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Section 1: 10-Q (10-Q)

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________ 
FORM 10-Q 
_______________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 001-34385
404404002_ivr-20200331_g1.jpg
Invesco Mortgage Capital Inc.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Maryland26-2749336
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1555 Peachtree Street, N.E., Suite 1800,
Atlanta,Georgia30309
(Address of Principal Executive Offices)(Zip Code)
(404) 892-0896
(Registrant’s Telephone Number, Including Area Code) 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer 
Non-Accelerated filer 
  Smaller reporting company 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
As of May 31, 2020, there were 164,966,357 outstanding shares of common stock of Invesco Mortgage Capital Inc.


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Explanatory Note
As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2020, filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (this “Quarterly Report”) was delayed due to disruptions in the Company’s day-to-day activities caused by the ongoing COVID-19 pandemic. The original filing deadline for this Quarterly Report was May 11, 2020. The COVID-19 pandemic caused the Company’s support personnel to work from home and resulted in delays in receiving information from the Company's custodian and various counterparties and clearing certain sales trades between the Company and third parties. The Company is relying on the SEC’s Order Under Section 36 of the Securities Exchange Act of 1934, as amended (Release Nos. 34-88318 and 34-88465), to file this Quarterly Report within the 45-day time frame provided by the extension, on or before June 25, 2020.


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INVESCO MORTGAGE CAPITAL INC.
TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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PART I
ITEM 1.  FINANCIAL STATEMENTS
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 as of 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):
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  
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended March 31,
$ in thousands, except share amounts20202019
Interest Income
Mortgage-backed and credit risk transfer securities185,536  185,492  
Commercial and other loans1,163  1,582  
Total interest income186,699  187,074  
Interest Expense
Repurchase agreements79,042  101,875  
Secured loans6,646  11,144  
Total interest expense85,688  113,019  
Net interest income101,011  74,055  
Other Income (loss)
Gain (loss) on investments, net(755,483) 268,382  
Equity in earnings (losses) of unconsolidated ventures170  692  
Gain (loss) on derivative instruments, net(910,779) (201,460) 
Realized and unrealized credit derivative income (loss), net(33,052) 7,884  
Net loss on extinguishment of debt(4,806)   
Other investment income (loss), net803  1,029  
Total other income (loss)(1,703,147) 76,527  
Expenses
Management fee – related party10,953  9,534  
General and administrative3,103  2,258  
Total expenses14,056  11,792  
Net income (loss)(1,616,192) 138,790  
Dividends to preferred stockholders11,107  11,107  
Net income (loss) attributable to common stockholders(1,627,299) 127,683  
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Basic(10.38) 1.05  
Diluted(10.38) 1.05  
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended March 31,
$ in thousands20202019
Net income (loss)(1,616,192) 138,790  
Other comprehensive income (loss):
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net(186,605) 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) (5,851) 
Currency translation adjustments on investment in unconsolidated venture480  (276) 
Total other comprehensive income (loss)(159,235) 56,369  
Comprehensive income (loss)(1,775,427) 195,159  
Less: Dividends to preferred stockholders(11,107) (11,107) 
Comprehensive income (loss) attributable to common stockholders(1,786,534) 184,052  

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

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 2020 and 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 amountsCommon Stock
SharesAmountSharesAmountSharesAmountSharesAmount
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 income (loss)—  —  —  —  —  —  —  —  —  —  (1,616,192) (1,616,192) 
Other comprehensive income (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, 20205,600,000  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  

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 amountsCommon Stock
SharesAmountSharesAmountSharesAmountSharesAmount
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 (loss)—  —  —  —  —  —  —  —  —  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, 20195,600,000  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  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Three Months Ended March 31,
$ in thousands20202019
Cash Flows from Operating Activities
Net income (loss)(1,616,192) 138,790  
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), net10,658  3,185  
Realized and unrealized (gain) loss on derivative instruments, net922,703  205,969  
Realized and unrealized (gain) loss on credit derivatives, net37,770  (2,534) 
(Gain) loss on investments, net755,483  (268,382) 
(Gain) loss from investments in unconsolidated ventures in excess of distributions received222  (692) 
Other amortization(9,936) (5,719) 
Net loss on extinguishment of debt4,806    
Changes in operating assets and liabilities:
(Increase) decrease in operating assets37,955  (10,015) 
Increase (decrease) in operating liabilities(33,431) 7,758  
Net cash provided by operating activities110,038  68,360  
Cash Flows from Investing Activities
Purchase of mortgage-backed and credit risk transfer securities(4,444,744) (4,340,536) 
(Contributions to) distributions from investments in unconsolidated ventures, net1,168  299  
Change in other assets19,269  1,154  
Principal payments from mortgage-backed and credit risk transfer securities636,498  300,222  
Proceeds from sale of mortgage-backed and credit risk transfer securities16,238,252  734,834  
Proceeds from sale of credit derivatives2,283    
Settlement (termination) of futures, currency forwards and interest rate swaps, net(904,220) (232,387) 
Net change in due from counterparties and collateral held payable on derivative instruments4,849  (14,060) 
Principal payments from commercial loans held-for-investment136  7,128  
Net cash provided by (used in) investing activities11,553,491  (3,543,346) 
Cash Flows from Financing Activities
Proceeds from issuance of common stock347,299  258,966  
Principal repayments of secured loans(300,000)   
Proceeds from repurchase agreements44,017,958  28,316,732  
Principal repayments of repurchase agreements(55,266,696) (25,094,829) 
Net change in due from counterparties and collateral held payable on repurchase agreements(311,732)   
Payments of deferred costs(40) (21) 
Payments of dividends (74,841) (57,972) 
Net cash provided by (used in) financing activities(11,588,052) 3,422,876  
Net change in cash, cash equivalents and restricted cash75,477  (52,110) 
Cash, cash equivalents and restricted cash, beginning of period289,502  135,617  
Cash, cash equivalents and restricted cash, end of period364,979  83,507  
Supplement Disclosure of Cash Flow Information
Interest paid131,074  109,392  
Non-cash Investing and Financing Activities Information
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities(149,648) 62,496  
Dividends declared not paid93,590  60,433  
Increase in Agency CMBS purchase commitments410,654  90,291  
Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments(760,217) (4,959) 
Offering costs not paid(273) (413) 
Net change in repurchase agreements, not settled(625)   
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 of 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 exclusion from the "Investment Company" definition under the Investment Company Act of 1940.
During the three months ended March 31, 2020, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic that resulted in a material adverse change in our financial condition. We recorded a $1.6 billion net loss attributable to stockholders and our stockholders' equity declined from $2.9 billion as of December 31, 2019 to $1.4 billion as of March 31, 2020.
Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties in the latter half of March 2020. We were unable to meet margin calls as of March 23, 2020 and were not in compliance with the terms of our various borrowings arrangements as of March 31, 2020 as described in Note 7 - "Borrowings". To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $16.2 billion and repaid $11.2 billion of our repurchase agreements during the quarter ended March 31, 2020. Our investment portfolio decreased from $21.9 billion as of December 31, 2019 to $8.1 billion as of March 31, 2020 primarily due to these asset sales. We also terminated our entire interest rate swap portfolio as our exposure to interest rate risk decreased as we sold Agency assets.
We have continued to focus on generating liquidity and reducing leverage in the second quarter of 2020. Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and our loan participation interest for cash proceeds of $21.6 million. Our investment portfolio decreased from $8.1 billion as of March 31, 2020 to approximately $1.6 billion, excluding cash and Agency CMBS purchase commitments, as of May 31, 2020 primarily due to these asset sales. We repaid all of our repurchase agreements and $512.5 million of Federal Home Loan Bank of Indianapolis "FHLBI" secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements. As of the filing date of this Quarterly Report, the balance of our secured loans is $837.5 million. For further details of events between March 31, 2020 and the filing date of this Quarterly Report see Note 15 - "Subsequent Events".
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While the Federal Reserve has taken a number of proactive measures to bolster liquidity in the second quarter of 2020, we expect market conditions for the mortgage REIT industry to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic. The COVID-19 pandemic caused our support personnel to transition to a remote workforce beginning in March 2020 and resulted in delays in receiving information from our custodian and various counterparties and clearing certain sales trades. In turn, this delayed the filing of this Quarterly Report. Our Manager has provided our investment team and support personnel with access to all systems necessary to fulfill their responsibilities and are in constant communication with one another and our external professional advisors.
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.
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 supportable 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 recorded 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 the 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 in the condensed consolidated statements of operations. Credit losses are accreted into earnings over time at the effective interest rate used to recognize interest income. Subsequent 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. Recoveries of amounts previously written off relating to improvements in cash flows are recognized in earnings when received.
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We record provisions for credit losses, reductions in provisions for credit losses, accretion of credit losses, and recoveries of amounts previously written off within gain (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 gain (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 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.
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 we purchased prior to election of the fair value option and held on January 1, 2020. For further information on the composition of
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our investment portfolio see Note 4 - "Mortgage Backed and Credit Risk Transfer Securities". During the three months ended March 31, 2020, we recorded $78.8 million of impairment on non-Agency securities that we intend to sell or more likely than not will be required to sell before we recover the amortized cost basis of the security. We recorded the impairment within gain (loss) on investments, net in our condensed consolidated statements of operations. As of March 31, 2020, we have not recorded a credit loss allowance on any of our securities.
We had one commercial loan as of December 31, 2019 that was measured at amortized cost. We implemented the new guidance for this loan by electing the fair value option and recording a cumulative effect adjustment to increase retained earnings by $342,000 on January 1, 2020. We recognized $1.7 million of unrealized losses on our commercial loan in our condensed consolidated statement of operations during the three months ended March 31, 2020.
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.
Note 3 – Variable Interest Entities ("VIEs")
Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, 2020 is presented in the table below.
$ in thousandsCarrying AmountCompany's Maximum Risk of Loss
Non-Agency CMBS2,869,051  2,869,051  
Non-Agency RMBS568,081  568,081  
Investments in unconsolidated ventures21,088  21,088  
Total3,458,220  3,458,220  
Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 5 - "Other Assets" for additional details regarding these investments.
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Note 4 – Mortgage-Backed and Credit Risk Transfer Securities
As discussed in Note 1 - "Organization and Business Operations", we sold MBS and GSE CRTs for cash proceeds of $16.2 billion during the three months ended March 31, 2020 to generate liquidity and reduce leverage given unprecedented market conditions as a result of the global COVID-19 pandemic. Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion as of March 31, 2020 as discussed in Note 15 - "Subsequent Events".
The following tables summarize our MBS and GSE CRT portfolio by asset type as of March 31, 2020 and December 31, 2019.
March 31, 2020
$ in thousandsPrincipal/ Notional
Balance
Unamortized
Premium
(Discount)
Amortized
Cost
Unrealized
Gain/
(Loss), net
Fair
Value
Period-
end
Weighted
Average
Yield (1)
Agency RMBS:
15 year fixed-rate67,123  767  67,890  3,276  71,166  3.29 %
30 year fixed-rate1,318,576  45,032  1,363,608  57,554  1,421,162  3.39 %
Hybrid ARM*
2,557    2,557  115  2,672  3.28 %
Total Agency RMBS pass-through1,388,256  45,799  1,434,055  60,945  1,495,000  3.39 %
Agency-CMO (2)
532,411  (247,963) 284,448  16,087  300,535  3.29 %
Agency CMBS(3)
2,070,199  32,398  2,102,597  175,430  2,278,027  2.90 %
Non-Agency CMBS (4)
3,889,234  (795,998) 3,093,236