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Section 1: 8-K (8-K)

ivr-20200622
0001437071false00014370712020-06-222020-06-220001437071us-gaap:CommonStockMember2020-06-222020-06-220001437071ivr:SeriesACumulativeRedeemablePreferredStockMember2020-06-222020-06-220001437071ivr:SeriesBCumulativeRedeemablePreferredStockMember2020-06-222020-06-220001437071ivr:SeriesCCumulativeRedeemablePreferredStockMember2020-06-222020-06-22

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 22, 2020
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Invesco Mortgage Capital Inc.

(Exact name of registrant as specified in its charter)
Maryland001-3438526-2749336
(State or other jurisdiction
of incorporation)
(Commission File Number)(IRS Employer
Identification No.)

1555 Peachtree Street, NE,
Atlanta,Georgia30309
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (404892-0896
n/a
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):  
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareIVRNew York Stock Exchange
7.75% Series A Cumulative Redeemable Preferred StockIVRpANew York Stock Exchange
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock IVRpBNew York Stock Exchange
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock IVRpCNew York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.




Item 2.02
Results of Operations and Financial Condition.

On June 22, 2020, Invesco Mortgage Capital Inc. (the “registrant”) issued a press release announcing its financial results for the quarter ended March 31, 2020 (the “Release”).

The Release is attached to this Report as Exhibit 99.1 and the information contained in the Release is incorporated into this Item 2.02 by this reference. The information contained in this Item 2.02 is being “furnished” and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities of that section. The information in this Item 2.02 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in such filing.





Item 9.01Financial Statements and Exhibits.
 
(d)Exhibits.
 
Exhibit No.
Description
99.1
104Cover Page Interactive Data File (embedded within the Inline XBRL document)







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
Invesco Mortgage Capital Inc.

By: /s/ R. Lee Phegley, Jr.
R. Lee Phegley, Jr.
Chief Financial Officer


Date: June 22, 2020
 


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Section 2: EX-99.1 (EX-99.1)

Document
Exhibit 99.1

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Press Release
For immediate release


Brandon Burke, Investor Relations
800-241-5477

Invesco Mortgage Capital Inc. Reports First Quarter 2020 Financial Results
Atlanta - June 22, 2020 -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the “Company”) today announced financial results for the quarter ended March 31, 2020.


Update from John Anzalone, Chief Executive Officer

“In the latter half of the first quarter, the COVID-19 pandemic led to unprecedented volatility and severe dislocations in financial markets. Uncertainty surrounding the economic impact of the pandemic produced sharply lower U.S. Treasury rates, significant declines in asset valuations and a liquidity crisis in the structured securities market. We responded to these events by initially meeting liquidity needs through asset sales before ultimately suspending margin payments to our counterparties and delaying our common and preferred stock dividends to preserve capital.

“Since March 31, 2020 we have materially de-levered our investment portfolio. We paid off all of our repurchase agreement debt and reduced our secured loans from $1.35 billion to $837.5 million. As of May 31, 2020, we have approximately $540 million of unlevered assets that we expect to benefit from further improvement in economic conditions and financial market liquidity.

“Over the next several quarters, we plan to transition capital into Agency RMBS investments as we continue to focus on increased liquidity and reduce our credit position through opportunistic sales. We expect this portfolio repositioning to produce a more normalized earnings stream as low funding costs, Federal Reserve support via asset purchases and a steepening yield curve should benefit Agency RMBS.

“Given the stability of our capital and confidence in the income generating capabilities of our investment portfolio, we are pleased to report that our Board of Directors has declared a cash dividend of $0.02 per common share for the second quarter of 2020.”






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Key performance indicators for the quarters ended March 31, 2020 and December 31, 2019 are summarized in the table below.
($ in millions, except share amounts)Q1 ‘20Q4 ‘19Variance
Average Balances(unaudited)(unaudited)
Average earning assets (at amortized cost)$17,837.7  $21,318.1  ($3,480.4) 
Average borrowings$16,532.0  $19,676.2  ($3,144.2) 
Average stockholders' equity$2,280.4  $2,595.3  ($314.9) 
U.S. GAAP Financial Measures
Total interest income$186.7  $192.8  ($6.1) 
Total interest expense$85.7  $106.8  ($21.1) 
Net interest income$101.0  $86.0  $15.0  
Total expenses$14.1  $12.4  $1.7  
Net income (loss) attributable to common stockholders($1,627.3) $106.9  ($1,734.2) 
Average earning asset yields4.19 %3.62 %0.57 %
Average cost of funds2.07 %2.17 %(0.10 %)
Average net interest rate margin2.12 %1.45 %0.67 %
Period-end weighted average asset yields*4.55 %3.86 %0.69 %
Period-end weighted average cost of funds1.69 %2.09 %(0.40 %)
Period-end weighted average net interest rate margin2.86 %1.77 %1.09 %
Book value per common share**$5.02  $16.29  ($11.27) 
Earnings (loss) per common share (basic)($10.38) $0.75  ($11.13) 
Earnings (loss) per common share (diluted)($10.38) $0.75  ($11.13) 
Debt-to-equity ratio5.4x  6.5x  (1.1x) 
Non-GAAP Financial Measures***
Effective interest income$191.4  $197.8  ($6.4) 
Effective interest expense$83.8  $100.7  ($16.9) 
Effective net interest income$107.6  $97.1  $10.5  
Effective yield4.29 %3.71 %0.58 %
Effective cost of funds2.02 %2.04 %(0.02 %)
Effective interest rate margin2.27 %1.67 %0.60 %
* Period-end weighted average yields are based on amortized cost as of period end and incorporate future prepayment and loss assumptions.
** Book value per common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million), Series B Preferred Stock ($155.0 million) and Series C Preferred Stock ($287.5 million); divided by total common shares outstanding.
*** Effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), and effective net interest income (and by calculation, effective interest rate margin) are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of total interest income (and by calculation, average earning asset yields), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin).

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Financial Summary
The Company's operating results for the first quarter of 2020 were severely impacted by market disruption associated with the COVID-19 pandemic. The Company reported a net loss attributable to common stockholders for the first quarter of 2020 of $1.6 billion compared to net income attributable to common shareholders of $106.9 million for the fourth quarter of 2019. The first quarter of 2020 net loss attributable to common stockholders was primarily due to net losses on derivative instruments of $943.8 million and net losses on investments of $755.5 million. The Company earned net interest income of $101.0 million, up $15.0 million (17%) from $86.0 million in the fourth quarter of 2019 primarily due to a reduction in its average cost of funds to 2.07% from 2.17% during the fourth quarter of 2019.
Book value per common share for the first quarter of 2020 was $5.02 compared to $16.29 in the fourth quarter of 2019 primarily due to significant interest rate spread widening in both Agency and non-Agency assets. To improve liquidity and decrease leverage, the Company sold mortgage-backed (“MBS”) and credit risk transfer securities (“GSE CRTs”) for cash proceeds of $16.2 billion during the first quarter and repaid $11.2 billion of repurchase agreements. As a result, total average assets decreased to $17.8 billion from $21.3 billion in the fourth quarter of 2019, and total borrowings decreased to $16.5 billion from $19.7 billion. The Company reduced its debt-to-equity ratio to 5.4x as of March 31, 2020 compared to 6.5x as of December 31, 2019.
Total expenses for the first quarter of 2020 increased to approximately $14.1 million compared to $12.4 million for the fourth quarter of 2019 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $1.1 million. The ratio of annualized total expenses to average equity (1) increased to 2.47% compared to 1.91% for the fourth quarter of 2019.
The Company has continued to focus on generating liquidity and reducing leverage in the second quarter of 2020. Between April 1, 2020 and May 31, 2020, the Company sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and its loan participation interest for cash proceeds of $21.6 million. The Company estimates that its book value per common share declined to a range of $2.65 to $3.15 as of May 31, 2020 primarily due to losses on these asset sales. As of May 31, 2020, the Company had a total investment portfolio, excluding cash and Agency CMBS purchase commitments, of approximately $1.6 billion consisting of 92% commercial credit investments, 7% residential credit investments, and 1% Agency mortgage-backed securities. Approximately $540 million of the investment portfolio was unencumbered. The Company has elected to hold its remaining non-Agency CMBS and GSE CRTs for a period of time given the Company's view that these investments will benefit from actions taken by the federal government to stimulate the economy and the market for MBS. As of May 31, 2020, the Company had a cash balance of $327.8 million, approximately $55.3 million of which was posted as collateral for secured loans. The Company's total debt was $837.5 million as of May 31, 2020.
On May 9, 2020, the Company's Board of Directors approved payment of the previously declared dividend of $0.50 per share of common stock (the "first quarter common stock dividend"). The first quarter common stock dividend will be paid on June 30, 2020 in a combination of cash and shares of the Company's common stock to stockholders of record as of May 21, 2020. The Company also declared the following dividends on its Series B and Series C Preferred Stock to its stockholders of record as of June 5, 2020: a Series B Preferred Stock dividend of $0.4844 per share payable on June 29, 2020 and a Series C Preferred Stock dividend of $0.46875 per share payable on June 29, 2020.
On June 17, 2020, the Company's Board of Directors declared a cash dividend of $0.02 per share of common stock for the second quarter of 2020. The dividend will be paid on July 28, 2020 to stockholders of record on July 6, 2020. The Board of Directors also declared a Series A Preferred Stock dividend to its stockholders of record as of July 1, 2020 of $0.4844 per share payable on July 27, 2020.

(1)The ratio of annualized total expenses to average stockholders' equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average stockholders' equity. Average stockholders' equity is calculated based on the weighted month-end balance of total stockholders' equity excluding equity attributable to preferred stockholders.
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About Invesco Mortgage Capital Inc.
Invesco Mortgage Capital Inc. is a real estate investment trust that primarily focuses on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company’s earnings conference call on Tuesday, June 23, 2020, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free: 800-857-7465
International:  1-312-470-0052
Passcode:   Invesco

An audio replay will be available until 5:00 pm ET on July 7, 2020 by calling:

888-562-6504 (North America) or 1-203-369-3940 (International).

The presentation slides that will be reviewed during the call will be available on the Company’s website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute “forward-looking statements” within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the ongoing spread and the economic and operational impact of the COVID-19 pandemic, the market for our target assets, our financial performance, including our core earnings, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “forecasts,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission’s website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Investor Relations Contact: Brandon Burke, 800-241-5477

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 Three Months Ended
$ in thousands, except share amountsMarch 31,
2020
December 31, 2019March 31,
2019
Interest Income
Mortgage-backed and credit risk transfer securities (1)
185,536  191,490  185,492  
Commercial and other loans1,163  1,291  1,582  
Total interest income186,699  192,781  187,074  
Interest Expense
Repurchase agreements79,042  97,993  101,875  
Secured loans6,646  8,808  11,144  
Total interest expense85,688  106,801  113,019  
Net interest income101,011  85,980  74,055  
Other Income (loss)
Gain (loss) on investments, net(755,483) (148,511) 268,382  
Equity in earnings (losses) of unconsolidated ventures170  427  692  
Gain (loss) on derivative instruments, net(910,779) 188,682  (201,460) 
Realized and unrealized credit derivative income (loss), net(33,052) 2,896  7,884  
Net loss on extinguishment of debt(4,806) —  —  
Other investment income (loss), net803  909  1,029  
Total other income (loss)(1,703,147) 44,403  76,527  
Expenses
Management fee – related party10,953  10,529  9,534  
General and administrative3,103  1,882  2,258  
Total expenses14,056  12,411  11,792  
Net income (loss)(1,616,192) 117,972  138,790  
Dividends to preferred stockholders11,107  11,106  11,107  
Net income (loss) attributable to common stockholders(1,627,299) 106,866  127,683  
Earnings (loss) per share:
Net income attributable to common stockholders
Basic(10.38) 0.75  1.05  
Diluted(10.38) 0.75  1.05  

(1)The table below shows the components of mortgage-backed and credit risk transfer securities income for the periods presented.
Three Months Ended
$ in thousandsMarch 31,
2020
December 31, 2019March 31,
2019
Coupon interest202,109  212,887  192,442  
Net premium amortization(16,573) (21,397) (6,950) 
Mortgage-backed and credit risk transfer securities interest income185,536  191,490  185,492  

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended
$ in thousandsMarch 31,
2020
December 31, 2019March 31,
2019
Net income (loss)(1,616,192) 117,972  138,790  
Other comprehensive income (loss):
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net(186,605) (30,054) 52,349  
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net36,957  —  10,147  
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense(10,067) (5,981) (5,851) 
Currency translation adjustments on investment in unconsolidated venture480  (852) (276) 
Total other comprehensive income (loss)(159,235) (36,887) 56,369  
Comprehensive income (loss)(1,775,427) 81,085  195,159  
Less: Dividends to preferred stockholders(11,107) (11,106) (11,107) 
Comprehensive income (loss) attributable to common stockholders(1,786,534) 69,979  184,052  

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
As of
 $ in thousands except share amountsMarch 31, 2020December 31, 2019
ASSETS
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $7,485,083 and $21,132,742, respectively)8,044,808  21,771,786  
Cash and cash equivalents143,291  172,507  
Restricted cash221,688  116,995  
Due from counterparties394,424  32,568  
Investment related receivable (including pledged securities of $534,524 at March 31, 2020)832,043  67,976  
Derivative assets, at fair value—  18,533  
Other assets (including pledged security of $21,577 and $44,654, respectively)140,993  166,180  
Total assets 9,777,247  22,346,545  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements6,287,746  17,532,303  
Secured loans1,350,000  1,650,000  
Derivative liabilities, at fair value302  352  
Dividends payable93,590  74,841  
Investment related payable560,807  99,561  
Accrued interest payable8,679  43,998  
Collateral held payable50,135  170  
Accounts payable and accrued expenses2,539  1,560  
Due to affiliate13,068  11,861  
Total liabilities 8,366,866  19,414,646  
Commitments and contingencies (See Note 14) (1)
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; 164,966,357 and 144,256,357 shares issued and outstanding, respectively
1,650  1,443  
Additional paid in capital3,239,602  2,892,652  
Accumulated other comprehensive income129,728  288,963  
Retained earnings (distributions in excess of earnings)(2,523,923) (814,483) 
Total stockholders' equity1,410,381  2,931,899  
Total liabilities and stockholders' equity9,777,247  22,346,545  


(1)See Note 14 of the Company's condensed consolidated financial statements filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
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Non-GAAP Financial Measures
The Company has historically used the following non-GAAP financial measures to analyze its operating results and believes these financial measures have been useful to investors in assessing the Company's performance as further discussed below:
core earnings (1) (and by calculation, core earnings per common share),
effective interest income (and by calculation, effective yield),
effective interest expense (and by calculation, effective cost of funds),
effective net interest income (and by calculation, effective interest rate margin), and
repurchase agreement debt-to-equity ratio
The most directly comparable U.S. GAAP measures are:
net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share),
total interest income (and by calculation, earning asset yields),
total interest expense (and by calculation, cost of funds),
net interest income (and by calculation, net interest rate margin), and
debt-to-equity ratio

The Company is not presenting core earnings for the three months ended March 31, 2020 ("first quarter 2020 core earnings") because core earnings excludes the material adverse impact that the market disruption caused by the COVID-19 pandemic has had on the Company's financial condition. In addition, first quarter 2020 core earnings is not indicative of the reduced earnings potential of the Company's current investment portfolio. The Company intends to resume reporting core earnings when its presentation provides a useful measure of the portfolio’s earning capacity.

The Company is also not presenting a repurchase agreement debt-to-equity ratio because this ratio as of March 31, 2020 is not indicative of how the Company has historically managed its business prior to the market disruption caused by the COVID-19 pandemic. In addition, the Company does not have any repurchase agreements as of the date of this release.
The non-GAAP financial measures used by the Company's management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of its peer companies.













(1)The Company has historically calculated core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and net loss on extinguishment of debt..
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Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin
The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net. The Company includes its GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.
The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense because the Company does not consider the amortization a current component of its borrowing costs.
The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.
The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.
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The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:
Three Months Ended
 March 31, 2020December 31, 2019March 31, 2019
$ in thousandsReconciliationYield/Effective YieldReconciliationYield/Effective YieldReconciliationYield/Effective Yield
Total interest income186,699  4.19 %192,781  3.62 %187,074  3.91 %
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
4,718  0.10 %4,987  0.09 %5,350  0.11 %
Effective interest income191,417  4.29 %197,768  3.71 %192,424  4.02 %

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:
Three Months Ended
 March 31, 2020December 31, 2019March 31, 2019
$ in thousandsReconciliationCost of Funds / Effective Cost of FundsReconciliationCost of Funds / Effective Cost of FundsReconciliationCost of Funds / Effective Cost of Funds
Total interest expense85,688  2.07 %106,801  2.17 %113,019  2.65 %
Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps 10,067  0.24 %5,981  0.12 %5,851  0.14 %
Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net
(11,924) (0.29)%(12,091) (0.25)%(4,509) (0.11)%
Effective interest expense83,831  2.02 %100,691  2.04 %114,361  2.68 %

The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:
Three Months Ended
 March 31, 2020December 31, 2019March 31, 2019
$ in thousandsReconciliationNet Interest Rate Margin / Effective Interest Rate MarginReconciliationNet Interest Rate Margin / Effective Interest Rate MarginReconciliationNet Interest Rate Margin / Effective Interest Rate Margin
Net interest income101,011  2.12 %85,980  1.45 %74,055  1.26 %
Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps
(10,067) (0.24)%(5,981) (0.12)%(5,851) (0.14)%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
4,718  0.10 %4,987  0.09 %5,350  0.11 %
Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net
11,924  0.29 %12,091  0.25 %4,509  0.11 %
Effective net interest income107,586  2.27 %97,077  1.67 %78,063  1.34 %

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Average Earning Asset Balances
The table below presents information related to the Company's average earning assets for the following periods.
Three Months Ended
$ in thousandsMarch 31,
2020
December 31, 2019March 31,
2019
Average Earning Asset Balances (1):
Agency RMBS:
15 year fixed-rate, at amortized cost232,551  288,050  371,228  
30 year fixed-rate, at amortized cost8,422,795  10,852,691  11,780,005  
Hybrid ARM, at amortized cost35,768  57,182  243,813  
Agency - CMO, at amortized cost365,936  420,532  291,914  
Agency CMBS, at amortized cost3,543,594  4,185,558  1,129,227  
Non-Agency CMBS, at amortized cost 3,552,164  3,685,198  3,361,132  
Non-Agency RMBS, at amortized cost751,090  873,774  1,084,721  
GSE CRT, at amortized cost876,341  885,571  808,296  
Commercial loans, at amortized cost23,965  24,099  27,375  
Loan participation interest33,545  45,419  54,763  
Average earning assets17,837,749  21,318,074  19,152,474  

Average Earning Asset Yields (2):
Agency RMBS:
15 year fixed-rate3.74 %3.32 %3.50 %
30 year fixed-rate3.75 %3.03 %3.38 %
Hybrid ARM4.35 %3.27 %3.48 %
Agency - CMO3.74 %3.50 %3.56 %
Agency CMBS3.65 %3.14 %3.52 %
Non-Agency CMBS5.32 %5.09 %4.98 %
Non-Agency RMBS7.17 %7.18 %6.71 %
GSE CRT (3)
3.11 %3.03 %3.67 %
Commercial loans10.31 %10.49 %11.08 %
Loan participation interest5.95 %5.71 %6.14 %
Average earning asset yields4.19 %3.62 %3.91 %
(1)Average balances for each period are based on weighted month-end average earning assets.
(2)Average earning asset yields for the period are calculated by dividing interest income, including amortization of premiums and discounts, by average month-end earning assets based on the amortized cost of the investments. All yields are annualized.
(3)GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.
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Average Borrowings and Cost of Funds
The table below presents information related to the Company's average borrowings and average cost of funds.
Three Months Ended
$ in thousandsMarch 31,
2020
December 31, 2019March 31,
2019
Average Borrowings (1):
Agency RMBS (2)
8,521,865  10,809,305  11,664,156  
Agency CMBS3,523,998  4,118,846  1,074,917  
Non-Agency CMBS (2)
3,049,547  3,146,907  2,663,941  
Non-Agency RMBS689,249  808,299  886,554  
GSE CRT722,179  758,793  717,482  
        Loan participation interest25,159  34,064  41,072  
Total average borrowings16,531,997  19,676,214  17,048,122  
Maximum borrowings during the period (3)
23,132,234  20,377,801  18,474,387  

Average Cost of Funds (4):
Agency RMBS (2)
2.30 %2.18 %2.59 %
Agency CMBS2.17 %2.13 %2.64 %
Non-Agency CMBS (2)
2.34 %2.61 %3.24 %
Non-Agency RMBS2.67 %2.82 %3.54 %
GSE CRT2.54 %2.85 %3.49 %
        Loan participation interest3.52 %3.61 %4.15 %
Cost of funds2.07 %2.17 %2.65 %
Interest rate swaps average fixed pay rate (5)
1.16 %1.56 %2.43 %
Interest rate swaps average floating receive rate (6)
(1.46)%(1.89)%(2.58)%
Effective cost of funds (non-GAAP measure) (7)
2.02 %2.04 %2.68 %
(1)Average borrowings for each period are based on weighted month-end balances; all percentages are annualized.
(2)Agency RMBS and non-Agency CMBS average borrowings and cost of funds include borrowings under repurchase agreements and secured loans.
(3)Amount represents the maximum borrowings at month-end during each of the respective periods.
(4)Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by the Company's average borrowings.
(5)Interest rate swaps average fixed pay rate is calculated by dividing annualized contractual swap interest expense by the Company's average notional balance of interest rate swaps.
(6)Interest rate swaps average floating receive rate is calculated by dividing annualized contractual swap interest income by the Company's average notional balance of interest rate swaps.
(7)For a reconciliation of cost of funds to effective cost of funds, see “Non-GAAP Financial Measures.”


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