 21,326,959

Collateral Held June 30, 2020 December 31, 2019

Collateral Held September 30, 2020 December 31, 2019

Repurchase Agreements:

1 unchanged sentence

Total repurchase agreements collateral held 3,919 191

Interest Rate Swaps:

Total interest rate swap collateral held — 160

Interest Rate Swaps and Currency Forward Contracts:

Total interest rate swap and currency forward contracts collateral held 280 160

Total collateral held:

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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.

We intend to maintain a level of liquidity that will enable us to meet margin calls.

Our repurchase agreement collateral pledged ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/amount outstanding) was 105 % as of September 30, 2020 and 109 % as of December 31, 2019.

Secured Loans

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

The FHLBI does not have the right to resell or repledge collateral posted unless an event of default occurs.

The FHLBI retains the right to mark the underlying collateral for FHLBI advances to fair value as determined by the FHLBI in its sole discretion.

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

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

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

The FHLBI retained the right to mark the underlying collateral for FHLBI advances to fair value as determined by the FHLBI in its sole discretion.

We repaid the outstanding balance of our secured loans during the nine months ended September 30, 2020 and did not have any secured loans outstanding as of September 30, 2020.

Interest Rate Swaps

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Our FCM agreements include cross default provisions.

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

Currency Forward Contracts

Our currency forward contract provides for bilateral collateral pledging based on market value as determined by our counterparty.

Collateral pledged with our currency forward counterparty is segregated in our books and records and can be in the form of cash or securities.

Our counterparty has the right to repledge the collateral posted, but has the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the currency forward contract changes.

TBAs and Currency Forward Contracts

Our TBAs and currency forward contracts provide for bilateral collateral pledging based on market value as determined by our counterparties.

Collateral pledged with our TBA and currency forward counterparties is segregated in our books and records and can be in the form of cash or securities.

Our counterparties have the right to repledge the collateral posted and the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the contracts changes.

Note 8 – Derivatives and Hedging Activities

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$ in thousands Notional Amount

of December 31,

2019 Additions Settlement,

or Exercise Notional Amount

September 30,

Interest Rate Swaps 14,000,000 98,225,000 ( 107,675,000 ) 4,550,000

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Credit Derivatives 464,966 — ( 464,966 ) —

TBA Purchase Contracts — 1,800,000 ( 900,000 ) 900,000

TBA Sale Contracts — ( 900,000 ) 900,000 —

Total 14,488,077 99,195,297 ( 108,208,751 ) 5,474,623

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At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time.

In addition, our secured loans have floating interest rates.

As such, we are exposed to changing interest rates.

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements.

To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy.

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.

Under the terms of our interest rate swap contracts, we make 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.

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 .

We reclassified $ 3.2 million and $ 17.8 million as a decrease (September 30, 2019:

$ 6.0 million and $ 17.7 million as a decrease) to interest expense for the three and nine months ended September 30, 2020, respectively.

During the next 12 months, we estimate that $ 22.4 million will be reclas sified as a decrease to interest expense, repurchase agreements.

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

As of September 30, 2020, $ 58.1 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 June 30, 2020.

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

As of September 30, 2020 and December 31, 2019, we had interest rate swaps with the following maturities outstand ing:

$ in thousands As of September 30, 2020

Maturities Notional Amount (1)

Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity

2024 1,000,000 0.16 % 0.15 % 3.8

2025 1,250,000 0.23 % 0.15 % 4.9

Thereafter 2,300,000 0.47 % 0.16 % 8.1

Total 4,550,000 0.34 % 0.15 % 6.3

(1) All swaps received variable payments based on 1-month LIBOR as of September 30, 2020.

$ in thousands As of December 31, 2019

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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 June 30, 2020 and December 31, 2019.

We did not have any futures contract outstanding as of September 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 June 30, 2020, we had $ 22.9 million (December 31, 2019:

As of September 30, 2020, we had $ 24.6 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.

Credit Derivatives

Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative.

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

$ in thousands June 30, 2020 December 31, 2019

Our GSE CRTs purchased prior to August 24, 2015 were accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative.

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

We did not hold any GSE CRTs that were accounted for as hybrid financial instruments as of September 30, 2020.

At December 31, 2019, terms of the GSE CRT embedded derivatives were:

$ in thousands December 31, 2019

Fair value amount 10,281

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Maximum potential amount of future undiscounted payments 464,966

We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency MBS.

The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of September 30, 2020.

We did not hold any such instruments as of December 31, 2019.

$ in thousands September 30, 2020

Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value

TBA purchase contracts 900,000 932,313 934,891 2,578

Net TBA derivatives 900,000 932,313 934,891 2,578

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 June 30, 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 September 30, 2020 and December 31, 2019.

$ in thousands

Derivative Assets Derivative Liabilities

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

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

Sheet Fair Value Fair Value Balance

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Currency Forward Contracts 168 — Currency Forward Contracts — 352

TBAs 2,969 — TBAs 391 —

Total Derivative Assets 8,402 18,533 Total Derivative Liabilities 391 352

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 and six months ended June 30, 2020 and 2019.

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

$ in thousands

Three months ended June 30, 2020

Three Months Ended September 30, 2020

not designated as

2 unchanged sentences

$ in thousands

Three months ended June 30, 2019

Three Months Ended September 30, 2019

not designated as

1 unchanged sentence

GSE CRT Embedded Derivatives — 5,196 ( 5,195 ) 1

$ in thousands Six months ended June 30, 2020

$ in thousands Nine Months Ended September 30, 2020

not designated as

1 unchanged sentence

GSE CRT Embedded Derivatives ( 31,354 ) 6,323 ( 10,281 ) ( 35,312 )

$ in thousands Six months ended June 30, 2019

$ in thousands Nine Months Ended September 30, 2019

not designated as

1 unchanged sentence

GSE CRT Embedded Derivatives — 15,846 ( 10,399 ) 5,447

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 and six months ended June 30, 2020 and 2019:

The following tables summarizes the effect of interest rate swaps, currency forward contracts, TBAs and futures reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019:

$ in thousands

Three Months Ended June 30, 2020

Three Months Ended September 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 ( 4,662 ) ( 555 ) 5,266 49

Currency Forward Contracts ( 1,643 ) — 675 ( 968 )

TBAs 1,227 — 2,578 3,805

Total ( 5,078 ) ( 555 ) 8,519 2,886

$ in thousands

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

not designated as

4 unchanged sentences

Total ( 173,607 ) 11,715 ( 15,352 ) ( 177,244 )

$ in thousands Six Months Ended June 30, 2020

$ in thousands Nine Months Ended September 30, 2020

not designated as

2 unchanged sentences

Currency Forward Contracts ( 1,297 ) — 519 ( 778 )

TBAs 1,227 — 2,578 3,805

Total ( 909,436 ) 11,369 ( 10,169 ) ( 908,236 )

$ in thousands Six Months Ended June 30, 2019

$ in thousands Nine Months Ended September 30, 2019

not designated as

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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 June 30, 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 June 30, 2020

Our derivative assets of $ 5.3 million as of September 30, 2020 and $ 18.5 million as of December 31, 2019 related to centrally cleared interest rate swaps are not included in the tables below as a result of this characterization of daily variation margin.

As of September 30, 2020

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

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3,137 — 3,137 ( 391 ) ( 168 ) 2,578

Secured Loans (3)

Total Assets 3,137 — 3,137 ( 391 ) ( 168 ) 2,578

Derivatives (1)(2)

( 391 ) — ( 391 ) 391 — —

Repurchase Agreements (3)

( 5,243,288 ) — ( 5,243,288 ) 5,243,288 — —

Total Liabilities ( 5,243,679 ) — ( 5,243,679 ) 5,243,679 — —

16 unchanged sentences

Total Liabilities ( 19,182,655 ) — ( 19,182,655 ) 19,182,303 320 ( 32 )

(1) Amounts represent collateral pledged that is available to be offset against liability balances associated with currency forward contracts.

(1) Amounts represent derivative assets and derivative liabilities which could potentially be offset against other derivative assets, derivative liabilities and cash collateral pledged or received.

(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 $ 480,000 and $ 116.4 million as of June 30, 2020 and December 31, 2019, respectively.

Cash collateral pledged on our currency forward contracts, TBAs and centrally cleared interest rate swaps was $ 167.4 million and $ 116.4 million as of September 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 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.

We held cash collateral on our derivatives of $ 280,000 and $ 160,000 at September 30, 2020 and December 31, 2019, respectively.

(3) The fair value of securities pledged against our borrowing under repurchase agreements was $ 5.5 billion and $ 19.1 billion at September 30, 2020 and December 31, 2019, respectively.

We pledged cash collateral of $ 3.1 million and $ 32.6 million under repurchase agreements as of September 30, 2020 and December 31, 2019, respectively.

We held cash collateral of $ 670,000 and $ 10,000 under repurchase agreements as of September 30, 2020 and December 31, 2019, respectively.

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

We pledged cash collateral against secured loans of $ 600,000 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.

June 30, 2020

September 30, 2020

Fair Value Measurements Using:

2 unchanged sentences

— 5,981,457 — — 5,981,457

Derivative assets — 8,402 — — 8,402

Other assets (4)

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(1) For more detail about the fair value of our MBS and GSE CRTs, refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities."

(2) Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments with an embedded derivative.

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

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.

(2) Our GSE CRTs purchased prior to August 24, 2015 were accounted for as hybrid financial instruments with an embedded derivative.

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

We did not hold any GSE CRTs accounted for as hybrid financial instruments as of September 30, 2020.

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 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.

As of September 30, 2020 and December 31, 2019, the weighted average remaining term of our investments in unconsolidated ventures w as 1.9 years an d 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 September 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 September 30, 2020.

We sold our 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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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 June 30, Six Months Ended June 30,

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2020

Beginning balance, at amortized cost 22,577 24,055

Beginning balance 21,792 24,055

Cumulative effect of adoption of new accounting principle — 342

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Unrealized losses ( 15 ) ( 2,484 )

Ending balance, at fair value 21,792 21,792

Ending balance 21,777 21,777

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

1 unchanged sentence

Fair Value at Valuation Unobservable Weighted

$ 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

Fair Value at Valuation Unobservable Weighted

$ in thousands December 31, 2019 Technique Input Range Average

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Fair Value at Valuation Unobservable

$ in thousands June 30, 2020 Technique Input Rate

$ in thousands September 30, 2020 Technique Input Rate

Commercial Loan 21,777 Discounted Cash Flow Discount rate 32.1 %

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 June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

$ in thousands Carrying

11 unchanged sentences

Total 5,243,288 5,243,271 19,182,303 19,184,344

(1) We elected the fair value option for our commercial loan on January 1 , 2020.

(1) The carrying value and estimated fair value of our commercial loan as of September 30, 2020 are not applicable for disclosure in this table because we elected the fair value option for our commercial loan on January 1, 2020.

The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the condensed consolidated balance sheets.

1 unchanged sentence

The fair value was determined by an independent pricing service using a discounted cash flow analysis.

• The estimated fair value of FHLBI stock, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement.

FHLBI stock may only be sold back to the FHLBI at its discretion at par.

As a result, the cost of the FHLBI stock approximates its fair value.

• The estimated fair value of FHLBI stock, included in "Other assets" on our condensed consolidated balance sheet as of December 31, 2019, is a Level 3 fair value measurement.

The cost of the FHLBI stock approximated its fair value because it could only be sold back to the FHLBI at its discretion at par.

FHLBI redeemed our stock at cost in connection with the repayment of our secured loans.

We terminated our membership in FHLBI in the third quarter of 2020.

• The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique.

1 unchanged sentence

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

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.

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 market.

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

We fully repaid our secured loans during the nine months ended September 30, 2020.

Note 11 – Related Party Transactions

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

During the three and nine months ended September 30, 2020, we reimbursed our Manager $ 242,000 and $ 726,000 (September 30, 2019:

$ 250,000 and $ 646,000 ), respectively, for costs of support personnel.

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

We have invested $ 1.3 million as of September 30, 2020 (December 31, 2019:

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

The investments are reported as cash and cash equivalents on our condensed consolidated balance sheets as they are highly liquid and have original or remaining maturities of three months or less when purchased.

During the three and nine months ended September 30, 2020, we sold non-Agency CMBS to affiliates of our Manager for cash proceeds of $ 40.0 million and recognized a realized gain of $ 4.1 million.

Management Fee Expense

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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 and six months ended June 30, 2020 and 2019.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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

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.

We issued 25,431 shares of common stock under the equity distribution agreement in the three and nine months ended September 30.

2020 for proceeds of $ 80,000 , net of approximately $ 2,000 in commissions and fees.

During the nine months ended September 30, 2019 , we issued 1,093,136 shares of common stock under the equity distribution agreement for proceeds of $ 17.2 million, net of approximately $ 363,000 in commissions and fees.

We did no t issue any common stock under the equity distribution agreement during the three months ended September 30, 2019.

Share Repurchase Program

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.

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

As of September 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 and six months ended June 30, 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 nine months ended September 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 June 30, 2020

Three Months Ended September 30, 2020

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

8 unchanged sentences

AOCI balance at end of period ( 156 ) 13,761 58,094 71,699

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

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

8 unchanged sentences

AOCI balance at end of period 207 243,755 81,888 325,850

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

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

8 unchanged sentences

AOCI balance at end of period ( 156 ) 13,761 58,094 71,699

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

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

9 unchanged sentences

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.

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

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

$ in thousands, except per share amounts Dividends Declared

Series A Preferred Stock Per Share In Aggregate Date of Payment

September 10, 2020 0.4844 2,713 October 26, 2020

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

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

September 16, 2019 0.4844 2,713 October 25, 2019

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

2 unchanged sentences

Series B Preferred Stock Per Share In Aggregate Date of Payment

August 5, 2020 0.4844 3,003 September 28, 2020

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

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

August 1, 2019 0.4844 3,003 September 27, 2019

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

2 unchanged sentences

Series C Preferred Stock Per Share In Aggregate Date of Payment

August 5, 2020 0.46875 5,391 September 28, 2020

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

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

August 1, 2019 0.46875 5,391 September 27, 2019

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

2 unchanged sentences

Common Stock Per Share In Aggregate Date of Payment

September 30, 2020 0.05 9,070 October 27, 2020

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

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

September 16, 2019 0.45 64,261 October 28, 2019

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

5 unchanged sentences

Note 13 – Earnings (Loss) per Common Share

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

In thousands except per share amounts 2020 2019 2020 2019

12 unchanged sentences

Diluted 0.53 0.57 ( 10.87 ) 1.65

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.

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

11,131 for restricted stock awards.

Note 14 – Commitments and Contingencies

1 unchanged sentence

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

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

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

As discussed in Note 5 - "Other Assets", we have invested $ 20.0 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

1 unchanged sentence

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

As of September 30, 2020 and December 31, 2019, our undrawn capital and purchase commitments were $ 6.7 million and $ 6.5 million, respectively.

Note 15 – Subsequent Events

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.

We declared the following dividends on November 5, 2020:

a Series A Preferred Stock dividend of $ 0.4844 per share payable on January 25, 2021 to our stockholders of record as of January 1, 2021, a Series B Preferred Stock dividend of $ 0.4844 per share payable on December 28, 2020 to our stockholders of record as of December 5, 2020 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on December 28, 2020 to our stockholders of record as of December 5, 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