Invesco Mortgage Capital Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of $ in thousands except share amounts September 30, 2020 December 31, 2019 ASSETS Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $ 5,509,166 and $ 21,132,742 , respectively) 5,981,457 21,771,786 Cash and cash equivalents 258,905 172,507 Restricted cash 166,193 116,995 Due from counterparties 4,335 32,568 Investment related receivable 12,767 67,976 Derivative assets, at fair value 8,402 18,533 Other assets (including pledged security of $ 44,654 as of December 31, 2019) 43,936 166,180 Total assets 6,475,995 22,346,545 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 5,243,288 17,532,303 Secured loans — 1,650,000 Derivative liabilities, at fair value 391 352 Dividends payable 11,781 74,841 Investment related payable 966 99,561 Accrued interest payable 589 43,998 Collateral held payable 950 170 Accounts payable and accrued expenses 2,198 1,560 Due to affiliate 4,692 11,861 Total liabilities 5,264,855 19,414,646 Commitments and contingencies (See Note 14) Stockholders' Equity: Preferred Stock, par value $ 0.01 per share; 50,000,000 shares authorized: 7.75 % Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($ 140,000 aggregate liquidation preference) 135,356 135,356 7.75 % Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($ 155,000 aggregate liquidation preference) 149,860 149,860 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($ 287,500 aggregate liquidation preference) 278,108 278,108 Common Stock, par value $ 0.01 per share; 450,000,000 shares authorized; 181,375,299 and 144,256,357 shares issued and outstanding, respectively 1,814 1,443 Additional paid in capital 3,314,008 2,892,652 Accumulated other comprehensive income 71,699 288,963 Retained earnings (distributions in excess of earnings) ( 2,739,705 ) ( 814,483 ) Total stockholders’ equity 1,211,140 2,931,899 Total liabilities and stockholders' equity 6,475,995 22,346,545 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, $ in thousands, except share amounts 2020 2019 2020 2019 Interest Income Mortgage-backed and credit risk transfer securities 26,907 194,938 242,071 581,167 Commercial and other loans 529 1,353 2,237 4,419 Total interest income 27,436 196,291 244,308 585,586 Interest Expense Repurchase agreements (1) ( 1,713 ) 112,851 76,059 332,704 Secured loans 297 10,413 8,655 32,815 Total interest expense ( 1,416 ) 123,264 84,714 365,519 Net interest income 28,852 73,027 159,594 220,067 Other Income (loss) Gain (loss) on investments, net 65,106 202,413 ( 996,743 ) 772,977 Equity in earnings (losses) of unconsolidated ventures 332 403 820 1,797 Gain (loss) on derivative instruments, net 2,886 ( 177,244 ) ( 908,236 ) ( 723,437 ) Realized and unrealized credit derivative income (loss), net 478 1 ( 35,312 ) 5,447 Net gain (loss) on extinguishment of debt 15,849 — 14,742 — Other investment income (loss), net 402 1,005 1,936 3,041 Total other income (loss) 85,053 26,578 ( 1,922,793 ) 59,825 Expenses Management fee – related party 4,111 8,740 24,857 27,644 General and administrative 1,828 1,862 9,009 6,119 Total expenses 5,939 10,602 33,866 33,763 Net income (loss) 107,966 89,003 ( 1,797,065 ) 246,129 Dividends to preferred stockholders 11,107 11,107 33,320 33,320 Net income (loss) attributable to common stockholders 96,859 77,896 ( 1,830,385 ) 212,809 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic 0.53 0.57 ( 10.87 ) 1.66 Diluted 0.53 0.57 ( 10.87 ) 1.65 (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". The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2020 2019 2020 2019 Net income (loss) 107,966 89,003 ( 1,797,065 ) 246,129 Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net 22,812 14,482 ( 217,064 ) 114,019 Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net ( 54,615 ) ( 954 ) 17,124 9,072 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 3,243 ) ( 5,981 ) ( 17,813 ) ( 17,748 ) Currency translation adjustments on investment in unconsolidated venture 397 290 489 ( 306 ) Total other comprehensive income (loss) ( 34,649 ) 7,837 ( 217,264 ) 105,037 Comprehensive income (loss) 73,317 96,840 ( 2,014,329 ) 351,166 Less: Dividends to preferred stockholders ( 11,107 ) ( 11,107 ) ( 33,320 ) ( 33,320 ) Comprehensive income (loss) attributable to common stockholders 62,210 85,733 ( 2,047,649 ) 317,846 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2020; June 30, 2020 and September 30, 2020 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock $ in thousands except share amounts Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2019 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 144,256,357 1,443 2,892,652 288,963 ( 814,483 ) 2,931,899 Cumulative effect of adoption of new accounting principle — — — — — — — — — — 342 342 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 Stock awards — — — — — — 10,000 — — — — — Common stock dividends — — — — — — — — — — ( 82,483 ) ( 82,483 ) Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 ) Amortization of equity-based compensation — — — — — — — — 131 — — 131 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 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. 4 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) For the three months ended March 31, 2019; June 30, 2019 and September 30, 2019 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock $ in thousands except share amounts Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2018 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 111,584,996 1,115 2,383,532 220,813 ( 882,087 ) 2,286,697 Net income — — — — — — — — — — 138,790 138,790 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 Stock awards — — — — — — 10,501 — — — — — Common stock dividends — — — — — — — — — — ( 57,720 ) ( 57,720 ) Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 ) Amortization of equity-based compensation — — — — — — — — 132 — — 132 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 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. 5 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, $ in thousands 2020 2019 Cash Flows from Operating Activities Net income (loss) ( 1,797,065 ) 246,129 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net 9,821 28,471 Realized and unrealized (gain) loss on derivative instruments, net 919,605 747,186 Realized and unrealized (gain) loss on credit derivatives, net 41,635 10,399 (Gain) loss on investments, net 996,743 ( 772,977 ) (Gain) loss from investments in unconsolidated ventures in excess of distributions received 245 ( 1,797 ) Other amortization ( 17,424 ) ( 17,356 ) Net (gain) loss on extinguishment of debt ( 14,742 ) — Changes in operating assets and liabilities: Increase (decrease) in operating assets 53,921 ( 13,578 ) Decrease in operating liabilities ( 49,027 ) ( 8,591 ) Net cash provided by operating activities 143,712 217,886 Cash Flows from Investing Activities Purchase of mortgage-backed and credit risk transfer securities ( 10,515,245 ) ( 7,980,486 ) (Contributions to) distributions from investments in unconsolidated ventures, net 2,267 2,198 Change in other assets 40,846 9,866 Principal payments from mortgage-backed and credit risk transfer securities 730,330 1,392,097 Proceeds from sale of mortgage-backed and credit risk transfer securities 24,265,520 2,387,143 Payment on the sale of credit derivatives ( 31,353 ) — Settlement (termination) of futures, currency forwards and interest rate swaps, net ( 909,435 ) ( 713,233 ) Redemption of Federal Home Loan Bank of Indianapolis stock 74,250 — Net change in due from counterparties and collateral held payable on derivative instruments ( 1,110 ) ( 8,909 ) Principal payments from commercial loans held-for-investment 136 7,394 Net cash provided by (used in) investing activities 13,656,206 ( 4,903,930 ) Cash Flows from Financing Activities Proceeds from issuance of common stock 347,182 486,506 Principal repayments of secured loans ( 1,650,000 ) — Proceeds from repurchase agreements 55,623,982 94,974,385 Principal repayments of repurchase agreements ( 67,898,255 ) ( 90,504,837 ) Net change in due from counterparties and collateral held payable on repurchase agreements 30,123 ( 3,612 ) Payments of deferred costs ( 29 ) ( 176 ) Payments of dividends ( 117,325 ) ( 195,865 ) Net cash provided by (used in) financing activities ( 13,664,322 ) 4,756,401 Net change in cash, cash equivalents and restricted cash 135,596 70,357 Cash, cash equivalents and restricted cash, beginning of period 289,502 135,617 Cash, cash equivalents and restricted cash, end of period 425,098 205,974 Supplement Disclosure of Cash Flow Information Interest paid 145,935 391,153 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities ( 199,940 ) 123,091 Dividends declared not paid 11,781 66,974 Increase (decrease) in Agency CMBS purchase commitments ( 99,557 ) 1,124,815 Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments 328 ( 19,598 ) Dividend paid in common stock 74,234 — Offering costs not paid ( 78 ) ( 468 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Organization and Business Operations Invesco Mortgage Capital Inc. (the "Company" or "we") is a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities ("MBS") and other mortgage-related assets. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm. We conduct our business through IAS Operating Partnership LP (the "Operating Partnership") and have one operating segment. We have historically invested in: • Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae"), or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS"); • Commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively "Agency CMBS"); • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS"); • CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS"); • Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); • Residential and commercial mortgage loans; and • Other real estate-related financing agreements. We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code o f 1986. 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 our exclusion from the "Investment Company" definition under the Investment Company Act of 1940. Note 2 – Summary of Significant Accounting Policies Basis of Presentation and Consolidation Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Company and our controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income recognition on mortgage-backed and credit risk transfer securities and allowances for credit losses. Actual results may differ from those estimates. 7 Table of Contents Significant Accounting Policies There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2019 other than as discussed below. Mortgage-Backed and Credit Risk Transfer Securities Allowances for Credit Losses on Available-For-Sale Securities We are not required to measure expected credit losses for situations in which historic credit loss information , adjusted for current conditions and reasonable and support able forecasts , results in an expectation that nonpayment of the amortized cost basis is zero. We consider our Agency portfolio to have zero loss expectation because (i) there have been no historical credit losses, (ii) full and timely payment of principal and interest is guaranteed by the GSEs and (iii) the yields, while not risk free, generally trade based on prepayment and liquidity risk as opposed to credit risk. 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 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. We calculate t he allowance for credit losses as the difference between prepayment adjusted contractual cash flows without credit losses and expected cash flows discounted at the effective interest rate used to recognize interest income on the investment. In developing an expectation of credit losses, we use internal models that analyze the loans underlying each investment and evaluate factors including, but not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration. We place reliance on these internal models in determining credit quality. We record an allowance for credit losses as a contra-asset on the condensed consolidated balance sheets and a provision for credit losses i n the condensed consolidated statements of operations . C redit losses are accreted into earnings over time at the effective interest rate used to recognize interest income. S ubsequent favorable or adverse changes in the amount of expected credit losses are recognized immediately in earnings. If the allowance for credit losses has been reduced to zero, we reflect the remaining favorable changes as a prospective adjustment to the effective interest rate of the investment. The allowance for credit losses is limited to the amount by which the investment’s amortized cost exceeds fair value. When the allowance for credit losses is limited, the effective interest rate used to recognize interest income and accrete credit losses is prospectively adjusted. We do not record an allowance for credit losses when an investment’s fair value exceeds its amortized cost. R ecoveries of amounts previously written off relating to improvements in cash flows are recognized in earnings when received. We record p rovisions for credit losses, reductions in provisions for credit losses, accretion of credit losses, and recoveries of amounts previously written off within g ain (loss) on investments, net in our condensed consolidated statements of operations. When we determine that we intend to sell , or more likely than not will be required to sell , an available-for-sale security in an unrealized loss position before we recover its amortized cost , we write off any allowance for credit losses and write down the investment’s amortized cost to its fair value. We record the write off of the allowance for credit losses and write down of the available-for-sale security within g ain (loss) on investments, net in our condensed consolidated statements of operations. We present accrued interest receivable separately from our investment portfolio on our condensed consolidated balance sheets. We do not estimate an allowance for credit losses on accrued interest receivable because we write off accrued interest receivable as a reduction to interest income if it is not received when due. Interest Income Recognition Mortgage-Backed Securities Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method. Interest income on 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. 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. In situations where an allowance for credit losses is limited by the fair value of the investment, we compute the yield as the rate that equates expected future cash flows to the current fair value of the investment. In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. 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 8 Table of Contents 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. We do not estimate prepayments in applying the effective interest method. Fair Value Measurements As of January 1, 2020, we report our commercial loan at fair value as determined by an independent pricing service. The pricing service values the loan using a discounted cash flow analysis. The yield used in the discounted cash flow analysis is determined by comparing the features of the loan to the interest rates and terms required by lenders in the new loan origination market for similar loans and the yield required by investors acquiring mezzanine loans in the secondary market and a comparison of current market and collateral conditions to those present at origination. 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 On January 1, 2020, we adopted the accounting guidance that changes how entities report credit losses for assets measured at amortized cost and available-for-sale securities. The new guidance significantly changes how entities measure credit losses for most financial assets, including loans, that are not measured at fair value through net income. The guidance replaces the existing “incurred loss” model with an “expected loss” model for instruments measured at amortized cost and requires entities to record credit allowances for available-for-sale debt securities rather than reduce the carrying amount, as they previously did under the other-than-temporary impairment model. The new guidance also simplifies the accounting model for purchased credit-impaired debt securities and loans and requires that entities record an adjustment to retained earnings on January 1, 2020 for the cumulative effect of adopting the new guidance. We were not required to record a cumulative effect adjustment to retained earnings because all of our purchased credit-impaired securities were in an unrealized gain position as of the implementation date. The new guidance specifically excludes available-for-sale securities measured at fair value through net income. 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 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 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 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 $ 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 In March 2020, new accounting guidance was issued for evaluating the effects of reference rate reform on financial reporting. The new guidance provides temporary optional expedients and exceptions to U.S. GAAP for contract modifications, hedge accounting and other relationships that reference London Interbank Overnight Financing Rate "LIBOR" or another reference rate that is expected to be discontinued due to reference rate reform. The guidance may be adopted on or after March 12, 2020 and is only effective for the period from March 12, 2020 through December 31, 2022. We have not yet adopted this guidance and are currently evaluating what impact the guidance will have on our consolidated financial statements. 9 Table of Contents Note 3 – Variable Interest Entities ("VIEs") 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 Non-Agency CMBS 427,369 427,369 Non-Agency RMBS 13,068 13,068 Investments in unconsolidated ventures 19,975 19,975 Total 460,412 460,412 Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 5 - "Other Assets" for additional details regarding these investments. Note 4 – Mortgage-Backed and Credit Risk Transfer Securities 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 Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 30 year fixed-rate 5,260,201 278,538 5,538,739 ( 2,636 ) 5,536,103 1.91 % Total Agency RMBS pass-through 5,260,201 278,538 5,538,739 ( 2,636 ) 5,536,103 1.91 % Agency-CMO (2) 20,637 ( 20,637 ) — — — — % Non-Agency CMBS 454,877 ( 28,114 ) 426,763 606 427,369 7.61 % Non-Agency RMBS (3)(4)(5) 955,880 ( 937,114 ) 18,766 ( 5,698 ) 13,068 0.36 % 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 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 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. 10 Table of Contents December 31, 2019 $ in thousands Principal/Notional Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 15 year fixed-rate 280,426 1,666 282,092 10,322 292,414 3.34 % 30 year fixed-rate 9,911,339 308,427 10,219,766 304,454 10,524,220 3.62 % Hybrid ARM 55,024 602 55,626 1,267 56,893 3.46 % Total Agency RMBS pass-through 10,246,789 310,695 10,557,484 316,043 10,873,527 3.61 % Agency-CMO (2) 883,122 ( 467,840 ) 415,282 12,230 427,512 3.54 % Agency CMBS (3) 4,561,276 75,299 4,636,575 131,355 4,767,930 3.01 % Non-Agency CMBS (4) 4,464,525 ( 772,295 ) 3,692,230 131,244 3,823,474 5.16 % Non-Agency RMBS (5)(6)(7) 2,340,119 ( 1,487,603 ) 852,516 103,155 955,671 6.98 % GSE CRT (8) 858,244 19,945 878,189 45,483 923,672 2.78 % Total 23,354,075 ( 2,321,799 ) 21,032,276 739,510 21,771,786 3.85 % (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-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. (4) Non-Agency CMBS includes interest-only securities which represent 13.1 % of principal/notional balance, 0.3 % of amortized cost and 0.3 % of fair value. (5) Non-Agency RMBS is 37.0 % variable rate, 57.7 % fixed rate, and 5.3 % 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. (6) Of the total discount in non-Agency RMBS, $ 120.2 million is non-accretable (calculated using the principal/notional balance) based on estimated future cash flows of the securities. (7) Non-Agency RMBS includes interest-only securities, which represent 56.2 % of principal/notional balance, 1.9 % of amortized cost and 1.3 % of fair value. (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 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 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. 11 Table of Contents September 30, 2020 December 31, 2019 $ in thousands Available-for-sale Securities Securities under Fair Value Option Total Fair Value Available-for-sale Securities Securities under Fair Value Option Total Fair Value Agency RMBS: 15 year fixed-rate — — — 98,666 193,748 292,414 30 year fixed-rate — 5,536,103 5,536,103 754,590 9,769,630 10,524,220 Hybrid ARM — — — 31,522 25,371 56,893 Total RMBS Agency pass-through — 5,536,103 5,536,103 884,778 9,988,749 10,873,527 Agency-CMO — — — 146,733 280,779 427,512 Agency CMBS — — — — 4,767,930 4,767,930 Non-Agency CMBS 344,911 82,458 427,369 2,150,991 1,672,483 3,823,474 Non-Agency RMBS 7,573 5,495 13,068 715,479 240,192 955,671 GSE CRT — 4,917 4,917 507,445 416,227 923,672 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 September 30, 2020 and December 31, 2019 are presented below. September 30, 2020 $ in thousands MBS and GSE CRT Securities Interest-Only Securities Total Principal/notional balance 5,730,464 966,463 6,696,927 Unamortized premium 278,546 — 278,546 Unamortized discount ( 32,415 ) ( 953,458 ) ( 985,873 ) Gross unrealized gains (1) 22,298 190 22,488 Gross unrealized losses (1) ( 23,503 ) ( 7,128 ) ( 30,631 ) Fair value 5,975,390 6,067 5,981,457 December 31, 2019 $ in thousands MBS and GSE CRT Securities Interest-Only Securities Total Principal/notional balance 20,957,410 2,396,665 23,354,075 Unamortized premium 440,503 — 440,503 Unamortized discount ( 419,983 ) ( 2,342,319 ) ( 2,762,302 ) Gross unrealized gains (1) 807,324 4,782 812,106 Gross unrealized losses (1) ( 66,064 ) ( 6,532 ) ( 72,596 ) Fair value 21,719,190 52,596 21,771,786 (1) Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for as derivatives or under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. 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 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 Greater than one year and less than five years 1,299,035 7,836,620 Greater than or equal to five years 4,569,936 13,666,630 Total 5,981,457 21,771,786 12 Table of Contents 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 September 30, 2020 and December 31, 2019. September 30, 2020 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 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 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 (1) 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 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 15 year fixed-rate 957 ( 1 ) 2 362 ( 3 ) 4 1,319 ( 4 ) 6 30 year fixed-rate 255,649 ( 207 ) 3 34,009 ( 256 ) 5 289,658 ( 463 ) 8 Hybrid ARM 434 ( 2 ) 1 1,524 ( 46 ) 3 1,958 ( 48 ) 4 Total Agency RMBS pass-through (1) 257,040 ( 210 ) 6 35,895 ( 305 ) 12 292,935 ( 515 ) 18 Agency-CMO (2) 67,875 ( 1,194 ) 15 6,155 ( 1,513 ) 13 74,030 ( 2,707 ) 28 Agency CMBS (3) 1,743,800 ( 50,521 ) 58 — — — 1,743,800 ( 50,521 ) 58 Non-Agency CMBS (4) 203,129 ( 2,783 ) 19 101,021 ( 11,425 ) 7 304,150 ( 14,208 ) 26 Non-Agency RMBS (5) 26,283 ( 3,935 ) 14 12,199 ( 636 ) 2 38,482 ( 4,571 ) 16 GSE CRT (6) 77,044 ( 74 ) 4 — — — 77,044 ( 74 ) 4 Total 2,375,171 ( 58,717 ) 116 155,270 ( 13,879 ) 34 2,530,441 ( 72,596 ) 150 (1) Includes Agency RMBS with a fair value of $ 271.3 million for which the fair value option has been elected. These securities have unrealized losses of $ 268,000 . (2) Includes Agency IO with fair value of $ 11.1 million for which the fair value option has been elected. These Agency IO have unrealized losses of $ 2.3 million. (3) Fair value option has been elected for all Agency CMBS that are in an unrealized loss position. (4) Includes non-Agency CMBS with a fair value of $ 181.5 million for which the fair value option has been elected. These securities have unrealized losses of $ 2.8 million. (5) Includes non-Agency RMBS and non-Agency IO with a fair value of $ 17.6 million and $ 8.5 million, respectively, for which the fair value option has been elected. These securities have unrealized losses of $ 261,000 and $ 3.7 million, respectively. (6) Fair value option has been elected for all GSE CRT that are in an unrealized loss position. 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 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. 13 Table of Contents 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. 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 nine months ended September 30, 2019: Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2019 2019 RMBS interest-only securities 1,826 3,778 Non-Agency RMBS (1) — 1,024 Total 1,826 4,802 (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 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 Gross realized gains on sale of investments 68,994 4,022 650,859 9,181 Gross realized losses on sale of investments ( 18,884 ) ( 1,485 ) ( 1,009,773 ) ( 15,730 ) Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis ( 8,983 ) — ( 94,104 ) — Other-than-temporary impairment losses — ( 1,826 ) — ( 4,802 ) 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 ) — Realized loss on loan participation interest — — ( 3,808 ) — Total gain (loss) on investments, net 65,106 202,413 ( 996,743 ) 772,977 14 Table of Contents 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 September 30, 2020 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 16,098 ( 2,520 ) 13,578 Non-Agency CMBS 10,259 3,109 13,368 Non-Agency RMBS 879 ( 874 ) 5 GSE CRT 223 ( 274 ) ( 51 ) Other 7 — 7 Total 27,466 ( 559 ) 26,907 For the three months ended September 30, 2019 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 122,725 ( 21,526 ) 101,199 Agency CMBS 25,434 ( 1,395 ) 24,039 Non-Agency CMBS 41,972 3,957 45,929 Non-Agency RMBS 12,746 2,725 15,471 GSE CRT 9,913 ( 2,369 ) 7,544 Other 756 — 756 Total 213,546 ( 18,608 ) 194,938 For the nine months ended September 30, 2020 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 123,537 ( 24,327 ) 99,210 Agency CMBS 35,822 ( 1,744 ) 34,078 Non-Agency CMBS 72,921 12,640 85,561 Non-Agency RMBS 13,163 1,646 14,809 GSE CRT 10,230 ( 2,560 ) 7,670 Other 743 — 743 Total 256,416 ( 14,345 ) 242,071 For the nine months ended September 30, 2019 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 374,208 ( 50,873 ) 323,335 Agency CMBS 53,767 ( 2,835 ) 50,932 Non-Agency CMBS 121,417 10,338 131,755 Non-Agency RMBS 40,890 9,447 50,337 GSE CRT 27,935 ( 5,399 ) 22,536 Other 2,272 — 2,272 Total 620,489 ( 39,322 ) 581,167 15 Table of Contents Note 5 – Other Assets 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 Loan participation interest — 44,654 Commercial loan, held-for-investment 21,777 24,055 Investments in unconsolidated ventures 19,975 21,998 Prepaid expenses and other assets 2,184 1,223 Total 43,936 166,180 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. 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 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 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. We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures. 16 Table of Contents Note 6 – Borrowings W e have historically financed the majority of our investment portfolio through repurchase agreements and secured loans. 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 September 30, 2020 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 5,243,288 0.23 % 14 Total Borrowings 5,243,288 0.23 % 14 $ in thousands December 31, 2019 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements: Agency RMBS 9,666,964 1.95 % 46 Agency CMBS 4,246,359 1.95 % 43 Non-Agency CMBS 2,041,968 2.71 % 14 Non-Agency RMBS 790,412 2.65 % 16 GSE CRT 753,110 2.70 % 13 Loan participation interest 33,490 3.22 % 240 Total Repurchase Agreements 17,532,303 2.11 % 39 Secured Loans 1,650,000 1.93 % 1587 Total Borrowings 19,182,303 2.09 % 172 Secured Loans 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 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 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. 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. 17 Table of Contents 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, 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. 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 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 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 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 September 30, 2020 and December 31, 2019, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets. 18 Table of Contents $ in thousands As of Collateral Pledged September 30, 2020 December 31, 2019 Repurchase Agreements: Agency RMBS 5,509,166 10,187,555 Agency CMBS — 4,446,384 Non-Agency CMBS — 2,549,841 Non-Agency RMBS — 943,176 GSE CRT — 918,117 Loan participation interest — 44,654 Cash 3,105 32,568 Total repurchase agreements collateral pledged 5,512,271 19,122,295 Secured Loans: Agency RMBS — 621,471 Non-Agency CMBS — 1,276,418 Restricted cash — 600 Total secured loans collateral pledged — 1,898,489 Interest Rate Swaps, Currency Forward Contracts and TBAs: Agency RMBS — 189,780 Cash 1,230 — Restricted cash 166,193 116,395 Total interest rate swaps, currency forward contracts, and TBAs collateral pledged 167,423 306,175 Total collateral pledged: Mortgage-backed and credit risk transfer securities 5,509,166 21,132,742 Loan participation interest — 44,654 Cash 4,335 32,568 Restricted cash 166,193 116,995 Total collateral pledged 5,679,694 21,326,959 As of Collateral Held September 30, 2020 December 31, 2019 Repurchase Agreements: Cash 670 10 Non-cash collateral 3,249 181 Total repurchase agreements collateral held 3,919 191 Interest Rate Swaps and Currency Forward Contracts: Cash 280 160 Total interest rate swap and currency forward contracts collateral held 280 160 Total collateral held: Cash 950 170 Non-cash collateral 3,249 181 Total collateral held 4,199 351 19 Table of Contents Repurchase Agreements Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value. We would be required to provide additional collateral or fund margin calls if the value of pledged assets declined. 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 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 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. Collateral pledged with our FCM is segregated in our books and records and can be in the form of cash or securities. Daily variation margin for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as gain (loss) on derivative instruments, net in our consolidated statements of operations. Our FCM agreements include cross default provisions. 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 The following table summarizes changes in the notional amount of our derivative instruments during 2020: $ in thousands Notional Amount as of December 31, 2019 Additions Settlement, Termination, Expiration or Exercise Notional Amount as of September 30, 2020 Interest Rate Swaps 14,000,000 98,225,000 ( 107,675,000 ) 4,550,000 Currency Forward Contracts 23,111 70,297 ( 68,785 ) 24,623 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 Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our derivative counterparties. Interest Rate Swaps Our repurchase agreements are usually settled on a short-term basis ranging from one to six months . At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. 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. 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. 20 Table of Contents 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 $ 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 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. 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 Maturities Notional Amount (1) Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity 2020 1,900,000 1.67 % 1.84 % 0.6 2021 2,500,000 1.40 % 1.77 % 1.3 2022 800,000 1.53 % 1.91 % 2.9 2023 2,400,000 1.44 % 1.72 % 3.9 2024 900,000 1.49 % 1.76 % 4.8 Thereafter 5,500,000 1.44 % 1.78 % 9.5 Total 14,000,000 1.47 % 1.79 % 5.2 (1) Notional amount includes $ 10.7 billion of interest rate swaps that received variable payments based on 1-month LIBOR and $ 3.3 billion of interest rate swaps that received variable payments based on 3-month LIBOR as of December 31, 2019. Futures and Currency Forward Contracts We purchase or sell U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our investment portfolio. We recognize realized and unrealized gains and losses associated with the purchases or sales U.S. 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 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 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. 21 Table of Contents Credit Derivatives 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 Notional amount 464,966 Maximum potential amount of future undiscounted payments 464,966 TBAs 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 September 30, 2020 and December 31, 2019. $ in thousands Derivative Assets Derivative Liabilities As of September 30, 2020 As of December 31, 2019 As of September 30, 2020 As of December 31, 2019 Balance Sheet Fair Value Fair Value Balance Sheet Fair Value Fair Value Interest Rate Swaps Asset 5,265 18,533 Interest Rate Swaps Liability — — 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 nine months ended September 30, 2020 and 2019. $ in thousands Three Months Ended September 30, 2020 Derivative 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 ( 17,223 ) 478 17,223 478 $ in thousands Three Months Ended September 30, 2019 Derivative 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 — 5,196 ( 5,195 ) 1 22 Table of Contents $ in thousands Nine Months Ended September 30, 2020 Derivative 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 ( 31,354 ) 6,323 ( 10,281 ) ( 35,312 ) $ in thousands Nine Months Ended September 30, 2019 Derivative 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 — 15,846 ( 10,399 ) 5,447 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 September 30, 2020 Derivative 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 September 30, 2019 Derivative 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 ( 137,346 ) 11,715 ( 15,772 ) ( 141,403 ) Futures Contracts ( 36,633 ) — ( 464 ) ( 37,097 ) Currency Forward Contracts 372 — 884 1,256 Total ( 173,607 ) 11,715 ( 15,352 ) ( 177,244 ) $ in thousands Nine Months Ended September 30, 2020 Derivative 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 ( 909,366 ) 11,369 ( 13,266 ) ( 911,263 ) 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 Nine Months Ended September 30, 2019 Derivative 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 ( 545,069 ) 23,749 ( 42,703 ) ( 564,023 ) Futures Contracts ( 169,274 ) — 7,990 ( 161,284 ) Currency Forward Contracts 1,110 — 760 1,870 Total ( 713,233 ) 23,749 ( 33,953 ) ( 723,437 ) 23 Table of Contents Note 9 – Offsetting Assets and Liabilities Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. 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 September 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 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 $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments (2) Cash Collateral (Received) Pledged Net Amount Assets Derivatives (1)(2) 3,137 — 3,137 ( 391 ) ( 168 ) 2,578 Total Assets 3,137 — 3,137 ( 391 ) ( 168 ) 2,578 Liabilities 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 — — As of December 31, 2019 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments (2) Cash Collateral (Received) Pledged Net Amount Liabilities Derivatives (1)(2) ( 352 ) — ( 352 ) — 320 ( 32 ) Repurchase Agreements (3) ( 17,532,303 ) — ( 17,532,303 ) 17,532,303 — — Secured Loans (4) ( 1,650,000 ) — ( 1,650,000 ) 1,650,000 — — Total Liabilities ( 19,182,655 ) — ( 19,182,655 ) 19,182,303 320 ( 32 ) (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, 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 $ 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. 24 Table of Contents Note 10 – Fair Value of Financial Instruments A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows: • Level 1 Inputs – Quoted prices for identical instruments in active markets. • Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 Inputs – Instruments with primarily unobservable value drivers. The following tables present our assets and liabilities measured at fair value on a recurring basis. September 30, 2020 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (3) Total at Fair Value Assets: Mortgage-backed and credit risk transfer securities (1)(2) — 5,981,457 — — 5,981,457 Derivative assets — 8,402 — — 8,402 Other assets (4) — — 21,777 19,975 41,752 Total assets — 5,989,859 21,777 19,975 6,031,611 Liabilities: Derivative liabilities — 391 — — 391 Total liabilities — 391 — — 391 December 31, 2019 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (3) Total at Fair Value Assets: Mortgage-backed and credit risk transfer securities (1)(2) — 21,761,505 10,281 — 21,771,786 Derivative assets — 18,533 — — 18,533 Other assets (4) — — 44,654 21,998 66,652 Total assets — 21,780,038 54,935 21,998 21,856,971 Liabilities: Derivative liabilities — 352 — — 352 Total liabilities — 352 — — 352 (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 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 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. 25 Table of Contents 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 September 30, Nine Months Ended September 30, $ in thousands 2020 2019 2020 2019 Beginning balance ( 17,223 ) 17,567 10,281 22,771 Sales and settlements 17,223 — 31,354 — Total net credit derivative gains (losses) included in net income: Realized credit derivative gains (losses), net ( 17,223 ) — ( 31,354 ) — Unrealized credit derivative gains (losses), net 17,223 ( 5,195 ) ( 10,281 ) ( 10,399 ) Ending balance — 12,372 — 12,372 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 September 30, Nine Months Ended September 30, $ in thousands 2020 2019 2020 2019 Beginning balance — 47,885 44,654 54,981 Purchases/Advances — 5,192 — 5,769 Repayments — ( 7,962 ) ( 19,269 ) ( 15,635 ) Sales — — ( 21,577 ) — Total net gains and losses included in net income: Realized losses — — ( 3,808 ) — Net unrealized gains and losses — — — — Ending balance — 45,115 — 45,115 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 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 21,792 24,055 Cumulative effect of adoption of new accounting principle — 342 Repayments — ( 136 ) Total net unrealized losses included in net income: Unrealized losses ( 15 ) ( 2,484 ) 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. The following tables summarize significant unobservable inputs used in the fair value measurement of our GSE CRT embedded derivatives: Fair Value at Valuation Unobservable Weighted $ in thousands December 31, 2019 Technique Input Range Average GSE CRT Embedded Derivatives 10,281 Market Comparables, Vendor Pricing Weighted average life 1.1 - 4.2 years 2.9 years These significant unobservable inputs change according to market conditions and security performance. We estimate the weighted average life of GSE CRTs in order to identify GSE corporate debt with a similar maturity. We obtain our weighted average life estimates from a third party provider. Although weighted average life is a significant input, changes in weighted average life may not have an explicit directional impact on the fair value measurement. 26 Table of Contents The following table summarizes the significant unobservable input used in the fair value measurement of our commercial loan: Fair Value at Valuation Unobservable $ 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 September 30, 2020 and December 31, 2019: September 30, 2020 December 31, 2019 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Assets Commercial loan, held-for-investment (1) N/A N/A 24,055 24,397 FHLBI stock — — 74,250 74,250 Total — — 98,305 98,647 Financial Liabilities Repurchase agreements 5,243,288 5,243,271 17,532,303 17,534,344 Secured loans — — 1,650,000 1,650,000 Total 5,243,288 5,243,271 19,182,303 19,184,344 (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. • The estimated fair value of our commercial loan, held-for-investment, included in "Other assets" on our condensed consolidated balance sheet as of December 31, 2019, is a Level 3 fair value measurement. 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 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. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality. • The estimated fair value of secured loans is a Level 3 fair value measurement. 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. 27 Table of Contents Note 11 – Related Party Transactions Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. 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 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 $ 1.3 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 Effective October 1, 2019, our management fee is equal to 1.50 % of our stockholders' equity per annum. For purposes of calculating the management fee, stockholders' equity is calculated as average month-end stockholders' equity for the prior calendar quarter as determined in accordance with U.S. GAAP. Stockholders' equity may exclude one-time events due to changes in U.S. GAAP and certain non-cash items upon 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. Expense Reimbursement We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, filing fees, and miscellaneous general and administrative costs. 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 nine months ended September 30, 2020 and 2019. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2020 2019 2020 2019 Incurred costs, prepaid or expensed 3,381 2,186 8,545 5,399 Incurred costs, charged against equity as a cost of raising capital — 236 227 680 Total incurred costs, originally paid by our Manager 3,381 2,422 8,772 6,079 Note 12 – Stockholders’ Equity Preferred Stock Holders of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum. Dividends are cumulative and payable quarterly in arrears. Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.18 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50 % of the liquidation preference of $ 25.00 per share or $ 1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. 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 28 Table of Contents 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. 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. Common Stock 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). 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 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 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 September 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 — 22,812 — 22,812 Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — ( 54,615 ) — ( 54,615 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 3,243 ) ( 3,243 ) Currency translation adjustments on investment in unconsolidated venture 397 — — 397 Total other comprehensive income (loss) 397 ( 31,803 ) ( 3,243 ) ( 34,649 ) AOCI balance at beginning of period ( 553 ) 45,564 61,337 106,348 Total other comprehensive income (loss) 397 ( 31,803 ) ( 3,243 ) ( 34,649 ) AOCI balance at end of period ( 156 ) 13,761 58,094 71,699 29 Table of Contents Three Months Ended September 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 — 14,482 — 14,482 Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — ( 954 ) — ( 954 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 5,981 ) ( 5,981 ) Currency translation adjustments on investment in unconsolidated venture 290 — — 290 Total other comprehensive income (loss) 290 13,528 ( 5,981 ) 7,837 AOCI balance at beginning of period ( 83 ) 230,227 87,869 318,013 Total other comprehensive income (loss) 290 13,528 ( 5,981 ) 7,837 AOCI balance at end of period 207 243,755 81,888 325,850 Nine Months Ended September 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 — ( 217,064 ) — ( 217,064 ) Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 17,124 — 17,124 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 17,813 ) ( 17,813 ) Currency translation adjustments on investment in unconsolidated venture 489 — — 489 Total other comprehensive income/(loss) 489 ( 199,940 ) ( 17,813 ) ( 217,264 ) AOCI balance at beginning of period ( 645 ) 213,701 75,907 288,963 Total other comprehensive income/(loss) 489 ( 199,940 ) ( 17,813 ) ( 217,264 ) AOCI balance at end of period ( 156 ) 13,761 58,094 71,699 30 Table of Contents Nine Months Ended September 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 — 114,019 — 114,019 Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 9,072 — 9,072 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 17,748 ) ( 17,748 ) Currency translation adjustments on investment in unconsolidated venture ( 306 ) — — ( 306 ) Total other comprehensive income/(loss) ( 306 ) 123,091 ( 17,748 ) 105,037 AOCI balance at beginning of period 513 120,664 99,636 220,813 Total other comprehensive income/(loss) ( 306 ) 123,091 ( 17,748 ) 105,037 AOCI balance at end of period 207 243,755 81,888 325,850 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. Dividends 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 2020 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 2019 September 16, 2019 0.4844 2,713 October 25, 2019 June 17, 2019 0.4844 2,712 July 25, 2019 March 18, 2019 0.4844 2,713 April 25, 2019 $ in thousands, except per share amounts Dividends Declared Series B Preferred Stock Per Share In Aggregate Date of Payment 2020 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 2019 August 1, 2019 0.4844 3,003 September 27, 2019 May 3, 2019 0.4844 3,004 June 27, 2019 February 14, 2019 0.4844 3,003 March 27, 2019 31 Table of Contents $ in thousands, except per share amounts Dividends Declared Series C Preferred Stock Per Share In Aggregate Date of Payment 2020 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 2019 August 1, 2019 0.46875 5,391 September 27, 2019 May 3, 2019 0.46875 5,390 June 27, 2019 February 14, 2019 0.46875 5,391 March 27, 2019 $ in thousands, except per share amounts Dividends Declared Common Stock Per Share In Aggregate Date of Payment 2020 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 2019 September 16, 2019 0.45 64,261 October 28, 2019 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. 32 Table of Contents Note 13 – Earnings (Loss) per Common Share 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 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders 96,859 77,896 ( 1,830,385 ) 212,809 Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 181,350 135,799 168,402 128,574 Effect of dilutive securities: Restricted stock awards 11 13 — 12 Dilutive Shares 181,361 135,812 168,402 128,586 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic 0.53 0.57 ( 10.87 ) 1.66 Diluted 0.53 0.57 ( 10.87 ) 1.65 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 Commitments and Contingencies Commitments and contingencies may arise in the ordinary course of business. 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. 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 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 Dividends 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. 33 Table of Contents